General Electric logo at corporate headquarters building in Boston, US, July 23 2019. File Picture: REUTERS/ALWYN SCOTT.
General Electric logo at corporate headquarters building in Boston, US, July 23 2019. File Picture: REUTERS/ALWYN SCOTT.

New York — General Electric (GE) took a step to cut the worst pension deficit in corporate US, freezing benefits for more than 20,000 employees.

The ailing manufacturer also plans to contribute as much as $5bn 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 $8bn.

GE’s stubborn pension deficit, with added pressure from falling interest rates, has complicated CEO Larry Culp’s efforts to put the 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 $6bn, follow similar moves by large companies including Boeing and Lockheed Martin as 401(k) retirement plans have gained favour. Meanwhile, companies such as FedEx have turned to offloading pension liabilities to insurers, including MetLife.

GE’s $22.4bn in underfunded pension liabilities at the end of 2018 — including the main and supplemental plans — represented the largest shortfall of firms in the Russell 1000 Index of large US 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 in September at an industry conference that interest rates could create a $7bn headwind for the pension in 2019.

The shares fell less than 1% to $8.55 at 10.24am in New York. GE had advanced 18% in 2019 to the close on 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 in 2025 tightened nearly eight 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 nine basis points to 131.8 basis points, according to ICE Data Services.

With Frank Connelly, Molly Smith and Katherine Chiglinsky.

Bloomberg