GE Reduces Pension Liabilities by 8 Percent, Still Faces Huge Burden

General Electric Company GE lowered its pension deficit by $2.4 billion in 2017 compared to the previous year owing to solid performance, employer contributions and changes in mortality and salary assumptions. The move marks 8% decrease in its existing $28.7 billion pension deficit. The company is going through tough times tackling the worst shortfall in corporate America.

Pension Woes

GE's pension plans cover about 6,18,000 current and former employees. The pension was well funded for many years but the deficit grew over the past decade because of low interest rates and volatile financial markets. The pension trust of the company holds more than 30 million GE shares that declined more than 50% in the previous year. As of now, GE's pension remains the most underfunded on the S&P 500.

GE reported $100.3 billion pension plan obligations and $71.6 billion liability in assets for 2017. Pension costs have therefore turned out to be a bottleneck for GE's earnings growth. With poor performance, stakeholders are concerned as to how the company will generate sources to meet liabilities. Following a management overhaul in mid-2017, GE took steps to shore up the pension fund, including a move announced in November to borrow $6 billion to pre-fund the plan through 2020. Also, the company intends to focus on three core segments — power, aviation and healthcare equipment, which require advanced hi-tech products with a high degree of reliability. These products often generate higher margins and are likely to contribute to higher long-term growth. GE will also benefit from rising interest rates. Every quarter-point increase cuts $2.4 billion from the amount the company will owe its pension plan participants. 

Light at the End of the Tunnel?

General Electric expects a gradual improvement in earnings with structural changes, simplification and cost-cutting initiatives. The company currently anticipates operating earnings in 2018 to be within $1.00-$1.07, with growth momentum in Aviation and Healthcare and continued challenges in the Power segment.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report