90,000 white collar Ford retirees will soon have a big decision to make. Should they stay in the auto company’s pension plan? Or take their chances with a lump sum payout instead?
The offer Ford Motor Company announced in late April is believed to be the first of its kind for such a large ongoing pension fund.
Lump sum the buzz at Ford retirement clubs
In Michigan there are more than 30 clubs for Ford retirees. The lump sum option is the conversation at retiree club meetings right now.
“Retirees are going to have to make a decision about mortality, about death; their own. That’s not something we do every day,” Ford retiree Charles White said. White worked at the Dearborn campus for 29 years in engineering management. He retired in 1996.
“Right now I’m smack dab on the fence,” White said about the lump sum offer. White and other retirees don’t have the terms of the offer yet. Ford will begin randomly drawing the first round of candidates for the lump sum option in August. The offers will come out in phases through the first half of 2013.
White helps organize two retirement clubs, and he says everybody is talking about it. He’s got a meeting later this month that he says would normally attract maybe 40 people. But this month more than 125 have registered – even though he’s made it clear they won’t have any new information for them on the option.
“De-risking” for investors
Ford’s pension liability is $49 billion dollars in the United State. The employees eligible for this lump sum offer represent about a third of that liability.
Ford doesn’t expect to make any money off the lump sum option, but if the company gets some of that liability off its balance sheet, it might look better to investors.
“There’s less risk involved on the part of the company which would mean a greater return, or a more likely return, or both for investors,” said Sheldon Stone, a partner at Amherst Capital who specializes in corporate turnarounds.
Ford is eager to prove to investors and all the ratings agencies that it’s worthy of moving up from junk rating to investment grade. One out of the three ratings agency recently upgraded Ford’s rating to investment grade and it needs the other agencies to consider doing the same. Because if Ford can do that it means lower borrowing costs and major bragging rights for a domestic auto company that mortgaged almost every asset it had to avoid bankruptcy and a federal bailout.
Stone says the plan could help Ford reach its goal. “If the take rate is high I think it could,” Stone said.
A Ford spokesman says the company has no clue how many retirees will take the offer because it’s available for a limited time and the company hasn’t done anything like it before.
“Because of the voluntary and unprecedented nature of this program, the participation level and therefore the impact on our future pension obligation, is difficult to predict,” Ford’s CFO Bob Shank said in a conference call that included the announcement.
Leon LaBrecque is CEO of LJPR, an independent wealth management firm. He’s been working with Ford retirees since 1985.
He says there will be some retirees who think they can invest their pension money better than Ford. There will be others who’d like to use the money to leave a legacy for a loved one or a cause. But LaBrecque assumes the lump sum option will likely only benefit about 1 in 4 retirees.
“The people who should take it are ones who would probably die before they’d get all their money back out,” LaBrecque said.
That worries him, because what if the Ford pension fund is left with a bunch of really healthy retirees? Left with people who are likely to live longer and cost the company more money over time than those who take the lump sum.
Take the lump sum or let Ford pay to manage pension?
A foursome of Ford retirees unwind over glasses of ice tea and Coke after their weekly 18 holes of golf at the Oak Ridge Clubhouse, about 40 miles north of Detroit.
Allan Yee retired from Ford’s Van Dyke Transmission Plant in 2007 after 30 years in engineering management. He and his wife have been talking about the option.
“My first impression was probably not but if they give me an offer that knocks my socks off than I’ll consider it,” Yee said.
It’s hard, if not impossible to get an 'average' take home pay for a typical white collar Ford worker. LaBrecque says a typical worker who retired now at age 64 could bring home around $3,000 a month. But take home money from pensions varies widely. Yee takes home more than that a month.
Yee says a million dollar lump sum offer would knock his socks off. Fellow Ford retiree Robert Matsui nods his head.
“I can’t imagine them offering me the kind of money it would take to make me take (the offer). Because you know I’m going to live a few years,” Matsui chuckles. “I’m hoping to at least live 20, 25 more years.”
Ford is not offering any incentive to take the lump sum. Matsui, Yee and two other retirees golfing with them predict few will actually to take it. Most retirees I spoke with thought that because the option is voluntary, it's a good move on Ford's part.
If Ford is successful, it could be a model for other large corporations with growing legacy costs.
**Be wary of those hoping to cash in on a lump sum option**
Several retirees I’ve contacted for this story say they’ve been contacted by scores of lawyers, investment bankers, and retirement gurus since the lump sum option was announced.
Here’s my favorite. In an email after the retiree’s signature and a “p.s” there was written a “p.p.s. If you are a financial person, in disguise, looking for our business, don't bother to show up as it would be a waste of time on your part!!”
LaBrecque says retirees should look for firms that are fee-based rather than commission-based, so that the advisor won’t make more money for retirees choosing the lump sum.