Recently, two of America's largest automakers, General Motors Corp. and Ford Motor Co., approved and announced bold steps to strengthen their balance sheets, reduce their pension obligations, and improve their financial positions. Their solution: implementing policies to "remove the risk" associated with their underfunded pension plans. This is the first time in history for an American company (equivalent to the size of GM and Ford) to launch such a unique program.
What motivated this change to offer lump-sum payments to specific retirees, former employees, and surviving spouses was to reduce their pension obligations. Ford plans to offer the buyout to just under 100,000 retirees, striving to reduce its approximately $74 billion pension obligations. GM will offer the buyout to 42,000 former employees to reduce their pension liabilities by about $26 billion.
The financial burden of monthly pension benefits paid out by GM and Ford is not a new concern. The pension plan for both Ford and GM is currently grossly underfunded as they have stated. By offering a lump-sum payout to current recipients or transferring the benefit payout to an annuity program, this risk is transferred to the individual or an insurance company.
GM retirees should expect the buyouts to apply to those who retired on or after Oct. 1, 1997 and before Dec. 1, 2011. As a former employee or surviving spouse of this group, there will be three options available and you will need to make an important decision: continue with a current monthly benefit payable by Prudential, receive a one-time lump-sum payment or restructure the monthly benefit annuity option (payable by Prudential).
Ford has not yet released their election kits (which will be more specific about election options). However, the announcement letter to former employees advised that the kit will contain the value of their lump-sum pension benefit, their specific payment options and instructions on how to make the election.
GM pension plan recipients will have until July 20 to make their decision, while Ford plans to roll out their offers in specific waves beginning in August. GM employees will need to make a decision this month, leaving little time for a retiree to meet with a financial professional for prudent advice. Be sure to connect early on and weigh in on the various options that are being offered. No two retirees have the same lifestyle circumstances; therefore the decision is personally oriented to what benefits you most. A financial planner can assist you in reviewing and solidifying your options.
Ford will be using a series of election periods held at the end of 2012 and beginning of 2013. Mailing times of the "Election Kits" will be based on a random process tied to an employee's Social Security number.
Current recipients that are part of the buyout group will receive an election kit and 90 days to make a decision. This will allow more time to study the impact of your selection with an adviser versed in your options. There are various factors to consider in making your decision including: the fairness of the offer, the long-term health of both Ford and GM, your health and weighing the option to invest directly into a rollover IRA to gain more control, avoid any current taxation and provide a legacy to your family.
Steven T. Merkel, along with others versed on this topic, helped research this information. Kim Ciccarelli Kantor is president and founder of Ciccarelli Advisory Services Inc., a family owned and operated firm in Florida and New York, which provides financial investment and estate planning services for individuals, families and businesses.
Ciccarelli Advisory Services Inc. is at 3066 U.S. N., No. 202, Naples. Call 239-262-6577 for more information.