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Ford to offer landmark pension buyouts

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By Reuters
Wednesday, May 30, 2012, 7:36 p.m.
 

Ford Motor Co. will pursue its boldest attempt yet to tackle a nearly $50 billion risk to its business when it begins offering lump-sum pension payout offers to 98,000 white-collar retirees and former employees this summer.

The voluntary buyouts have the potential to lop off one-third of Ford's $49 billion U.S. pension liability, a move that could shore up the company's credit rating and stock price. It is unclear to Ford, retirees and analysts just how many people will gamble on the offer, which pension experts described as unprecedented in its magnitude and scope.

"We think if we can get at least a meaningful number of employees, this will take billions of dollars of obligations potentially off the table," Ford CFO Bob Shanks told Reuters.

A growing concern for decades as American automakers lost market share to foreign-based automakers in their home country, pension costs became an albatross for the industry with the sector's downturn five years ago.

The offers are the latest in a series of steps Ford and its larger rival General Motors Co have taken to cut these risks. Since 2000, Ford's pension liability has increased almost 50 percent. Several companies have asked Ford how the buyout offers will be rolled out, a sign that others may follow suit if Ford is successful.

The No. 2 American automaker sketched out its pension buyout offer for current retirees when it released first-quarter earnings in April, but until now had offered few details.

As early as August, between 12,000 and 15,000 U.S.-based workers will receive the first wave of offers to swap their monthly pension checks for a one-time payment.

The offer shifts the responsibility of managing those funds from Ford to the retiree. It is rare for a company to amend an existing pension plan.

"I feel schizophrenic at times," said Rick Popp, Ford's director of employee benefits. "There are times when I think it will be very popular. Other times, I think nobody will take it. To us, it's an opportunity."

At the end of 2011, the gross pension liabilities of both GM and Ford rose to record levels, Citi analyst Itay Michaeli said. Ford finished 2011 with a global pension obligation of $74 billion, nearly double the company's $40 billion stock market value.

Ford's global pension plan was underfunded by $15.4 billion as of end 2011. This shortfall, which widens and contracts based on asset returns and interest rates, is typically viewed as debt by credit ratings agencies.

The voluntary buyouts will not change the pension shortfall, but lowering the overall size of the obligation will help Ford align plan assets with liabilities. Like many businesses, both GM and Ford have taken steps to shift their pension assets to steady, fixed-income investments and are pouring in cash to fund those plans.

The idea of the voluntary buyouts came after a meeting between Ford's top financial executives and in-house pension experts three years ago. In the midst of the financial downturn, Ford's then-CFO Lewis Booth met with Shanks, Ford Treasurer Neil Schloss and in-house pension experts to consider ways to slash the company's pension liability.

Ford received governmental approval to make the lump-sum payments in March. Shanks said the approval came after Ford showed the deal would give "an incremental favorable option to the plan participant." Shanks and Ford declined to elaborate.

Ford shares have lost 16.4 percent since mid-February. The stock closed down 1.7 percent at $10.66.

The automaker benefits from a change in U.S. pension law this year that allows companies to use a corporate bond rate in calculating lump-sum payments, rather than the 30-year Treasury rates. That would make it less expensive to make those offers, said Jonathan Barry, a partner at benefits consulting firm Mercer.

 

 
 


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