GE cuts US$2.4b from biggest pension deficit on S&P 500

[NEW YORK] General Electric Co trimmed its pension deficit by US$2.4 billion as the manufacturer tackles the worst shortfall in corporate America.

The US$28.7 billion deficit is down about 8 per cent from the prior year, according to a regulatory filing late Friday. The company closed 2017 with US$100.3 billion in obligations across its pension plans and US$71.6 billion in assets.

Pension funding has become a central issue for GE stakeholders concerned about how the beleaguered company will meet its obligations while dealing with severe cash-flow and earnings challenges. The sizable tab complicates chief executive officer John Flannery's efforts to turn GE around through changes to the structure of the Boston-based conglomerate.

While it's not uncommon to have an underfunded pension, GE's deficit at the end of 2016 was the biggest among S&P 500 companies and 50 per cent greater than any other corporation in the US GE's rank for 2017 won't be known until all companies release annual reports, but among those that have filed, the US$28.7 billion shortfall still ranks as the largest.

The decrease in the deficit was due primarily to "investment performance, employer contributions and changes in mortality and salary assumptions," GE said in the filing. That helped offset an increase in liabilities, which are affected by long-term interest rates. GE also said it's reducing expectations for long-term investment returns to 6.75 per cent from 7.5 per cent.

GE was little changed after regular trading Friday. The shares have fallen 17 per cent this year, the worst in the Dow Jones Industrial Average.

The pension details came in GE's annual report, in which the company sought to enhance its disclosures as part of Flannery's push for greater transparency. GE discussed the ongoing investigation of its former subsidiary WMC, saying the Department of Justice is "likely to assert" that the subprime-mortgage lender violated financial laws in connection with its activities in 2006 and 2007. GE said it would seek a settlement.

The company also detailed several recently filed shareholder lawsuits that allege that current and former top executives made false and misleading statements about GE's financial health. GE said it believes "we have defenses to the claims and will respond accordingly."

GE's pension plans cover about 618,000 current and former employees. The primary plan, one of the biggest in the US, includes about 439,000 of those people.

The pension was well funded for many years, but the deficit grew over the past decade because of low interest rates and volatile financial markets. The pension trust also holds more than 30 million GE shares, which have declined by more than 50 per cent in the last year.

Following a management overhaul in mid-2017, GE took steps to shore up the pension, including a move announced in November to borrow US$6 billion to pre-fund the plan through 2020.

GE also benefits from rising interest rates: Every quarter-point increase cuts US$2.4 billion from the amount the company will owe its pension plan participants, GE has said.

BLOOMBERG