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Tue Jul 17, 2012 1:41am EDT (Reuters) — Is it better for retirees to convert their pension to an annuity or 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.
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, Ariz.
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, Mich., technical center when he retired in 2003 after 29 years.
Fusinski has done the math. He would need what he sees as an unattainable 7% to 8% 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.
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.
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.
- Keith Pople, 62, Nashville, Tenn.
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 IRA, he can come close to meeting the income stream he is accustomed to from his GM pension.
- Jody Sprague, 69, Macomb, Mich.
As the widow of a GM employee, Jody Sprague has been collecting 65% 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, Mich. 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.
“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.”
- 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, he said.
“The concern here is that GM upper management views retirees as liabilities,” Lasanen said. “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 his 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.
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.
Lasanen, like others who make the same choice, hopes that Prudential remains solvent for as many years as he and his wife have left.
(Reporting by Cynthia Ramnarace,a Reuters contributor in New York; Editing by Lauren Young, Jilian Mincer and Matthew Lewis)
© 2011 Thomson Reuters.
