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GE’s Latest Casualty? Pension Promises

Brooke Sutherland
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GE’s Latest Casualty? Pension Promises

(Bloomberg Opinion) -- General Electric Co. employees are still paying the price for the company's mistakes.

The industrial conglomerate announced on Monday that it will freeze U.S. pension benefits for approximately 20,000 salaried employees and supplemental payouts for 700 executives. They’ll get to keep the benefits they’ve already accrued, and a plan to prefund an additional $4 billion to $5 billion of those obligations helps ensure they will actually get paid out. There’s no change for retirees, and hourly production workers won’t be impacted, either.

GE is throwing in a sweetener to help its current salaried workforce transition over to its 401(k) plan. But this still is bound to feel like a slap in the face for those employees who’ve grinded it out through some of the company’s darkest days.

Former Chief Executive Officer Jeff Immelt, who lavished precious cash on the ill-conceived acquisitions and buybacks that have contributed to GE’s current troubles, is already collecting his pension benefits and won’t be affected by these changes. Both former Chief Financial Officer Jeff Bornstein and Immelt’s successor, John Flannery, who served just 14 months as CEO, were vested into their accrued pension benefits pursuant to their separation agreements. Immelt had amassed $85 million in overall pension benefits as of the end of 2017, the year he retired, according to GE’s 2018 proxy statement. Bornstein had $24 million in benefits as of that year, while Flannery’s total pension benefits were sized at about $23 million as of the end of 2018.

Larry Culp, who replaced Flannery a year ago, doesn’t participate in GE’s pension plan, along with all other employees who joined after 2011, although he isn’t hurting for compensation. Culp may be the one announcing this pension change, but I doubt employees will blame him for it, nor should they. It’s a tough decision that unfortunately needed to be made and will help GE cap one of its biggest and most fluid liabilities. Pension obligations represent $21 billion of the company’s $54 billion in industrial net debt, as calculated by GE at the end of the second quarter. With interest rates plunging, the company’s unfunded pension balance was set to balloon.

As part of the changes announced Monday, GE will also offer former employees who haven’t yet started collecting their pension benefits the option to receive them in a lump sum (paid by existing assets in the plan) versus monthly installments. Depending on how many of them take that deal, collectively, these actions will reduce GE’s pension deficit by as much as $8 billion.

 

GE bonds rallied on the news, but the company’s shares were more or less flat. To me, that’s a reflection of GE’s decision to dump an additional $4 billion to $5 billion of cash into its pension fund next year to prepay minimum obligations for 2021 and 2022. While that removes some of the risk associated with GE’s pension plan, it’s money that not all analysts may have been prepared to see the company spend in this time frame, particularly given projections for at best meager cash-flow at its industrial businesses over the next few years. It also leaves less of a cushion should any of GE’s other opaque, large liabilities mushroom, particularly in the long-term care insurance business where the company should announce the results of its annual GAAP loss recognition testing later this month.

At the end of the day, GE needs to reduce its debt load and that’s what it’s doing here. But it leaves a bitter taste.

To contact the author of this story: Brooke Sutherland at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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