Is it better for existing retirees to convert their pension to an annuity or to take a lump sum payout?
That is the tricky choice thousands of former General Motors Co employees must make by July 20. It is also a decision that many more workers will make as other companies move expensive pension plans off their balance sheets. Rival Ford Motor Co, for example, will begin offering pension buyouts this summer to 98,000 white-collar retirees and former employees who are vested in its pension, potentially cutting roughly one-third of Ford's U.S. pension liability.
GM informed 118,000 of its white-collar retirees of upcoming changes to its pension program on June 1. At the crux of the change is the decision by No. 1 U.S. automaker to get out of the pension business by no longer administering the program that puts a check in a retiree's bank account each month.
Of those 118,000, about 42,000 who retired between 1997 and 2011 will be offered the choice of a lump sum buyout or of continuing their pension as an annuity through the Prudential Insurance Company of America, a unit of Prudential Financial Inc. An annuity is a fixed sum of money paid to someone each year.
There is no decision to be made for GM's remaining 76,000 employees. Those who retired before 1997 will automatically receive their pension through Prudential beginning in January. Current pension-eligible employees and those who retired since December 1, 2011, will be offered a lump-sum or monthly pension option at retirement payable by GM.
For retirees, each investment choice has risks. The lump-sum option relies on workers to manage their savings to generate a large enough return to match the current monthly pension amount. The pension, to be paid as an annuity, puts faith in the health of Prudential and its ability to maintain the payments throughout the retirees' lifespans.
Here are the stories of how four retirees made their investment decisions.
Richard Fusinski, 64, Cottonwood, Arizona
For Richard Fusinski, the buyout is not so much an offer as an insult.
"There was a time I was going to leave General Motors, but they told me what a big mistake that would be because of the great retirement that I'd have," said Fusinski, who was a senior engineering technician at the company's Warren, Michigan, technical center when he retired in 2003 after 29 years. "Now they're trying to screw that up."
Fusinski has done the math. He would need what he sees as an unattainable 7-8 percent return on his six-figure, lump-sum offer to earn him the same monthly amount he receives now from his pension. He also chafes at the assumption that he will not live past 75.
"They calculated the figure based on my monthly income from GM lasting me another 10 1/2 years," said Fusinski. "There's no possible way that that's going to be good for me. I take no prescription drugs. I'm just extremely healthy. What if I lived to 100? That's 35 years from now."
Moving his pension to Prudential "aggravates me," said Fusinski. Currently, his pension is guaranteed through the U.S. government's Pension Benefit Guaranty Corp (PBGC), which by law will cover a maximum of roughly $56,000 per year in benefits for those who started receiving payments from PBGC at age 65 or later.
Once the annuity is transferred to Prudential, it no longer has federal backing. Each plan will be covered by individual state guaranty associations, which set their own limits.
In Arizona, where Fusinski lives, the Department of Insurance is still waiting to hear from Prudential on whether the pension would be considered an individual annuity covered up to $100,000, or one of various types of unallocated pensions issued to a group. If the latter, there is a chance there would be no protection for Arizona's GM retirees were Prudential to go out of business. This concern is very real for Fusinski.
"People keep on telling us what a great company Prudential is, but look at how many big banks have gone belly-up," Fusinski said. "I don't trust any of that in this economy. Just because a company is big doesn't mean they're going to be around or that they're going to manage your money properly."
Both GM and Prudential say that scenario, voiced by retirees worried about the transfer, is unlikely thanks to safeguards in the GM-Prudential agreement. Prudential must maintain a separate account for the GM benefits plan, said Dave Roman, director of financial communications at GM.
The account is protected from claims against creditors were Prudential to have financial trouble, Roman noted. And Prudential has agreed to make annuity payments from its general account if payment obligations exceed the amount GM shifted to create the new annuity.
Fusinski has chosen what he considers the lesser of two evils: he is keeping his pension with Prudential. "There's only one possible choice for me, which is to gamble that Prudential may stay alive," he said.
Keith Pople, 62, Nashville, Tennessee
For Keith Pople, the decision of whether to take the lump sum or stick with the pension hinges on two issues. First, can he invest his lump sum and earn enough to cover his pension amount? And second, if he stays with the annuity, what would the survivorship benefits be for his wife?
"I'd like to go off into the sunset fat, dumb and happy with my pension coming in every month, and then when I pass away my wife is guaranteed a certain amount," said Pople, who was an IT portfolio manager for GM when he retired in 2004 after 33 years. "But now we have to figure out some other direction."
