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DETROIT (Reuters) - General Motors Co (GM.N) 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 unveiled on Friday will cut $26 billion from the automaker's massive U.S. pension liability of nearly $109 billion. GM's pension overhang is a top concern for investors. It was 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."
The automaker also announced a third pension-related move. GM will shift most of its salaried employees and a small number of retirees who started receiving pension benefits on or after December 1, 2011, to a new pension plan that GM will continue to pay for. These retirees are not part of the 118,000 affected by the pension overhaul announced Friday.
GM will buy a group annuity contract from a unit of Prudential Financial Inc (PRU.N), which will pay and manage benefit payments starting in January 2013 to retirees who are ineligible or elect not to take a lump-sum pension buyout.
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's pension shortfall will also narrow by $1 billion.
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.
"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 healthcare, life insurance and a vehicle discount.
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.
Over a 15-year stretch that ended in 2006, GM put $55 billion into its workers' pension plans, compared with $13 billion it paid out in dividends, according to the 2008 book, 'While America Aged" by Roger Lowenstein.
"We will be less exposed to the funding volatility and calls on cash we have experienced in the past, which in turn, will improve our flexibility to deploy cash for alternate uses," Ammann said on Friday.
The announcement is part of a series of steps that GM and its smaller rival Ford Motor Co (F.N) have taken to manage the risks posed by their pension obligations, which have hit the stock prices and the credit ratings of both automakers.
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.
A UAW spokeswoman could not be immediately reached.
Ammann said the pension moves represented an "important step" toward GM obtaining an investment-grade credit rating. Fitch Ratings described the changes as "incrementally positive" to GM's rating.
"Today's transaction could spark other companies to consider similar transactions in the future to reduce exposure to plan volatility," Fitch Ratings analyst Stephen Brown said.
Ammann said GM does not have an estimate for how many retirees would likely take the lump-sum offer. The company is offering free independent financial counseling and group meetings for those eligible for lump-sum payments. GM also has established websites to outline the pension changes.
GM has also created two separate call centers to help answer retirees' questions.
Before the pension announcement, GM shares were down as much as 3.4 percent as the automaker posted weaker-than-expected May auto sales.
But the stock recouped its losses and rose as much as 5.1 percent on the news of the pension changes. GM shares closed at $22.01, down slightly less than 1 percent.
Reporting By Deepa Seetharaman and Ben Klayman; Editing by Bernadette Baum, Carol Bishopric, Gunna Dickson and Jan Paschal