(Bloomberg) -- General Electric Co. took a step to cut the worst pension deficit in corporate America, freezing benefits for more than 20,000 employees.
The ailing manufacturer also plans to contribute as much as $5 billion to cover its estimated pension funding requirements through 2022, according to a statement Monday. The moves will help trim the shortfall by as much as $8 billion.
GE's stubborn pension deficit, with added pressure from falling interest rates, has complicated Chief Executive Officer Larry Culp's efforts to put the Boston-based company on more stable ground. The CEO, who took the helm a year ago, has said debt remains one of the company's thorniest problems, alongside a slumping power business and lingering insurance liabilities.
The efforts to reduce debt are encouraging, though a pension freeze is likely to damage employee morale, Barclays analyst Julian Mitchell said in a note. "In a situation of 'corporate battlefield surgery', this tends to be a typical, if unfortunate, casualty."
The pension changes, which will reduce GE's industrial net debt by as much as $6 billion, follow similar moves by large companies including Boeing Co. and Lockheed Martin Corp. as 401(k) retirement plans have gained favor. Meanwhile, companies such as FedEx Corp. have turned to offloading pension liabilities to insurers, including MetLife Inc.
GE's $22.4 billion in underfunded pension liabilities at the end of last year -- including the main and supplemental plans -- represented the largest shortfall of firms in the Russell 1000 Index of large U.S. companies, according to a Bloomberg review of the data.
While GE's deficit has come down in recent years, the company faces a challenge from falling interest rates, which increase the funding gap by shrinking expected investment returns. Culp said last month at an industry conference that interest rates could create a $7 billion headwind for the pension this year.
The shares fell less than 1% to $8.55 at 10:24 a.m. in New York. GE advanced 18% this year through Friday, matching the S&P 500 Index.
GE's bonds gained on Monday's news. The risk premium on the company's 3.373% bonds due 2025 tightened nearly 8 basis points to 145.6 basis points, according to Trace bond price data. The cost to protect its debt against default for five years fell 9 basis points to 131.8 basis points, according to ICE Data Services.
What Bloomberg Intelligence Says:
GE has the resources to slash net debt with asset sales over the next two years. Yet significant operating improvement also needs to occur, and the company will likely face more meaningful insurance and pension liabilities as rates decline.
--Joel Levington, senior credit analyst
Click here to read the research
Beginning in 2021, about 20,000 employees in GE's main U.S. pension plan will stop accruing new benefits, under the plans GE unveiled Monday. About 700 employees in a supplementary plan will also be affected. At that time, GE will contribute 3% of eligible compensation to a 401(k) plan and will provide matching contributions of 50% on as much as 8% of eligible compensation.
The company, which closed its pension plan to new entrants in 2012, said retirees already drawing pension benefits won't be affected. GE will offer a lump-sum payment to 100,000 eligible former employees who haven't started receiving their monthly pension payments.
"Returning GE to a position of strength has required us to make several difficult decisions, and today's decision to freeze the pension is no exception," GE's chief human resources officer, Kevin Cox, said in the statement. GE had 283,000 employees worldwide at the end of last year, including about 97,000 in the U.S.
GE Pension Promises Are Latest Casualty: Brooke Sutherland
GE aims to reduce the net debt of its industrial businesses by $25 billion, and Culp has said he wants to reduce GE's debt-to-earnings ratio to 2.5 times by the end of next year. The pension changes come several weeks after the company announced a $5 billion debt tender.
Since taking the helm in October 2018, Culp has been aggressive in his effort to fix the ailing company. He sold GE's biopharmaceutical business to Danaher Corp. for $21.4 billion, divested a jet-leasing unit and unloaded part of GE's stake in Baker Hughes, easing investors' liquidity concerns.
The portfolio changes have helped bring in about $38 billion in new cash, giving the company funds for the pension moves. GE said it expects to take a non-cash, pretax charge against its fourth-quarter earnings.
--With assistance from Frank Connelly, Molly Smith and Katherine Chiglinsky.
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