General Motors announced modifications to its pension and other benefits for U.S. salaried employees aimed at providing a competitive and fair benefit to future retirees, while reducing financial risks to GM.
Effective Jan. 1, 2007, GM will freeze the accrued pension benefits for U.S. salaried employees under the current defined benefit plan formula and begin the shift toward a broader reliance on defined contribution plans in the future. Salaried employees who were hired on or after Jan. 1, 2001 will move exclusively to a defined contribution plan for future service. Salaried employees hired before that date will remain in the defined benefit plan. They will receive a reduced retirement benefit for future accruals under a new career average pay formula. Pension benefits earned prior to the transition date will be preserved. The changes do not affect the benefits of GM’s current U.S. salaried retirees or the vested benefits of former employees.
“As noted on Feb. 7, when we announced significant additional actions to support GM’s ongoing turnaround plan, these decisions are difficult, but necessary to position GM for future success and preserve employees’ earned retirement benefits,” GM Chairman and Chief Executive Officer Rick Wagoner said. “These changes will reduce financial risks and future costs for GM, while protecting current retirees’ and employees’ earned pension benefits and providing competitive and fair retirement benefits going forward.”
These changes, effective Jan. 1, 2007, include the following:
GM salaried employees hired before Jan. 1, 2001, who currently participate in the traditional defined benefit plan with a final average pay formula will stop accruing future benefits under that formula and receive a modified future benefit based on 1.25 percent of average monthly base salary for their future years of service.
GM salaried employees hired on or after Jan. 1, 2001, who currently participate in a cash balance plan, will stop accruing future pay credits under that plan and receive a contribution to their salaried 401(k) program from GM of 4 percent of annual base salary. Existing balances under the cash balance plan continue to earn annual interest credits.
GM U.S. executives who participate in the Supplemental Executive Retirement Plan (SERP) also will have their SERP benefits frozen as of Dec. 31, 2006. Effective Jan. 1, 2007, the SERP plan will be amended to be aligned with the revised U.S. salaried employee pension plan.
The changes to the U.S. salaried pension plan and related benefits follow a series of actions announced on Feb. 7 aimed at reducing GM’s structural costs and improving GM’s financial flexibility, including capping retiree health-care benefits for U.S. salaried retirees; cutting compensation for GM’s top officers and board members by up to 50 percent; and reducing the quarterly dividend by 50 percent.
Late last year, GM reached a tentative agreement with the United Auto Workers Union that would significantly reduce GM’s hourly retiree health-care costs. This agreement was ratified by members of the union and is awaiting court approval. GM also announced plans to reduce its North American manufacturing capacity, and eliminate 30,000 hourly jobs by 2008.
“Global competition is truly changing the auto industry, and we must restructure ourselves to compete successfully in it,” Wagoner said. “In many cases, our non-U.S. based competitors do not have comparable legacy costs, because retirement benefits for employees and retirees in their home countries are more heavily government funded. So, our legacy costs in pensions and health care are an area of significant competitive disadvantage for us. These changes we are announcing today in our salaried retirement program, plus other changes we announced in recent months, will continue to provide our employees with a good benefit package today, while reducing GM’s financial risk and cost structure.”
In connection with the changes being announced today, GM expects its worldwide FAS-87 pre-tax pension expense to be reduced by approximately $420 million in 2007. On an annual basis, commencing in 2007, the additional 401(k) contributions the corporation will make for employees hired after Jan. 1, 2001 are expected to increase expense by approximately $15 million. As a result of the changes, GM also expects to record a FAS-88 pre-tax charge of approximately $120 million upon remeasurement of GM’s long term pension liability. Assuming the remeasurement occurs by the end of March, 2006, GM expects to realize about 75 percent of the expected annual FAS-87 expense reduction in 2006. The changes are also expected to reduce GM’s year-end 2006 pension liability by approximately $1.6 billion.
In addition to these actions, effective Jan. 1, 2007, all eligible U.S. salaried employees who contribute to GM’s 401(k) program will receive a company match of 50 percent on the amount the employee contributes up to 4 percent of base salary. This action will increase pre-tax expense by approximately $70 million annually.