Ford Motor Co., which has a $15.4 billion unfunded pension liability, rejected offloading its retiree obligations as General Motors Co. is doing in favor of investing on global expansion, new models and paying dividends.
The second-largest U.S. automaker considered shifting its salaried pension plan to an outside company as GM is doing by purchasing an annuity with a Prudential Financial Inc. unit, Bob Shanks, Ford's chief financial officer, said yesterday. GM said it will spend $3.5 billion to $4.5 billion to purchase the group annuity and offer pension buyouts to 42,000 salaried retirees.
"That's a huge outlay," Shanks said in an interview in his office on the 11th floor of Ford's Dearborn, Michigan, headquarters. "When we look at our spending plans, look at our plans for dividends, look at our plans for pension contributions, when we think about our growth plans, product plans. As we do all that, we don't think we have excess cash."
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Ford is offering lump-sum pension payments to about 98,000 U.S. salaried retirees and former employees. Shanks can't say how much that may lower Ford's global $74 billion pension liability because it's unclear how many retirees will take the buyout. GM said it aims to cut its pension obligation by $26 billion through offering buyouts and creating the annuity.
"We've looked at all sorts of options," Shanks said. "It's not like it's rocket science, there's only so many things you can do to de-risk a pension plan. We are comfortable with what we've done thus far."
'Very Personal'
Ford is contributing $3.5 billion to its global pension plans this year and will begin making buyout offers to salaried retirees in August, Shanks said. GM's move to also offer lump-sum payments to retirees isn't likely to have any impact on the take-rate at Ford, Shanks said.
"If it were me, it would be very personal," Shanks said. "I'd have my own point of view about how I felt from a financial perspective. I'd have my point of view about how I felt about the health of the company because, obviously, by not taking a lump sum you're assuming and depending on Ford continuing as an ongoing operation for the balance of your lifetime."
The multi-billion dollar size of the annuity makes GM's move a "wow," Shanks said. No annuity transaction has exceeded $1 billion since the 1980s, according to insurance broker Aon Plc.
"The market has been thin, relatively speaking, in terms of these types of deals, maybe a billion a year," Shanks said. "So to do billions and billions and billions of dollars, they've clearly had to do some really good work with Prudential to put together a market big enough to accommodate."
The creation of the annuity gives GM assurance that it can lower its pension liability by $26 billion, CFO Dan Ammann said June 1. GM's global pension obligation of $134 billion was underfunded by $25.4 billion at the end of last year, up from $22.2 billion a year earlier, according to a company regulatory filing.
"We're offering lump sums similar to what Ford has proposed," Ammann said. "For all of the remaining liability that is left, i.e. what doesn't get taken up from lump sums, that is what we are going to transfer to Prudential through the annuity contract. So one way or another, we know we will move the entire $26 billion off of our balance sheet."
Ford fell 0.8 percent to $10.04 at the close in New York. The automaker's shares are down 6.7 percent this year. GM slid 4.1 percent to $21.11, the lowest since Jan. 3. The shares are up 4.1 percent this year.
Ford's Investments
Ford has earmarked "quite a substantial amount" to fully fund its pension plans by mid-decade, Shanks said.
The automaker also is spending $4.9 billion to build eight factories and introduce 15 new models by 2015 in China, where it has less than 3 percent of the world's largest auto market. Ford this year is boosting factory capacity in North America to build 400,000 additional vehicles a year.
Ford resumed paying a dividend in March following a five-year suspension. The automaker would eventually like to increase its 5-cents-a-share quarterly payout, Shanks said, without giving a timetable.
"We've got more we'd like to do with dividends down the road as we continue to grow," Shanks said. "Clearly, at 5-cents-a-share, we wouldn't expect to stay there forever."
Though Ford continues to look for additional ways to reduce its pension obligation, Shanks said he doesn't see any additional options.
"We've looked at everything, at least everything I think we can think of," Shanks said. "If someone comes up with something else, I'm sure we'll look at that, too. But I think we're comfortable with where we are at."
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