Lump Sum vs Prudential Annuity - Buyout Overview
The General Motors Pension Buyout was a widely publicized and highly controversial financial move by GM to limit its pension liability. In June 1st 2012 GM offered 42,000 of 118,000 retired salaried (white collar) employees the option of accepting a lump sum distribution or to continue receiving their monthly pension benefit from Prudential Insurance Co. of America. Retirees were given until July 20th 2012 to make their decision.
General Motors projected that this option would eliminate $26 billion of its $134 billion in worldwide pension obligations. This at the time would have closed the gap and returned the pension trust fund to 100% funded.
What does all this mean for the General Motors retiree?
Opting to take the lump sum could be a risky affair for some folks as they would have to reinvest that money to try and recreate the same type of monthly benefit.
This is a tall order and unlikely due to high fees and ever changing financial markets.Buying an annuity directly from an insurance company is an option but more expensive for the individual meaning that the retirees benefits would be lower than what they have been previously receiving directly from GM. The challenge with continuing to receive the monthly benefit from Prudential is that the benefits would no longer be insured by the federal Pension Benefit Guaranty Corp.
Roughly 30% of the eligible retirees opted to take the lump-sum payment which equaled $3.6 Billion to General Motors. The average payout was $273,000. The remainder of liabilities were shifted to Prudential, a deal which finalized on November 1 2012.
This plan cut $29 billion from the pension obligations which was $3B better than GM analysts predicted. Additionally General Motors contributed $2.6 billion in cash contribution to the salaried pension plan however this was less than previously projected.
Future Buyouts
Early in calendar year 2013 General Motors began talks with the United Auto Workers (UAW) union about offering lump sum pension payouts to hourly retirees in the United States. This "blue collar" group is much larger than the salaried retirees representing roughly 400,000 former employees.
At the time it was reported that the UAW opposes union pension buyouts and has historically fought vigorously for pension benefits. With talks being postponed until 2015, there is much anticipation surrounding this issue.