GE Freezes Pension Plan for 20,000 Employees

Posted by Charles Middleton on 10/08/2019

General Electric (GE) Co. announced on Oct. 7 it is freezing new vesting in its defined-benefit pension plan for about 20,000 current U.S. employees with salaried benefits effective Jan. 1, 2020, as part of its effort to reduce its pension deficit by up to $8 billion. GE will offer a limited-time lump-sum payment option to about 100,000 former employees who have not yet started their monthly pension payments.

GE also will freeze U.S. supplementary pension benefits for approximately 700 employees who became executives before 2011. There is no change for GE retirees already collecting pension benefits, the company said. The change does not affect union workers, or nonunion production workers paid hourly wages.

The company had allowed salaried workers to continue to accrue traditional pension payments, although it closed its plan to new participants in 2012.

"Returning GE to a position of strength has required us to make several difficult decisions, and [the] decision to freeze the pension is no exception," said Kevin Cox, chief human resources officer at GE. "We carefully weighed market trends and our strategic priority to improve our financial position with the impact to our employees. We are committed to helping our employees through this transition."

GE's move is the latest in an ongoing trend in corporate America away from defined-benefit pensions in favor of 401(k)-type defined-contribution retirement plans. GE announced that workers vested in the frozen pension will receive an extra 2 percent of their salary in the company's existing 401(k) plan for two years.

Once common among large and midsize U.S. companies, traditional defined-benefit pension plans are offered by only 21 percent of Society for Human Resource Management (SHRM) members. Ten percent maintain a pension plan frozen for current employees or not open to new hires, according to the research report Investment and Retirement, part of the SHRM 2019 Employee Benefits series.

Frozen Plan Alternatives

"In freezing pension accruals, GE took a step that a number of other large organizations have also taken," said John Lowell, an Atlanta-based partner and actuary with October Three Consulting, a retirement plan advisory firm. However, defined-benefit plan sponsors may have other options that "don't result in an exit from the defined-benefit system but do serve the purpose of limiting volatility in liability growth and in cash and accounting costs," Lowell noted.

"Without knowing what other options GE may have considered, it's not possible to know if [freezing the plan] was the optimal solution."

De-risking options other defined-benefit pension sponsors have taken to keep their plans open to employees include:

 

  • Offer former employees an immediate lump-sum benefit from the pension plan in lieu of a monthly annuity sometime in the future. The company's offer has to be voluntarily accepted by the beneficiary and is generally targeted to former employees who are fully vested in their pension benefits but not yet old enough to collect them. These payouts must provide the current dollar value of participants' vested benefits from the pension plan.
  • Convert pensions into an insurance annuity. Employers make a deal with an annuity provider, usually an insurance company, to transfer a certain amount of plan assets, plus pay additional fees, in return for monthly payments to plan beneficiaries when they retire. Alternatively, plan sponsors may choose to self-fund plan annuities, which can be less expensive than purchasing annuities from a third party.
  • Adopt liability-driven investing strategies that attempt to match returns to plan obligations. This tactic can be used in conjunction with other de-risking strategies, for instance by paying lump sums to a certain number of participants while simultaneously changing investment policy to better match liabilities.

 

Cash-Balance Plans: Another Solution

"If a company has been in the defined-benefit arena for as long as GE, then what they have essentially done is made a commitment to providing lifetime income solutions at a fair price to their employees," Lowell said. "What has driven many companies away from this is not the lifetime income concept, but the volatility and unpredictability of the costs of defined benefit."

While some of the tactics listed above will either smooth out the financial risk of providing a defined benefit or transfer it away from the employer, "they do so at a substantial psychological cost to those employees that are depending on lifetime income" backed by the employer.

A solution Lowell favors is to convert traditional pension plans to market-based cash-balance plans, which combine features of traditional pensions, including backing by the federal Pension Benefit Guaranty Corp., and defined-contribution plans, such as employee contributions. "The key about market-based cash balance is that it eliminates most of the unwanted volatility," he noted, by tying interest credits to a market-based return.

This approach can "give employees the opportunity to choose between lump sums or fairly priced lifetime income within the plan, while providing cost predictability and stability for the employer," Lowell said.

Written by Stephen Miller, CEBS, Online Manager/Editor, Compensation & Benefits

Published www.shrm.org, October 8, 2019