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Pensions Drowning General Electric?

June 14, 2012 | About:
Muhammad Bazil

Muhammad Bazil

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General Electric (GE), the company best known for its industrial technologies, owns the world's 38th biggest pension fund. With a fund that large, is it time for investors to start reconsidering their stock price?

In February of last year, after nearly 25 years of no employer-based contributions to the $45 billion pension, GE will be required to make an estimated $1.4 billion contribution to their long running program and $2.5 billion by next year. Amid the troubled financial market of 2008 and 2009, the company was forced to make a contribution after interest rates had been driven down. Pension contribution for U.S. employers is expected to total $100 billion in 2012, an increase of 67 percent. It is expected that over the next six years that total will be near $400 billion. With this large of a contribution made by U.S. employers, is there time for panic to commence?

On December 31, the company chose to close its defined benefit pension plan, with new employees switching to the more progressive 401k. The new terms include contributions equal to 3 percent matching of employee contributions. According to CEO Jeffery Immelt the company's pension plan contributed .14 per share in 2001, but is now negative .13 per share in 2011.

The plan went into effect in January of this year and the company expects lower costs going forward. Low interest rates are driving costs of the pension fund with bonds now purchased at record lows, the ability to gain raise revenue from cash deposits has decreased. In February, the company filed that its principal pension plans (unfunded) contained liabilities of $18.14, which are more than doubled from the previous year's $7.1 billion, an $8.5 billion increase. This was in part related to dips in the discount rate banks offer which went from 5.28 percent, to 4.21 percent. Because of this, the fair value of the company's assets fell from $44.8 billion to $42.1 billion the next year, leading to the first negative pension contribution to share prices.

Further Analysis

While the company manages to suffer from the increased costs of pensions and the U.S. Federal Government's requirements to have them fully funded within the next few years, the company still manages to have a strong financial bottom line avoiding capital investments and still gravitating toward investments in technology, medical imaging, energy and strong partnerships.

With the move to diversify the stock and develop an improved stock portfolio, the company is positioned to buy back nearly $12.5 billion in common stock, which should move share prices higher and provide extra capital for the company.

Risky?

Unlike General Motors (GM) which used pension funding increases to avoid union battles, GE has never had to deal with these types of issues. The company also has managed to profit from its pension and only until recently has managed to see loses, of $.14 per share. Once the loses were realized, the company quickly took action to fix the growing anxiety, which was a negative $.13 a share. Since then, the appropriate actions to end the program have been taken, and the company has adopted a more progressive 401k plan to offset long-term costs from pensions.

General Electric, like many companies, is tied to the world market and faces the same economic outlook as other industrial corporations. With European uncertainties and the overall state of the global market in uncertainty, GE stands to gain in other avenues. In the event of interest rates increasing the pension stays financed and the company's cash reserves remain protected. In the event rates stay below or near zero, as they currently are, the company can utilize it's resources to purchase technology and make acquisitions.

In the event of economic stimulus provided by world governments, the company will still continue to benefit from low interest rates and guaranteed payments from GE Capital through stronger lenders assist programs and new purchasers of industrial equipment.

In either scenario, GE should continue to secure, through its strong stock value, the many mutual funds and 401k plans that many investment firms rely on for their own retirement plans.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

Rating: 2.8/5 (16 votes)

Comments

traderatwork
Traderatwork - 1 year ago
Most if not all US companies move away from pension because it's not sustainable, even IBM a profitable company can't afford it. How could US government - a budget deficit government continue to give public employees till death do us apart pension?

And we have "thieves" teachers like

"California Yvonne Chan’s pension, even though her salary rose $100,000, or 67 percent, over her final three years at the 2,000-student Vaughn Next Century Learning Center in a low-income corner of Los Angeles. She started the San Fernando Valley charter school in 1993...." Bloomberg News

And this individual is not alone, these pension inflating been around decades, nobody really care because they just rub each other back and 'pension' the most "sacred" or because "they've worked their whole life" bs. As a group they steal from the government and tax payer and one day we and our children will pay. Pension are entitlement that should have not given long time ago.

Check out the ugly truth from Steven Greenhut :

Plunder: How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation

paulwitt
Paulwitt premium member - 1 year ago
The following is an excerpt from the June 1,2012 Orange County Register (CA)

California’s public retirement agency plans to radically slash the pension of ex-Vernon City Manager Bruce Malkenhorst Sr. — dropping him from a state high of more than $540,000 a year to $115,848.

The retirement system dubbed Malkenhorst’s pension illegally inflated and said it would attempt to recover overpayments during the three-year statute of limitations.

Malkenhorst, who lives in Huntington Beach, told the Watchdog on Friday that he will hire an attorney and explore fighting for his half-million dollar a year pension.

“This is clearly a case of elder abuse,” said Malkenhorst, 77. “I’m from an era where you made as much as you could for as long as you could.”

The California Public Employees Retirement System this week announced its plans to reduce Malkenhorst’s pension and deny six other Vernon officials all or part of their memberships in the retirement system. The action followed an audit of Vernon’s salary history and pension formulas. It is the largest reduction in CalPERS history.

The agency found that Malkenhorst’s oversized retirement was illegally based on unpublished pay rates, overtime and an inflated longevity allowance. Malkenhorst’s allowance was 5 percent higher than any other Vernon employee.

During his 29 years with Vernon, Malkenhorst simultaneously worked as city manager, finance director, city clerk, redevelopment agency director, treasurer and chief of light and power, in a city with 100 people. He earned a whopping $600,000 a year. (The picture above was snapped in his city office in 1977.)

His spending habits caught the attention of the Los Angeles County District Attorney’s Office, which had him indicted. Malkenhorst last year pleaded guilty to misappropriating $60,000 in public funds to pay for golf games and massages, among other expenses. He was ordered to repay the $60,000 to the city plus pay a $10,000 fine, but avoided jail time.[b][/b]

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