That other direction is complicated by one major issue: Pople's recent battle with cancer. "I hope to live a normal lifespan, but the odds are not with me," he said.
After meeting with his financial adviser, Pople feels confident that by adding the lump sum to money in his individual retirement account (IRA), he can come close to meeting the income stream he is accustomed to from his GM pension.
Pople knows this is a gamble. "Nobody has a crystal ball," he said. "We could have a new president at the end of the year. The markets may love him and shoot out of sight or they may not, and they could tank. Who knows?"
But in the end, considering Pople's health issues, the lump sum creates a more secure future for his wife. "The amount she would receive at my death would be significantly reduced with the Prudential plan," he said. "And if our investments continue to perform, our son and daughter will have a decent amount of money left to them."
Jody Sprague, 69, Macomb, Michigan
As the widow of a GM employee, Jody Sprague has been collecting 65 percent of her husband's monthly pension, about $2,500 a month as a survivor benefit, since his death in 2010. That, plus Social Security and another small pension, have kept her comfortable.
But how would the lump sum change her financial situation?
For the better, actually, said her financial planner, John Schindler, senior vice president-investments of the Schindler Group at UBS Financial Services in Birmingham, Michigan. If she rolls the lump sum into her IRA, Schindler is confident that her total investment will earn her $10,000 more per year than what she currently earns on her investments. If she takes the lump sum, Schindler is advising her to move her current strong portfolio of income-producing stock, alternatives and bond mutual funds into individual bond managers, which are safer and more predictable.
"Don't just look at the negatives of, ‘Hey, General Motors is doing this or that to me,'" said Schindler. "There is opportunity in this."
For Sprague, the increased income is enticing. But even more important is knowing that the lump sum allows her to leave whatever is left of the buyout to her children after her death.
"I feel like it is a gamble either way I go," said Sprague, who decided just days ago to take the lump-sum option. "The annuity would be there, but then there wouldn't be anything for my kids. But with the pension, if I kick the bucket tomorrow, the kids wouldn't get anything from that much money. With the lump sum, they still would have what I have put away."
The math does not work out this way for everyone, said Schindler. The fact that his client already has a strong portfolio of stocks and bond mutual funds is a huge factor leaning toward the lump-sum option. So too is her status as a widow and her health history which includes cancer.
Schindler also recommends the lump sum to retirees who have children with special needs or other loved ones, such as an unmarried partner, whom they would like to provide for after their death.
"If she had not had other income sources, our recommendation to her would be 'keep the pension because you don't know how long you would live,'" Schindler said. "But she has plenty of financial resources to sustain her income if she lives longer."
Dennis Lasanen, 65, Defiance, Ohio
Dennis Lasanen spent 39 years as a GM employee, working as an industrial engineer at several GM locations in Ohio and Michigan. He retired in 2008, expecting that he and his wife would live a simple-yet-comfortable, worry-free retirement. All of those assumptions have been upended, Lasanen said.
"The concern here is that GM upper management views retirees as liabilities," said Lasanen. "They want the new stock to increase in value. Their thinking is that if they can reduce any liability the investors would then consider buying the stock."
In Lasanen's opinion, GM's future should not be balanced on the back of the workforce that brought the company to its position as the biggest U.S. automaker. Not to mention the fact that the lump sum offer does not provide an income equal to the pension he currently receives. He is sticking with the pension as a matter of preference, but also as a matter of principle.
"When I was hired as a college graduate over 42 years ago, I was given the promise of a company pension in retirement," he said. "What you are actually seeing is a company without much soul."
GM has said that by getting out of the pension business, the company -- which filed for bankruptcy protection in 2009 and exited 40 days later -- is actually securing a safer financial future for its retirees. Those 42,000 former employees had about six weeks to decide their financial future. 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.
"The fact is that Prudential is a strong company," said Roman. "They're highly rated by crediting agencies. And right now we are not investment-grade. They're the experts in the pension space. We're the experts at building cars. We want to get our investments and dollars into our products. That's important for the future health of the company."
Lasanen, like others who make the same choice, hopes that Prudential remains solvent for as many years as he and his wife have left.
"You're finding yourself dealing with finances and projections on retirement and additional worries that you never thought you would have when you started working for the company," he said. "It's a complete change."
(Reporting by Cynthia Ramnarace in New York; Editing by Lauren Young, Jilian Mincer and Matthew Lewis)
(Cynthia Ramnarace is a Reuters contributor)