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Not so long ago, many American workers could expect to receive monthly pension benefits from their employers after they retired. Yet in the last few decades, employers have moved sharply away from giving their workers pension benefits, turning to alternatives like 401(k) plans to shift responsibility for retirement saving and investment risk back to their employees.
Yet even though few new workers can expect to see any pension benefits at all, some employers aren't satisfied with a slow phaseout of their pension liabilities. Instead, employers are taking some extreme measures to try to buy their way out of their pension obligations once and for all, and the moves have major implications for the workers who have to decide whether to take pension buyouts.
Auto workers and pensions
A couple of months ago, Ford (NYSE: F ) decided to give about 90,000 former salaried workers an interesting choice. Rather than receiving monthly pension payments that would last as long as they lived, these workers could instead accept an upfront one-time payment. This lump sum would completely eliminate any future obligation Ford would have to pay those workers, and once the decision was made, workers couldn't go back and change their mind later.
Not to be outdone, General Motors (NYSE: GM ) came back with a similar but expanded offer. Not only would the company offer a lump-sum buyout to about 42,000 of its retirees, it would also buy a group annuity from Prudential that would cover monthly payments for the remainder of its salaried retirees.
The buyouts represent a huge part of the automakers' pension liability. They could cut as much as a third from Ford's $49 billion pension liability and about a quarter of GM's roughly $110 billion in obligations.
Moreover, with GM's annuity twist, the move helps to match up assets and liabilities better. With GM's U.S. pension fund already underfunded by nearly $13 billion, the company clearly wanted to avoid any further uncertainty about meeting its obligations going forward.
Underfunded pensions aren't just a problem in the auto industry. Throughout the economy, you'll find plenty of companies falling short on their pension obligations. According to a report from Fitch Ratings earlier this year, retailer Sears Holdings (Nasdaq: SHLD ) , aluminum giant Alcoa (NYSE: AA ) , and grocery store chain SUPERVALU (NYSE: SVU ) are just a few of the companies that are between 20% and 25% underfunded in their pension liabilities.
Companies with underfunded pensions have a few choices. They can roll the dice and hope that their workers end up not costing them as much as actuarial projections estimate. Yet with life expectancies having lengthened in recent decades, many companies have underestimated their eventual pension liabilities. That's likely a major reason Ford and GM want to opt out of the system going forward.
The other alternative is for companies to boost their pension funding through big contributions. But because of the impact those contributions have on current earnings, many companies are reluctant to divert cash away from earnings toward long-term obligations.
By comparison, buyouts like Ford's and GM's are a relatively easy way out for companies. Costs get bundled into a one-time event that's easier for a company to justify to investors. And once again, workers and retirees end up assuming the risk that those companies would otherwise have to bear.
A big trend
If Ford and GM are successful in getting their workers to sign up for their lump-sum payments, you can expect many more companies to jump on the bandwagon. Given the difficulties that everyone is having in producing solid, dependable investment returns, most employers would far rather pass on the responsibility for generating those returns to their workers. Sooner or later, employers will probably be out of the pension business entirely -- and at that point, you'll be completely on your own to produce the income and gains you need to retire successfully.
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