A question of timing: GM locks in high pension obligation

On Friday, GM announced changes to its salaried pension plan that will affect about 118,000 salaried retirees and reduce the company’s pension obligation by $26 billion. The company will make a lump sum payment option available to about 42,000 white-collar retirees and enroll the remainder of salaried retirees into a group annuity that will be administered by Prudential Insurance Co. starting in 2013. Bloomberg offers commentary on the announcement.

While the decision eliminates $26 billion from the company’s pension obligations, the timing raises some questions. Milliman’s John Ehrhardt spoke to the Wall Street Journal and offered this perspective:

John Ehrhardt, an actuary at consulting firm Milliman, said GM is making this move at arguably one of the worst possible times. That’s because it is basically locking in pension obligations at discount rates that are near historical lows.

Discount rates, which are calculated based on corporate bond rates, are used to determine the present value of future liabilities. Lower rates mean higher obligations, and GM has seen its discount rate fall to 4.15%  at the end of 2011 from 4.96% a year earlier.

“They’re paying a price for risk management by locking in liabilities at the highest values in history,” Ehrhardt said.

For more insight into why the timing now is less than ideal, check out our ongoing publishing surrounding the low interest rate environment. Also a useful resource is this post on the retirement landscape.

Leave a Reply