(Bloomberg) — General Electric took a bold step to cut the debt hampering its turnaround, freezing pension benefits for more than 20,000 U.S. employees.
The company also plans to pre-fund $4 billion to $5 billion (all dollars US) of its estimated requirements for 2021 and 2022, according to a statement Monday. The moves will help trim the pension shortfall by as much as $8 billion and reduce GE’s industrial net debt by $4 billion to $6 billion.
GE’s stubborn pension deficit has complicated CEO 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.
GE’s $22.4 billion in underfunded pension liabilities at the end of last year represented the largest shortfall of firms in the Russell 1000 Index of large U.S. companies, according to a Bloomberg review of the data. Pension liabilities exceed assets by more than $559 billion for all the companies in the index.
The shares rose less than one per cent to $8.59 before regular trading in New York. GE advanced 18 per cent this year through Friday, matching the S&P 500 Index.
GE’s bonds gained on Monday’s news. Its 3.373 per cent 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 about 10 basis points to 131.51 basis points, according to ICE Data Services.
The moves will affect about 20,000 employees in the company’s main U.S. pension plan. Supplementary pension benefits also will be frozen for about 700 employees. GE had 283,000 employees worldwide at the end of last year, including about 97,000 in the U.S.
The company, which closed its pension plan to new entrants in 2012, will offer a lump-sum payment to 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 CHRO, Kevin Cox, said in the statement.
Culp has said he wants to reduce GE’s debt-to-earnings ratio to 2.5 times by the end of 2020. 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 for $21.4 billion, divested a jet-leasing unit and unloaded part of GE’s stake in Baker Hughes, bringing in cash and easing investors’ liquidity concerns.