Friday, June 1, 2012

GM Lump Sum Offer

On June 1, General Motors announced a plan to reduce its pension liability by an expected 26 Billion dollars <click here to read the Prototype of our White Paper on this topic>. In a move similar to one recently announced by Ford Motor Company, GM plans to provide select U.S. salaried retirees a lump-sum payment offer and other retirees with a continued monthly pension payment securely administered and paid by The Prudential Insurance Company of America. Approximately 42,000 salaried retirees and surviving beneficiaries will be eligible for the lump-sum offer. The initial eligibility and options are:

A. Retired from GM on or after October 1, 1997 and before December 1, 2011, you have three options:
  • One-time, single lump-sum payment
  • Continue with current monthly benefit, payable by Prudential
  • New form of monthly benefit (based on marital status)- single life annuity or joint and survivor monthly benefit, payable by Prudential
Retired from GM before October 1, 1997: You will continue with current monthly benefit, payable by Prudential.

Most active Salaried employees and retirees who started receiving their pension benefits on or after December, 1 2011:
  • Moved into new GM pension plan
  • Lump sum payment
  • Monthly pension benefit available at retirement, payable by GM
The lump-sum vs. monthly pension benefit decision is an exceedingly complex one, with tax, estate, mortality, investment, and many more consequences. LJPR, LLC is experienced in this type of analysis. We have written a White Paper analyzing the Ford Lump-Sum offer, and we wrote a White Paper <currently a Prototype, pending final information from GM> to help GM Retirees decipher the June 1 offer from General Motors. We are also writing a White Paper with the analysis on Generic Lump-Sum Buyouts.

As we state in our White Paper, keep in mind that, in general, comparing an annuity stream to a lump sum is an equation involving Present Value.  This calculation is based on the series of payments, the time period involved and the rate of return.  General Motors will provide the retiree with a lump sum that has been actuarially computed to equal the monthly stream at a rate of interest.  Retirees should note that what they currently have from GM is an annuity and a reasonably nice one.  It is a lifetime annuity for the retiree. For a married retiree, it is a reduced annuity lasting for their lifetime and that of the surviving spouse.   The analysis is therefore:  "Which alternative is best for me?”  Because of the personalized nature of the analysis, here are a few of the ‘moving parts’ or variables of the analysis, in no particular order:
  1. What is the age of the retiree?  (Under 59 ½, 59 ½ to 70 ½, or 70 ½ and older?);
  2. Marital status of the retiree?
  3. What is the relative health of the retiree?  The spouse?
  4. What is the sex of the retiree?  The spouse?
  5. What heirs or legacy wishes does the retiree have?  (Leave excess funds to children, grandchildren, charity?);
  6. How important is the flexibility of withdrawals? (spouse working, spouse’s pension, Social Security);
  7. What income tax bracket is the retiree in, what bracket after age 70 ½?
  8. What is the size of the retiree’s taxable estate?
  9. Does the retiree have dual credit bypass trusts (if married), and if so, how are they funded?
  10. What is the retiree’s risk tolerance?
  11. What is the retiree’s anticipation of future inflation?
  12. What is the retiree’s expected future return on investments?
  13. What is the retiree’s investment knowledge or willingness to delegate investment management?
  14. What are the retiree’s other retirement income flows? (Spouse’s pension, investment income, Social Security (retiree and spouse), rents, jobs, etc.);
  15. What other retirement assets does the retiree have? (SSPP, IRAs, Roth IRAs, Annuities, and other investments);
  16. What is the necessary retirement cash flow for the retiree?  (E.g. living expenses, debt service, medical, etc.);
For our Prototype White Paper on the GM Lump Sum Offer, click here. For more information on this topic, please call our offices at: 248.641.7400.