GM DB to DC Pension Move among Belt-Tightening Steps

February 7, 2006 ( - Following the announcement of major job cuts at Ford, General Motors on Tuesday announced its own round of belt-tightening moves including a new retirement savings program and a retiree health coverage cap.

In a news release on its Web site, the giant automaker announced that it is examining how its US pension program should be restructured.

GM Chairman and Chief Executive Officer Rick Wagoner said in the announcement that the company intends to freeze its defined benefit program for salaried employees and move workers to a new plan that he said could be a defined contribution or a cash balance arrangement. Wagoner said the pension plan changes would not affect current retirees or surviving spouses who are drawing benefits from the Salaried Retirement Program.

“We have decided to substantially alter the pension benefits for currentUS salaried employees so that we can provide a competitive and fair benefit but also reduce the financial risks to GM,” Wagoner said in the statement.

The revelation from GM follows a steady stream of smallerUS firms that have already taken the defined benefit to defined contribution plan step (See Two More Companies Join DB Plan Freezing List ).

In addition to the first specific announcement about a pension plan change and specifics of its retiree health coverage cap, GM also listed a series of other cost-saving steps including a 50% cutback in stockholders’ dividends, a “significant” reduction in salary for senior GM managers and a 50% cutback in outside directors’ compensation.

Cutting Health Care Liability $4.8 Billion

Regarding health care coverage offered to salaried retirees, Wagoner said in the statement that the plan changes are expected to slash the company’s liability by about $4.8 billion and its annual health-care expense by almost $900 million before tax.

The automaker said that it will cap its contributions to salaried retiree health-care at the level of its 2006 expenditures. The cap will take effect beginning January 1, 2007 and will affect those employees and retirees who are eligible for the salaried post-retirement health-care benefit, their surviving spouses and their eligible dependents. Salaried employees who were hired after January 1, 1993, are not eligible for retiree health-care benefits, so they are not affected by these changes, the announcement said.

When average costs exceed established limits following 2006, additional plan changes that affect cost-sharing features of program coverage will occur, effective with the start of the next calendar year. Program changes may include, but are not limited to:

  • higher monthly contributions
  • deductibles
  • coinsurance
  • out-of-pocket maximums
  • prescription drug payments.

Plan changes may also be implemented in medical, dental, vision, and prescription drug plans, the GM official said.

“This is a difficult but necessary decision, and it was made only after the greatest deliberation,” said Wagoner. “A number of otherUS companies have already taken similar action in the face of these rising costs and increasing global competition. In particular, US health-care costs continue to rise at high rates. When these benefits were conceived decades ago, no one could have foreseen the explosive cost inflation that we have been experiencing in recent years. These costs are simply not sustainable.”