GE freezes pensions of 20,000 employees

GE will freeze the pensions of 20,000 employees and offer pension buyouts to another 100,000  to reduce debt.

Aimee Picchi had the news for CBS:

General Electric announced it will freeze the pensions of 20,000 U.S. salaried workers, a measure designed to reduce its pension deficit and trim debt. The move will shave GE’s pension deficit by as much as $8 billion and its net debt by as much as $6 billion.

As part of the pension freeze, the industrial conglomerate said it will freeze supplementary pension benefits for approximately 700 employees who became executives before 2011. Supplemental pension plans are typically designed for higher-ranking employees and offer benefits beyond the typical pension plan.

“Returning GE to a position of strength has required us to make several difficult decisions, and today’s decision to freeze the pension is no exception,” said Kevin Cox, chief human resources officer at GE.

As part of such efforts, the company said last month it would spend $5 billion to pay down debt. But the effort to reduce debt could also damage employee morale at a time when CEO H. Lawrence Culp Jr. is trying to turn around the troubled conglomerate.

“The impact on employee engagement/morale of some of these pension measures is unlikely to be positive, but in a situation of ‘corporate battlefield surgery,’ this tends to be a typical, if unfortunate casualty,” noted Barclay’s analyst Julian Mitchell in a Monday research note.

CNN’s Matt Egan reported:

GE (GE) said it will pre-fund $4 billion to $5 billion of its pension obligations for 2021 and 2022 and offer lump-sum payouts to 100,000 former employees who have not started their monthly payments yet. GE is also freezing supplementary pension benefits for about 700 employees who became executives prior to 2011. To fund the pensions through 2022, the company said it will use a portion of the $38 billion of cash it plans to raise from asset sales.

Together, the moves are aimed at slashing GE’s pension deficit by between $5 billion and $8 billion, helping reduce the struggling company’s mountain of liabilities.

The maker of light bulbs, MRI machines and jet engines said the steps will not impact GE retirees who are already collecting pensions. It also will not affect employees with production benefits.

GE closed its pension to new hires in 2012. The pension freeze for salaried workers will go into effect January 1, 2021, meaning those workers will not earn additional pension benefits, though they will keep what they have already earned.

GE said that starting in early 2021, it will contribute 3% of eligible compensation to the company’s 401(k) plan and provide matching contributions of 50% on up to 8% of eligible compensation. For the first two years, GE will provide an extra 2% to the 401(k) plans.

CNBC’s Sarah O’Brien focused on the employee perspective:

Whether you count yourself among those former GE workers or are employed by another company with a similar option on the table, advisors say the decision shouldn’t be made lightly.

“It can be tempting to accept a large-sounding payout, but you have to consider if you have the help necessary to invest the funds successfully,” said certified financial planner Liz Miller, president of Summit Place Financial Advisors in Summit, New Jersey.

For people who are offered a lump sum in exchange for exiting their company’s plan, there are some things to consider.

For starters, be aware that the amount offered is generally lower in comparison to the amount you are promised to get down the road, over time, if you were to stay in the plan.

However, if you want to remain a participant, be sure you have confidence in the company’s ability to make those future payments. Although the Pension Benefit Guaranty Corporation would step in if the company could not, the federal agency would pay only a certain portion of promised benefits.

Sometimes, companies end up buying annuities for workers who decide to remain in the plan, which means an insurance company takes over the payments (and the financial risk).

Also, if you choose to remain in the pension plan instead of taking the lump sum, keep in mind that the amount you’ll receive may be fixed for life. Pensions typically don’t have a cost-of-living adjustment for payments, which means the income would lose purchasing power over time.

Additionally, although some pensions offer spousal benefits — i.e., when you die, your spouse would continue getting a portion of the payments — there is nothing left for heirs. In other words, your death (or your spouse’s) ends the plan’s obligations to you.