In April 2012 the Ford Motor Co. said it would offer lump sum payments to about 90,000 U.S. salaried retirees and former salaried workers who are vested in the pension plan, saying this was a way to lower the risk of volatility for those in the plan – a statement that on its face is nonsense for workers in a defined benefit plan. As for the company, you don’t choose to lower the volatility of a series of small future funding payments by paying the total present value out now, because that just forces a cash out that must be funded now. However if you can get the employees to accept less than the present value of what you owe them, saying it is lower than the present value of the debt because you are giving them a new cash out benefit they did not have before, it is a great deal for the company. So Ford has taken care of its underfunded $15.4 billion globally by conning the workers, lowering its liabilities and indeed getting a small increase in future earnings.
Indeed the above was the situation at the Cotton Growers Association where I was the actuary in 2007 and where I stated it had to be made clear to the workers that they were giving up a lot to get a little cash – followed by my being fired as the plan actuary as they chose to tell the workers only about their “new benefit”.
Now GM – in theory controlled by Obama – earlier this year said it would end traditional defined benefit pension plans for its U.S. white-collar workers and shift to a defined contribution 401(k) – and since defined benefit plans represent a fringe benefit of about 12% of salary, the likely 6% max salary match in the 401(k) is a one heck of a cost savings, albeit a screwing of the workers and a future problem as 401(k) retirees have on average retirement income not even 50% of what defined benefit pension plan retirees are getting – more like 10% – as we become a “Social Security only” nation – and as the GOP demands cuts to Social Security so as to use the payroll tax surplus to fund tax cuts for the rich.
Adding to the above is today’s GM announcement that it will establish a new plan for active salaried employees that “has the same provisions as its existing plan” – which is more nonsense on its face as GM hides the benefit reduction that is the only possible reason for the change. Union-represented hourly workers are not affected by the latest move, but GM will no doubt take care of that by opening more plants in non-union “right to work” states. GM is also going to take its retired salaried employee obligation for 118,000 employees and the assets behind those obligations and give them to Prudential Financial Inc. (GM is still obligated but the accounting is different thereby reducing its pension obligation by $26 billion). Like Ford, GM is trying for a con-job “new benefit” with its “new plan with same provisions ploy” – reducing its obligation by paying out less than the present value of the benefit to the “lucky” 42,000 retirees who will have the option of taking a one-time payment rather than switching to the new plan.
So GM will now contribute between $3.5 billion and $4.5 billion to its U.S. salaried pension plans to help fund the purchase of the group annuity contract and includes a small piece to “firm up the funding status” of the current pension plan for active salaried employees, as it “de-risk”‘s and “strengthen(s) our balance sheet and give(s) us more financial flexibility” per GM’s CFO Dan Ammann.
So Obama has overseen GM’s taking care of that nasty post bankruptcy $134 billion in global pension obligations that are underfunded by around $25 billion (in the U.S., $107 billion in obligations are underfunded by around $15 billion).
I’d still be working if only I, as an actuary, had understood what it meant to be an Obama Democrat and accepted the new ethics norm.