Summary
One fear investors have regarding General Electric relates to the company's significant pension obligations.
For years now, the company has owed more than $20 billion and as high as $30+ billion that must eventually be covered.
Certainly, this is painful for investors, but between the $6 billion or more that will be allocated this year and interest rate change impacts, it's not horrible.
Over the next few years, and assuming the economy doesn't slow considerably, we could see the pension issue largely resolve itself.
One of the biggest fears investors appear to have regarding General Electric(GE) is the conglomerate’s significant pension liabilities. Like most of the large industrial giants that have survived the past several decades, General Electric, in its heyday, set up defined benefit pension plans in order to reward and take care of its loyal employees. Also, like some of the other major industrial firms of its day, the company is coming to realize that the pain caused by these plans is not immaterial. Truth be told, pension liabilities for General Electric, given their size, can be a real problem in the years to come, but what data we have today suggests that the picture on that front might be starting to improve.
My take on defined benefit plans
I remember learning about defined benefit plans back in college and, truth be told, it had been so long since I looked over that data (about 6 years) that I had to crack open my Intermediate Accounting book to refresh myself on the finer points of how the plans work. You see, unlike defined contribution plans, which rely on amounts actually contributed by the employee and that are often matched by the employer, defined benefit plans are based on a complicated (but sensible) methodology that begins with the individual pension equation and ends with adjustments being made to plan assets to meet the firm’s PBO (pension benefit obligation).
