GE Has Yet Another Problem: Pensions

My Comments: Did you read the news bulletin last week that GE was terminating 4,000 salaried employees this week? There’s a reason for that and it’s described here. This problem is not just about GE, but about thousands of corporations and government entities that exist in the US.

A pension plan like the one at GE is known as a ‘defined benefit plan’. What you get every month after retirement is determined by how long you worked and your average salary. Typically, it’s funded 100% by the employer and is ‘defined’ by the terms of your employment.

Care to guess why GE finds it economical to get rid of those salaried employees? It’s at least in part because they don’t want to pay any more money into a defined benefit plan for them. If you get rid of them, you can find new, younger workers for whom you don’t have to make a contribution if the plan is effectively closed to new people.

But it’s not just GE. It’s estimated that defined benefit pensions plans in this country are underfunded to the tune of many trillions of dollars. In the public sector alone, which means sanitation workers, firefighters, teachers and other state and municipal workers, there is an estimated $4.4T shortfall. It’s a ticking time bomb.

If you have any ideas how I might bring my online retirement planning school to the attention of some of these employers to benefit their employees, please let me know.

By Al Root \ Dec. 3, 2018

The list of issues General Electric management have been dealing with is long. There’s one that hasn’t gotten a lot of attention: GE’s pension plan is underfunded.

That’s in addition to problems at GE Capital, growing reserves for long-term-care insurance, ongoing Securities and Exchange Commission and Justice Department investigations, and defects with new power-generation turbine blades, as well as significant turnover in the C-suite. Wall Street analysts continue to slash their price targets for the stock.

GE (ticker: GE) has about 618,000 retirees and active workers covered by defined-benefit pension plans world-wide. Some 430,000 of them are in plans covered by U.S. retirement law, which requires that companies set aside the money needed to make the future payments.

Defined-benefit plans promise workers fixed payments, rather than the fixed contributions companies make to a 401(k). In all, GE’s workers have been promised about $100 billion in payments, but the company has only $71 billion in assets set aside to meet those obligations.

There’s no consensus among investors and analysts about the GE pension plan. Some analysts fret about the funding gap. Others argue that pension gaps are only theoretical—because a pension number isn’t like a bond with a face amount and a fixed maturity. Those who downplay concerns also argue the funding situation is spelled out clearly for anyone willing to read the notes to the financial statements.

So is it, or isn’t it, something to worry about?

Pensions don’t usually become an issue for investors until the stock market declines, shrinking the value of the assets set aside to pay workers. But given the widespread downbeat sentiment about GE stock, we don’t think the company can afford another large call on its liquidity, so it may be better for management to aggressively manage the shortfall before the next bear market.

Management has started to make progress. A company spokesperson reminded Barron’s that the company has funded contributions of $6 billion to the pension plan in 2018. That should take care of GE’s cash contributions through 2020, assuming markets don’t fall.

Higher interest rates also help shrink pension liabilities, reducing the present value of open-ended obligations. Discount rates track bond yields and the 30-year bond yield is up about 0.5 percentage point this year. GE disclosed in its 2017 annual report that a 0.25 percentage-point increase in rates would shrink the pension obligation by $2.2 billion—a point Chief Financial Officer Jamie S. Miller reiterated in February.That’s just how the math works.

Still, pension plans in the S&P 500 are about 85% funded. Even with this year’s contributions, GE probably needs to pump in another $5 to $8 billion to reach that level.

Adding cash to the plan is one option. GE could also move a portion of its pension off the books entirely. Steve Catone, a senior consulting actuary at Korn Ferry , told Barron’s that, “companies have been immunizing themselves from old pension obligations by purchasing annuities with insurance companies.” He added, “you can retire a pension plan for good for about 15% of the benefit obligation.”

Of course, you have to transfer the pension assets along with the liability. That could get expensive, and GE may want to hang onto its available liquidity.

But the company may be able to leverage higher rates and recent contributions to lower its obligation permanently. With the right mix of choices, GE could take the pension issue off the table for years to come.