In a move to alleviate its significant pension deficit, General Electric Co. has announced plans to freeze benefits for over 20,000 employees. This decision is part of the company’s efforts to reduce debt and improve its financial stability.
A Lingering Issue: GE’s Pension Deficit
GE’s underfunded pension liabilities stood at $22.4 billion as of last year, representing the largest shortfall among firms in the Russell 1000 Index of large U.S. companies. Despite a decrease in recent years, the company faces challenges from falling interest rates, which increase the funding gap by shrinking expected investment returns.
Impact on Employees and Shareholders
The pension freeze will affect approximately 20,000 employees in GE’s main U.S. pension plan, as well as about 700 employees in a supplementary plan. Beginning in 2021, these employees will no longer accrue new benefits under the frozen plans. Instead, they will receive a 401(k) plan with employer matching contributions.
Retirees already drawing pension benefits will not be affected by this decision. Additionally, GE will offer a lump-sum payment to 100,000 eligible former employees who have not yet started receiving their monthly pension payments.
Reducing Debt: A Key Priority for GE
The company’s chief human resources officer, Kevin Cox, stated that the decision to freeze the pension was made as part of GE’s efforts to "return [the] company to a position of strength." As part of its debt reduction strategy, GE aims to reduce the net debt of its industrial businesses by $25 billion and lower its debt-to-earnings ratio to 2.5 times by the end of next year.
Share Price Reaction
The shares fell less than 1 percent to $8.55 at 10:24 a.m. in New York, following the announcement. GE’s bonds gained on Monday’s news, with the risk premium on its 3.373 per cent bonds due 2025 tightening nearly 8 basis points.
Conclusion
GE’s decision to freeze its pension plans is a significant step towards addressing its substantial pension deficit and reducing debt. While this move may impact some employees, it is part of the company’s broader efforts to improve its financial stability and position itself for long-term success.
Key Statistics:
- GE’s underfunded pension liabilities stood at $22.4 billion as of last year.
- Approximately 20,000 employees in GE’s main U.S. pension plan will be affected by the freeze.
- The company aims to reduce its net debt by $25 billion and lower its debt-to-earnings ratio to 2.5 times by the end of next year.
Related Articles:
- "GE’s Pension Deficit: A Growing Concern for Investors"
- "General Electric’s Debt Reduction Strategy: A Closer Look"
- "Pension Reform: What’s Next for GE and Other Companies?"