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GM and Ford Offer Retirees Lump-Sum Pension Payments

Auto company retirees have important investment decisions to produce because they consider special pension buy-out programs on offer by both Automobile ("GM") and Ford Motor Company ("Ford"). Even though the unprecedented lump-sum buy-out offers helps the automobile makers of what Ford describes being a "long-term tactic to de-risk its global funded pension plans," the experience will transfer the chance of managing pension funds from all of these Fortune 10 employers into the hands of the pensioners themselves.

The General Motors Type of pension

GM promises to eliminate traditional pension plans for many current salaried employees by the end of 2012, in line with the Wall Street Journal.

The enormous auto maker takes two unusual steps to tear down pension costs. First, GM is providing lump-sum cash payments to 42,000 eligible salaried retirees who receive monthly pension checks. Its not all salaried retirees meet the criteria for your lump-sum offer.

Second, GM is outsourcing pension administration for an additional pair 76,000 U.S. salaried retirees. Prudential Financial Inc. will administer the brand new GM [http://www.die-altersvorsorgepflicht.de die-altersvorsorgepflicht], which can be being funded through a group annuity contract. Pension payments to these GM retirees, which are not supposed to difference in terms of monthly benefits, begins in 2013 within the new plan. Unlike the lump-sum buyout, annuitizing the master plan through Prudential does not need approval from your individual plan participants.

GM is required to pay for between $3.5 and $4.5 billion as a cash contribution for the U.S. salaried pension plans in order to purchase the annuity and increase pension plan funding levels. This step doesn't impact GM's obligations for other benefits, including retiree medical care, insurance coverage and vehicle discounts.

The Ford Plan

Ford offers 90,000 U.S. salaried retirees and U.S. salaried former employees the opportunity to voluntarily pay a lump-sum payment of their pension assets. Ford will essentially settle their pension obligations to the people retirees who choose to take the sale. Payouts, that may begin later in 2010, is going to be paid from existing pension fund assets. This offer is similar to the lump-sum pension payout option offered to U.S. salaried future retirees as of July 1, 2012.

The Retiree Dilemma

Fitch Ratings, according to a June 2012 press release, expects that "companies with both significant pension obligations and considerable cash might consider adopting a fresh strategy so that you can reduce their contact with plan volatility. Massive pension liabilities have already been constraining large companies for decades... and turn into an important concern for investors."

As private and public employers make a plan to limit their contact with pension liabilities, more responsibility for retirement planning will be moved to the consumer retiree. Economic pressures in the present uncertain job environment may force some retirees to redirect large cash pension payouts to the demands of daily living, even for early withdrawal penalties.

Retiree medical benefits remain a major part of risk for private and public retirees also. Unlike pension obligations, which carry specific advance funding requirements, retiree medical benefits are funded with a pay-as-you-go system and do not automatically vest. In a lot of cases, the well-intended promises of retiree medical treatment have no budgets. Employers are decreasing retiree medical subsidies and also expanding spending budget efforts, as outlined by a 2011 Aon Hewitt survey of 500 employers.

To sum up

The GM and Ford moves are significant because of the auto makers' role as leading U.S. employers, along with the magnitude of their efforts to transfer pension risks off their balance sheets. GM intends to settle approximately $26 billion in pension obligations, with Ford following at up to $18 billion.