Less than a month on the job and it seems General Electric Chief Investment Officer Harshal Chaudhari is revamping the blue-chip company’s nearly $70 billion pension fund. On Monday, General Electric announced that it is freezing the plan for approximately 20,000 employees with salaried benefits and supplementary benefits for approximately 700 employees.
The pension fund will have $4 to $5 billion in pre-funding for 2021 and 2022 from the $38 billion in cash the company is generating from asset sales.
The change takes effect on January 1, 2021. That is also when GE will begin contributing 3% of eligible compensation to the company’s 401(k) plan and will provide matching contributions of 50% on up to 8% of eligible compensation. The company is offering a limited time lump-sum payment to about 100,000 eligible former employees who have not started their monthly pension plan payments. GE’s pension plan has been closed to new entrants since 2012.
GE’s DB plans totaled $69.4 billion in fair market value as of year-end 2018, which equals 75% funded, according to the company’s financial filing. Overall, the company contributed $6.3 billion last year to boost the pension program, up from $2.9 billion the previous year.
Chaudhari advocated liability-driven investing at IBM. That is how he hedged the portfolio’s risks and enhanced its return-seeking abilities. He overhauled the fixed-income fund to lessen reliance on traditional corporate credit.
The goal is to reduce its pension deficit by about $5 billion to $8 billion, with net debt being about $4 billion to $6 billion. Total pension and retiree benefit plan liabilities were $27.1 million in the second quarter of 2019 and 2018. Principal pension plans cost were nearly $1.7 million in the first six months of 2019 compared to $2 million for the same period in 2018.
GE has been caught in a bit of a whirlwind in recent months. Bernie Madoff whistleblower Harry Markopolos, an accounting expert, released a report In August that claimed the company inflated its cash reserves in inaccurate and fraudulent financial filings. The company said the allegations had no merit.
More bad news followed. GE Aviation suffered a black eye when it became ensnared in the grounding of the Boeing 737 MAX jet that used engines made by a joint GE venture. JP Morgan analyst Stephen Tusa said on Friday that GE Aviation, a bright spot in the GE repertoire, has been lackluster. In a 92-page-report, he wrote that investor expectations for future operating performance are “too generous when measuring value.” The company, a top supplier of Boeing, said in July that the grounding could suck as much as $1.4 billion from cash flow this year.
In the second quarter, consolidated revenue was down 1% from $29.2 billion in 2018 to $28.8 billion in 2019, with industrial-segment revenues down from $27.2 billion in 2018 to $27.1 billion in 2018. GE Industrial revenues were down from $27.1 billion in 2018 to $26.8 billion in 2019. The company had an increase in cash of $2.2 billion and $1.4 billion in the first six months of 2019 and 2018, respectively. The rise in liquidity was due to lower net income and high cash used for working capital and employee benefit liabilities compared to the previous year.
CEO Larry Culp said at a Morgan Stanley investor conference in September that he expects asset sales to bring in about $38 billion in cash as it pares down its debt load. Culp, who took the reins of the company in 2018, said that falling interest rates will increase GE’s pension benefits obligation by about $7 billion net of investment returns. Insurance reserve funding obligation will increase by less than $1.5 billion. Neither of the adjustments will require a cash contribution.
GE is unloading a variety of units. In February, the company deleveraged its $121 billion debt load by selling part of its biotech business to Danaher Corp. for $21.4 billion. The transaction is expected to close in the fourth quarter. GE also sold its transportation business and airplane-finance operation. GE also gave up its majority holding in Baker Hughes, receiving net proceeds of about $2.7 billion. The sale will trigger a write-down of more than $7 billion.