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US: G.M. to Freeze Pension Plan for Salaried Workers

by Michelle MaynardThe New York Times
March 7th, 2006

General Motors announced significant changes today to its retirement benefits covering 42,000 salaried workers in the United States.

G.M., the nation's biggest auto company, said it would freeze its defined-benefits pension plan and shift to less-expensive retirement programs.

G.M.'s move will result in a pretax charge against earnings of $120 million this year, the company said. But, it said the action also would reduce its 2006 pension expense by approximately $1.6 billion.

The company's action does not affect the benefits of its retired salaried workers. It also does not affect active or retired members of the United Automobile Workers union.

The move by G.M. echoes steps taken at a number of companies, including Verizon Communications, Motorola and I.B.M., which have frozen their pension plans and shifted employees to less-costly plans.

Its action comes as G.M. is struggling to reverse a slide in sales and market share. G.M. lost $8.6 billion in 2005, most of it in North America. In November, G.M. said it would shut all or parts of a dozen plants and cut 30,000 jobs by 2008. The first of those plants, in Oklahoma City, closed last week.

G.M. and other Detroit auto companies face heavy burdens for pension and health care expenses, which they refer to as legacy costs. The companies estimate these expenses cost them $1,800 per vehicle.

By contrast, foreign automakers like Toyota, Honda, Nissan and others with factories in the United States generally do not offer defined-benefits pension plans, relying more heavily on 401(k) programs that require employees to contribute for retirement.

"Our legacy costs in pensions and health care are an area of significant competitive disadvantage for us," G.M.'s chief executive, Rick Wagoner, said in a statement.

He went on, "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 G.M.'s financial risk and cost structure."

In its announcement today, G.M. said employees who were hired before Jan. 1, 2001 and who participate in its pension plan would stop accruing future benefits under its current formula.

Instead, they would be paid a modified pension benefit based on 1.25 times their monthly earnings for future years of service.

G.M. employees who were hired after Jan. 1, 2001, who currently participate in a type of retirement program called a cash balance plan, will stop accruing cash benefits.

Instead, G.M. will make a contribution to their 401(k) plans, equal to 4 percent of their annual base salary. The cash they have contributed will continue to earn interest, however.

G.M. also said it was freezing benefits that its executives have accrued under their supplemental pension plan. It said those benefits would be adjusted to reflect the salaried employees' plans.

Beginning Jan. 1, 2007, G.M. said it would provide a 50 percent match for salaried employee 401(k) contributions of up to 4 percent of their salary. It said that move would cost it $70 million more a year before taxes.

GM was unable to estimate how the moves would affect an individual worker. "I think it's fair to say it will represent a reduction; I just can't say how much," a G.M. spokesman, Jerry Dubrowski, said.

G.M.'s pension liability for 2004 was $89 billion. It does not have a liability number yet for 2005; G.M. estimates that it went up. G.M.'s pension plan is $6 billion overfunded. Companies are only allowed to freeze their plans, outside of bankruptcy, if they are funded.

G.M. signaled its intent to make the move last month, when it cut its dividend in half and announced changes in its health care plans for retired salaried employees. Last year, it reached agreement with the U.A.W. on modest cuts in health care coverage for union members. The plan still requires court approval.

At a hearing in Detroit on Monday, G.M.'s lawyers said approval of the union health care plan was necessary for the company's survival. Workers at Ford narrowly approved the cuts in December. Chrysler and the U.A.W. have not yet negotiated a similar program.




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