GE's deep pension freeze
When I first saw the story that General Electric (GE) was closing its traditional pension plan to new hires I thought about lifelong activist and friend Helen Quirini and knew that she would be furious! Helen was a long-time GE employee who fought for cost-of-living adjustments in GE retirement plans. Sadly, Helen died last fall, and won't be around to fight this battle, but I am confident that, had she lived, she would have been front-and-center at GE’s next shareholder meeting – to argue the case for future GE employees.
There are two things that make GE’s decision to freeze its plan so shocking. The first is that we are talking about General Electric – a company that is as American as apple pie. Founded by Thomas Edison, the company's history is part of American history. GE is one of the largest companies in the world and probably not a day goes by in which every single American uses technology created by the company (i.e. electricity, computers, medical equipment, television, etc.).
The second thing that makes this pension freeze so puzzling is the very nature of the General Electric pension plan. Much like the company itself, GE’s pension plan is special because it is what is known as a “contributory defined benefit plan.” This means that employees make contributions to the pension plan, helping keep the plan funded. Although few pension plans require employees to make contributions, the result is a very well-funded pension plan. In this case, GE's plan has survived economic downturns that have brought about the end of many other major pension plans.
In fact, employee contributions have kept the GE pension plan so well funded, that the company has not had to make a contribution to the pension fund since 1987!
I am at a loss. Why did GE freeze its wildly successful pension plan that it hasn’t had to spend any money on for nearly 24 years? In the press release announcing the freeze, GE CEO Jeffrey Immelt was quoted saying that the “Pension has been a drag for a decade.” A drag on who? On the company that doesn’t pay for the plan? On the employees who reap the rewards of knowing that they have a guaranteed pension in retirement? Who?
What do you think of GE's decision to close its pension plan to new employees? Let us know your thoughts by posting a comment below.
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A defined benefit plan is a pension plan, usually funded entirely by employer contributions, that pays benefits according to a formula. The formula is typically based on the participant's wages or salary and length of time spent working for an employer or group of employers. Defined benefit plans are also known as traditional or guaranteed pensions.