Business

Tim Catts and Zachary Tracer

GM pension plan shift may be signal of things to come

NEW YORK — General Motors’ deal to cut pension obligations by $26 billion and shift plans to Prudential Financial is poised to fuel more transfers as US firms face a retirement funding shortfall the size of Greece’s debt.

MetLife and Prudential are among insurers that expect the GM deal to encourage more corporations to offload plans. Pension liabilities exceed assets by more than $435 billion, according to a Bloomberg review of data disclosed by firms in the Russell 1000 index of large US companies. Greece had total debt of about $450 billion at the end of 2011.

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Employers who endured two stock market crashes in a decade and 10-year Treasury yields near a record low may be tempted to follow GM’s lead by paying insurers to take the risk that market returns are inadequate or that beneficiaries live longer than expected. Transferring the obligations can reduce swings in earnings tied to securities and relieve companies of the need to manage large pools of money.

There ‘‘may be a greater willingness to pull the trigger and execute a transaction,’’ said Robin Lenna, executive vice president of MetLife’s corporate benefit funding group. ‘‘They have a model. Somebody already did it in a big way.’’

GM, the largest automaker, said most of the 118,000 retirees and surviving beneficiaries affected by the shift will get Prudential annuities, with about 42,000 having the option of lump-sum payments. GM pensions were underfunded by $25.4 billion, the largest gap among the biggest US companies, as of Dec. 31. The Detroit-based firm had global pension obligations of about $134 billion.

GM will contribute $3.5 billion to $4.5 billion in cash to the salaried pension plan to help fund it and purchase the annuities from Prudential, GM finance chief Dan Ammann said.

The federal Pension Protection Act, which was passed in 2006, gave employers seven years to fully fund their retirement plans and required them to use an interest rate based on a basket of corporate bonds to compute liabilities. As bond yields decline, corporate pensions must set aside more money to cover future obligations.

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Timken Co. is among firms that may follow GM’s path. The maker of bearings has spoken with Prudential and other insurers about annuitizing its pensions, which have $2.6 billion in assets and $3.1 billion in liabilities, said Glenn Eisenberg, the Ohio-based company’s executive vice president of finance and administration.

Timken this year began offering retiring employees the option of receiving benefits in a lump sum, Eisenberg said. Contributions to the company’s pension plans consumed $521 million since 2010 and are expected to cost $165 million this year, according to a company filing.

Tim Catts and Zachary Tracer write for Bloomberg News.
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