GM to Cut White-Collar Retirement Costs
Wednesday, March 8, 2006
General Motors Corp., accelerating a cost-cutting push, said yesterday that it is slashing retirement plans for 42,000 salaried employees and freezing its pension program.
With the pension moves, GM joins a growing number of companies, troubled and healthy, that are phasing out their traditional pensions in favor of 401(k) and similar retirement plans in which the investment risks are borne by the workers.
GM said savings from the changes will amount to about $335 million annually on a pretax basis. As sales have slowed, GM has strained under big payouts in fixed costs, including labor-related expenses, such as health care and retirement benefits.
GM lost $8.55 billion in 2005, its biggest annual loss since 1992. To reverse the slide, the auto giant is undergoing a reoganization. The world's largest automaker has announced a plan to eliminate 30,000 workers and close all or part of 12 factories. Labor leaders complain that factory workers are being disproportionately hammered by GM's downsizing. Last year, GM and the United Auto Workers union agreed to reduce the company's health care bill, which is expected to hit $5.6 billion this year.
But GM's salaried workers and retirees have been taking big hits, too. Since 2000, GM has slashed its white-collar North American workforce by 18 percent. GM has been cutting its health plans for salaried retirees for years, angering a loyal base of former office workers, engineers and designers. Last month, GM said it will cap its costs for white-collar retirees at this year's levels. Once the limit is reached, the retirees will face monthly contributions, larger deductibles and higher prescription-drug bills.
The company is also ending a special retirement plan that covers 1,950 high-level employees. The executives will now participate in the company's 401(k) plans, like other salaried workers, the company said. In January, Jerome B. York -- top lieutenant to big GM shareholder Kirk Kerkorian -- called on the company to distribute the pain of downsizing to its white-collar workers and executives.
GM said the changes to its retirement plans will lower its pension obligations by $1.6 billion in 2006. The automaker will take a one-time pretax charge of $120 million in an upcoming quarter related to the pension liability. A year ago, GM said its pension obligations totaled about $89 billion, with about $90 billion in assets.
David Healey, auto analyst at Burnham Securities Inc., said the changes might make it easier for GM leaders to wrest greater concessions from the UAW next year when contract negotiations begin between Detroit automakers and the powerful union. "It's a shot over the bow," he said.
In recent years, companies including United Airlines parent UAL Corp., which was then in bankruptcy protection, and profitable International Business Machines Corp., Verizon Communications Inc. and Hewlett-Packard Co. have terminated or frozen traditional pensions or announced plans to do so. Other firms that have announced freezes include Sprint Nextel Corp., Tribune Co., Lexmark International Inc., Alcoa Inc. and Russell Corp.
As of last September, according to benefits consulting firm Watson Wyatt Worldwide Inc., 627 of the Fortune 1000 companies sponsored traditional pensions, and of those, 115 have been terminated, frozen or closed to new workers.
Such "defined benefit" plans are typically funded entirely by the employer and promise a retirement income or lump sum based on a formula contained in the plan. In cases, such as United's, where the employer fails and the plan's assets are inadequate to pay promised benefits, the federal government's Pension Benefit Guaranty Corp. takes over the plan and pays at least a portion of the benefits.
The future of private-employer defined-benefit plans, which currently pay out some $120 billion a year in benefits to retirees and their families, is increasingly in doubt. The Bush administration is pressing for much tighter funding rules for such plans -- two bills to do some of that, though the administration considers them inadequate, are awaiting conference committee action on Capitol Hill. But experts in private industry warn that if the rules are too tough, companies will follow GM, IBM and the others and freeze pensions.
The increase in freezes by profitable companies suggests that the trend is also being spurred by companies' realizations that they can save money and that nonunion workers have no effective way to resist.
Already, overall coverage of private-sector workers by any type of retirement plan is shrinking, according to a report last month by the Bureau of Labor Statistics, with defined-benefit plans shrinking fastest of all.
In 1992-93, according to the BLS, 32 percent of private-sector workers were participating in a defined-benefit plan and 35 percent in a defined-contribution plan such as a 401(k). By last year, the share of workers in a 401(k) or similar plan had risen to 42 percent, while defined-benefit participation had shrunk to 21 percent. There is some overlap because some employers offer both types.
GM stopped allowing new employees to join its "traditional" pension program in 2001, instead offering new hires a "cash balance" pension plan. These plans are technically defined-benefit plans but resemble defined-contribution plans. The company is freezing the traditional plan but will allow participants to earn modest additional benefits as time passes. Employees in the cash-balance plan and new hires will transition into a 401(k).
In the plan announced yesterday, GM said it will match half of employee contributions up to 4 percent of annual base salary. GM said the changes do not affect the pension benefits by current employees earned before the transition. Additionally, GM said the changes do not affect the benefits of its current salaried employees or the vested benefits of former employees.
Last year, GM temporarily suspended 401(k) contributions for salaried employees in a cost-cutting move.