June 1, 2012 / 7:10 PM / 5 years ago

UPDATE 3-GM to cut 24 percent of U.S. pension liability

* GM pension changes that will cut $26 bln in obligations

* $29 bln in plan assets, up to $4.5 bln cash to fund deal

* UAW-represented retirees not affected by deal

By Deepa Seetharaman and Ben Klayman

DETROIT, June 1 (Reuters) - General Motors Co will cut nearly a quarter of its U.S. pension obligation by transferring the management of its pension plans for 118,000 white-collar retirees to a third-party and offering lump-sum buyouts.

The two moves announced Friday will cut $26 billion from the automaker's massive U.S. pension liability of nearly $109 billion. GM's pension risk is a top concern for investors and is one of a handful of issues left untouched during GM's U.S.-financed bankruptcy restructuring three years ago.

"There are lots of companies with pension plans, very few have plans in the absolute or relative size as us," Chief Financial Officer Dan Ammann said during a conference call.

"We would like to get back into the category where this is sort of a non-issue for us," Ammann added. "That doesn't mean eliminating it completely but obviously we've taken a big step in the right direction today."

GM will buy a group annuity contract from a unit of Prudential Financial Inc which will pay and manage benefit payments starting in 2013 to retirees who are ineligible or elect not to take a lump sum pension buyout.

By shifting responsibility to, GM will no longer be responsible for managing the pensions of 118,000 of its U.S. white-collar retirees. GM will also offer pension buyouts to about 42,000 retirees and their surviving beneficiaries, who will have until July 20 to make a decision. The company will start sending those offers to eligible retirees next week.

To fund the transaction, GM will shift $29 billion from its pension plan assets to Prudential and put in between $3.5 billion and $4.5 billion in cash.

GM will take a special charge of between $2.5 billion and $3.5 billion in the second half of the year. It will also result in a $200 million non-cash hit to earnings.

GM's pension shortfall will also narrow by $1 billion.

"Although the transaction doesn't come cheap, it serves a very important purpose of permanently de-risking 25 percent of GM's U.S. pension obligation," Citi analyst Itay Michaeli said.

The shift to Prudential and the buyouts are expected to be completed at the end of this year. The pension changes do not affect white-collar retirees' eligibility for post-retirement health care, life insurance and a vehicle discount.

UAW PENSIONS IN FOCUS

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

Friday's announcement is one of a series of steps GM and its smaller rival Ford Motor Co have taken to manage the risks posed by their pension obligations, which have hit both automaker's stock price and credit rating.

This summer, Ford will begin offering pension buyouts to the first wave of 98,000 white-collar retirees and former employees who are vested in their pension plan. The move could lop off one-third of Ford's U.S. pension liability.

GM retirees represented by the United Auto Workers union are not affected by Friday's announcement. Hourly retirees account for the bulk of GM's U.S. pension obligation.

Last year, GM and the UAW agreed to discuss ways to cut the risk posed by GM's pension plan during contract negotiations.

During the conference call, Ammann declined to shed light on those talks, beyond saying that pensions were a "significant topic of discussion" during those meetings.

"We have generally agreed with the UAW that we will maintain a dialogue on pensions going forward and continue to look at de-risking alternatives but anything we discuss with them on that remains private between us and them," Ammann said.

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