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GM, Ford pension strategy is not the rule of thumb

August 9th, 2012 Leave a comment Go to comments

By Javier Sanabria

The decisions by GM and Ford to offload their pension liabilities are exceptions to the rule and should not become the rule of thumb among United States employers. In an article with Bloomberg BNA, Milliman’s John Ehrhardt said:

“What Ford and GM are doing is really about managing their balance sheet. The size of these pension obligations and assets are so big relative to the size of everything else on their balance sheet, the balance sheet doesn’t look like the balance sheet of a manufacturing company. It looks more like the balance sheet of an insurance company.”

The GM and Ford settlements come at a time of historically low interest rates, meaning companies that offer lump sum payouts or buy group annuities to resolve pension obligations end up paying a high price for risk management.

Here’s an excerpt citing Ehrhardt regarding such settlements:

“My initial reaction was, ‘Why are you doing this?’” Ehrhardt said. Notwithstanding the differences in rates used for plan funding, for calculating lump sums, and for accounting purposes, all are at historic lows, which means companies that offer lump sums and buy group annuities to settle pension obligations now are paying a high price to do so, he said.

“If you’re trying to reduce the size of your obligations so they have less of an impact on your balance sheet, paying lump sums or buying an annuity does that,” Ehrhardt said. However, employers will be buying annuities at the highest price point and paying lump sums at the next-to-highest price point, he said.

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