GE to freeze, pre-pay pensions to save up to $8 billion, cut debt

© Reuters. FILE PHOTO: The General Electric Co. logo is seen on the company's corporate headquarters building in Boston

By Alwyn Scott and Ankit Ajmera

(Reuters) - General Electric (NYSE:GE) Co said on Monday it would freeze pensions for about 20,000 salaried U.S. employees and take other related moves to help the ailing conglomerate cut debt and reduce its retirement fund deficit by up to $8 billion.

Analysts said the move would largely offset the rise in GE's pension obligations due to lower interest rates and was in line with other steps Chief Executive Officer Larry Culp has taken over the past year to raise cash and pare down $105.8 billion in debt.

Culp has slashed GE's quarterly dividend to a penny and has sold - or announced plans to sell - non-core businesses, slimming the once-sprawling company to focus just on power plants, jet engines and windmills, plus related equipment and services.

GE's pension plans are among its biggest liabilities and were underfunded by about $27 billion at the end of 2018. U.S. employees facing the pension freeze will be moved to a defined-contribution retirement plan, such as a 401(k) plan, in 2021.

The company has struggled to boost profits amid a slump in demand for its gas-fired turbines for power generation. It also faces potential costs of more than $1 billion in its jet engine unit from the grounding of Boeing (NYSE:BA) Co's 737 MAX airliner.

GE also is likely to set aside about $11 billion to cover liabilities for its long-term care insurance business.

By freezing the U.S. pensions, pre-paying about $4.5 billion in contributions due in 2021 and 2022 and offering lump sums to about 100,000 retirees, GE said it expects to cut pension underfunding by $5 billion to $8 billion.

William Blair & Co. analyst Nicholas Heymann said there was no immediate net reduction in GE's pension liabilities given the 90 basis-point decline in long-term interest rates since the end of last year, which has caused its pension liabilities to creep up to about $34 billion from $27 billion toward the end of 2018.

"The impact is being offset now, rather being reduced. So it is possible that investors are not cheering," Heymann told Reuters. He added, though, that Culp “is setting up (GE for) much better performance next year."

GE's shares were down 0.2% at $8.55 in afternoon trading, after rising 2.6% to $8.79 in premarket trading.

The pension freeze takes effect Jan. 1, 2021.

The moves also are expected to help lower GE's net debt by $4 billion to $6 billion, the Boston-based company said, adding that there would be no change for retirees already collecting pension benefits.

GE's industrial net debt stood at $54.4 billion as of June 30.

"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 Chief Human Resources Officer Kevin Cox said in a press release.

GE's pension plan has been closed to new entrants since 2012. The company had about 283,000 employees at the end of 2018, about 97,000 of them in the United States.

GE expects to record a non-cash pension settlement charge in the fourth quarter, but did not specify the amount.

The company also said it would pre-fund about $4 billion to $5 billion of its requirements for 2021 and 2022 under the Employee Retirement Income Security Act by using a portion of the $38 billion in cash it is collecting from the sale of various businesses.

GE said it was on track to hit its target of less than 2.5 times net-debt-to-earnings before interest, tax, depreciation and amortization, or EBITDA, by the end of 2020.