Ford's lump-sum offer is a first for a U.S. pension plan

PPA's new corporate bond rates make the move less expensive

Published: April 30, 2012 - Pensions & Investments

Ford Motor Co., Dearborn, Mich., will offer a voluntary lump-sum defined benefit plan payment to about 90,000 U.S. salaried retirees and former employees, apparently a first among large U.S. plans.

Company executives billed the lump-sum offer, announced on April 27, as the latest move in their long-term strategy to reduce risk in Ford's $39.4 billion U.S. pension plans.

The Ford executives didn't explain the timing, but observers said they believe Ford is making the offer now because it will cost less than in the past. Under a provision of the Pension Protection Act, new corporate bond rates were recently phased in, replacing 30-year Treasuries.

Robert L. Shanks, executive vice president and CFO, said during Ford's quarterly earnings conference call with analysts that he wouldn't provide details on the assumptions or discount rate.

“We have assumptions, obviously, but we prefer not to share them now because we don't know how good they are,” Mr. Shanks said, according to a transcript of the call provided by Bloomberg.

Nor would he say by how much the payout would cut Ford's pension obligation. “Because of the voluntary and unprecedented nature of this program, the participating level and therefore the impact on our future pension obligations is difficult to predict,” Mr. Shanks said.

“Individual offers will be made over time to accommodate the size and complexity of this program, and we would expect to complete the process some time next year,” he said.

The lump sums will be funded from plan assets, he said, and planned contributions will not be affected.

“This is a really significant step for us because it's really important that we improve the risk profile of the company,” Mr. Shanks said.

Ford's action appears to be unprecedented for a large U.S. pension plan.

“I'm not aware of anyone who has done this without terminating or annuitizing their plan,” said Jeremy Gold, president of Jeremy Gold Pensions, New York, an actuarial consulting firm.

“All your lump summing for employees is part of that (kind of) event, but ... I'm not aware of this being done on an optional basis,” he said.

“It could stimulate copycats, so I would think we might see a fair amount of this, particularly from companies whose pension plans are liquid enough or whose capability to fund their plan is not under great stress.”

Risk, not cost

Matt Hermann, St. Louis-based leader of Towers Watson & Co.'s retirement risk management group, said he believes Ford made the offer primarily to reduce risk and the size of the plan, and not as a way to save money.

“I can tell you that, broadly speaking, the majority of plan sponsors we're working with don't see this as a liability cost savings. There could be an administrative cost savings, (but) primarily this is a risk-management exercise to reduce the overall size of the plan,” Mr. Hermann said.

As for why Ford is making the offer now, Donald Fuerst, senior pension fellow at the American Academy of Actuaries, Washington, said the final phase of the PPA — allowing the use of purely a corporate bond rate instead of the 30-year Treasury rate — was implemented this year.

That rate will be used to determine the size of the lump-sum payments.

“It would have been more expensive in the past,” Mr. Fuerst said.

The spread between corporate bond and 30-year Treasury rates is generally 125 to 150 basis points. The phase-in of the new rate began in 2008 and was completed at the beginning of this year.

Mr. Fuerst predicts other companies will follow Ford's lead.

“(Ford's move) is a big deal. I think it is going to be a catalyst. I think you're going to see a lot more lump-sum distributions from now on.“

“From the company's standpoint, I can understand what they're trying to accomplish. It's an opportunity to move liabilities off the balance sheet,” Mr. Fuerst said. He added, however, that he thinks the Ford retirees will be “taking on a lot more risk.”

He explained that it will cost retirees more to buy an annuity on their own; there's the danger of retirees spending the lump sum too quickly and running out of money later; and the payouts for women are calculated the same as men, but they live longer, on average.

Mr. Hermann agreed that more plans might take this step. “Improved funded status and the strength of the equity markets should likely lead to additional action in this space,” he said.

In March, Neil Schloss, vice president and treasurer of Ford, said the plans would shift their allocations to lower risk, moving to 80% fixed income and 20% growth-seeking equity and alternatives assets over the next few years.

As of Dec. 31, the pension plans' allocation was 52.3% fixed income, 31.4% equity, 7% hedge funds, 4.9% private equity, 3.5% cash and 0.9% real estate.

Ford made $1.1 billion in pension contributions in the first quarter, up from $300 million a year earlier, according to its earnings statement. The company on Jan. 27 said it planned to contribute a total of about $3.5 billion in cash to its global pension plans in 2012, including about $2 billion in discretionary contributions to its U.S. pension plans.

The company reported $39.4 billion in assets and $48.8 billion in projected benefits obligations as of Dec. 31, according to its 10-K filing with the SEC.

Reporters Hazel Bradford and Kevin Olsen contributed to this story.