G.M. Freezes Pension Plan of Its Salaried Workers

[Marc]

Unexpected? From the New York Times

DETROIT, March 7 — The General Motors Corporation announced extensive changes to the retirement plans of its salaried employees on Tuesday, a decision that will cut its pension costs by $1.6 billion this year and lead to lower benefits for workers. G.M. said it would freeze its defined-benefits pension plan and shift to less-expensive retirement programs for 42,000 workers in the United States.

A G.M. spokesman, Jerry Dubrowski, said the company could not estimate how the steps would affect the average worker, only that "it will be a reduction." But Brian Foley, a lawyer in White Plains who specializes in pension matters, said that for the typical salaried employee at G.M., "this has got to be a significant hit."

The benefits of G.M.'s retired salaried workers are not affected and neither are those of active or retired members of the United Automobile Workers union. In its freeze-and-shift strategy, G.M. is following similar moves by companies like Verizon Communications, Motorola and I.B.M.

The change, which will result in a pretax charge of $120 million this year, is the latest in a series of steps taken by the company, which is trying to cut billions of dollars in costs as well as revive its sales and market share. G.M. lost $8.6 billion in 2005, most of it in North America, and said in November that it would shut all or parts of a dozen plants and cut 30,000 jobs by 2008. G.M. and other Detroit auto companies face heavy burdens for pension and health care expenses, known as legacy costs, which they estimate are as much as $1,800 a vehicle.

By contrast, foreign automakers with factories in the United States, like Toyota and Nissan, generally do not offer defined-benefit 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.

In its announcement, G.M. said employees who were hired before Jan. 1, 2001 — believed to be the bulk of its salaried staff — would stop accruing 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 take part 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. said it was also freezing benefits that its executives had 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 up to 4 percent of their pay. It said that move would cost it $70 million more a year before taxes. G.M.'s pension liability for 2004 was $89 billion. It does not have a liability number yet for 2005; however, Mr. Dubrowski estimated that it rose.

He said G.M.'s pension plan was overfunded by $6 billion. Companies are allowed to freeze their plans, outside of bankruptcy, only 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.

Those actions came after a call for more sacrifice by G.M. employees from Jerome B. York, an associate of Kirk Kerkorian, who is G.M.'s biggest shareholder. On Monday, Mr. York attended his first G.M. board meeting since being named a director last month.

In late 2005, G.M. reached agreement with the U.A.W. on modest cuts in health care coverage for union members. The plan still requires court approval.