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Defined retirement plan for Devon Energy and General Motors

Defined retirement plans of Devon Energy Corporation and General Motors

In this project, two American companies Devon Energy (DE) and General Motors (GM) are compared based on their retirement plans and benefits provided to their employees. Before, indulging into explanation brief business summary of both the chosen companies is presented to highlight the nature of their respective businesses.

Business Summary of Devon Energy Corporation and General Motors

Devon Energy is an energy firm which engages in development, exploration and production of natural gas, oil and natural gas liquids (NGLSs) in United States and Canada. Company has primary interest in properties located in number of locations such as Permian Basin, Eagle Ford, and Anadarko Basin etc.  Company is currently operating 19000 wells and has started midstream services including transmission, fractionation and processing of crude oil, natural gas and NGLS. It is located in Oklahomacity and was founded in 1971(YahooFinance, 2015). On the other hand, General Motors designs is building and selling cars trucks and automobile parts cross the world. It has number of business segments such as GM financial segment, GM Europe, GM North America and GM international operations. Its primary vehicles are Chevrolet, GMC, Opel, Buick, Cadillac and Vauxhall. IT also offers financing services through its subsidiary GM financial company. The head quarter of GM is located in Detroit Michigan and company was founded in 1897.

Defined Retirement benefit Analysis

 After studying the financial statements (FS) of both the companies, pension plan is compared.  DE has been using both qualified and non-qualified retirement plans.

Qualified Benefits

DE’s qualified plans gives retirement profit for definite Canadian and US employees who meet the specific age criteria and service requirement. DE base the benefit plans on compensation and years of service and are financed from assets held in the plans trusts. Similarly, GM also provides the qualified benefit pensions. According to GM annual reports, qualified plan contributes not less than the minimum required by the applicable regulations and law.  In addition, it pays the pay directly where applicable. GM has statedits defined pension plans for its hourly employees both working in Canada and US, who were hired before 2007 provide the negotiated amount for the each year of service  and other supplementary benefits for employees who are going to retire before their 30 years  of nominal service. In addition, GM has ceased the accrual of defined benefits of its salaried employees in FY12 in both America and Canada. 

Non-Qualified benefits

Devon funding non-qualified plans through established Trusts

Under the non-qualified plans, Devon Energy provides retirements benefits for specific employees those benefits are limited under the income tax regulations.  They are also based on employees’ compensation and years of service. Like qualified benefits, Devon has also setup the fund to fulfill this obligation. According to the FS of the company, the total value of these trusts was $25 million and $27 million in financial year (FY) 2014 and 2013 respectively(DevonEnergy, 2015). Besides, this fund is integrated in the long term assets in their consolidated balance sheet statement of the company.

Funding through Cash and cash equivalents for rest of non-qualified plans

For those retirement plans, for which trust is yet to be established, Devon funds the rest of the non-qualified plans from cash available in Cash and cash equivalents.

Unfunded non-qualified plan for GM employees

GM has unfunded non-qualified pension, which primarily covers its executives primarily for the service provided prior to January01, 2007. The summary of GM’s non-qualified plan is given below in the table:

 

2012

2013

2014

US hourly and Salaried

2420

128

143

Non US

855

886

770

Total

3275

1014

913

 

GM has the policy not to contribute less than the minimum required by the law and company is expecting to pay $70 million and $1.1 billion to its US and non-US pension plan in FY15.

Other Post retirement plans for Devon Energy and GM

Devon has also defined Post retirement plans and provides the benefits for substantially all US employees and it is expected to offer medical and life insurance benefits which could be both contributory and non-contributory and its amount will depend on future cost sharing intentions of the company(GMMotors, 2015).

Funding through Cash and Cash equivalents

Again, Devon has formulated the policy to fund the benefits, whenever they will become due from its availableCash and Cash equivalents.

However, on the other hand, unlike Devon Energy, GM has different hourly and salaried benefit plans and similar to Devon Energy, it provides the postretirement medical, legal service, dental and life insurance to eligible US and Canadian retirees and their dependents. Following table reflects the other postretirement contributions to the US plans.

 

2012

2013

2014

Employee contributions

432

393

354

Plan Participants contributions

4

29

22

Total Contributions

436

422

376

While, Devon Energy’s defined contribution retirement plan is as follows:

 

2012

2013

2014

401 (k) and enhanced contribution plans

36

41

49

Canadian pension savings plans

23

26

20

Total

59

67

69

 

Both the companies have recorded following figures in their respective financial statements (FS).

 

GM

Devon Energy

 

Pension benefits

Other

Total

Pension benefits

Other

Total

Change in benefit obligation

           

GM

104621

6625

111246

1377

1177

2554

Ending funded status

-24129

-6625

-30754

-228

-24

-252

Amount recorded in balance sheet

-24129

-6625

-30754

-228

-24

-252

Net amount recorded in acc. Comprehensive loss

-4589

-854

-5443

336

-20

316

Based on these figures, it can be stated that GM has recorded exceedingly higher than the amount recoded by DE. In addition, GM recorded the net amount as loss in its balance sheet, while, DE recorded the positive value on its balance sheet.  Since, GM is much bigger company than DE, therefore, it has higher benefit plan than DE.

Devon aims for achieving  stability of the planning of funded status, while offering long term growth for income and  invested capital for ensuring that benefit payment is ensured and funded when required and target allocation percentages and investment defined through  its strategies are given below:

 

Devon Energy

GM

 

2014

2013

2014

2013

Fixed Income

70%

70%

16%

19%

Equity

20%

20%

60%

58%

Other

10%

10%

24%

23%

GM has different allocation for its US and Non US plans based on risks facing the company. Therefore, its strategic asset mix and risk mitigation strategies are tailor made for each plan. Based on investment study carried out, company had decided to change its allocation percentagesin FY 2014. , which had resulted in changes in long term expected rate of return., which was decreased from 6.5% in FY13 to 6.4% in FY14. However, Devon Energy had also decreased the discount rate from 4.80% in FY 13 to 3.90% in FY14.

In addition, both the companies have established the pension plans assets to achieve the stability in funding status,  and to provide for  funding for benefit payment, goals are set and different investment strategies are adopted by the companies to provide long term expansion of invested capital and income.

Based on discussion and analysis of defined retirement plan of both the companies, it can be argued that both companies have devised their own strategies and plans to pay retirement benefits. However, it can be argued that Devon Energy has most robust and beneficial retirement plan as compared to GM 

 

References:

DevonEnergy. (2015). Retrieved December 0, 2015, from DevonEnergy: http://www.devonenergy.com/documents/Overview/DVN-2014-10-K-Letter-to-Shareholders.pdf

GMMotors. (2015). Retrieved December 07, 2015, from GMMotors: http://www.gm.com/content/dam/gmcom/COMPANY/Investors/Corporate_Governance/PDFs/InvestorContactsPDFs/10-K.pdf

YahooFinance. (2015). Retrieved Decemeber 07, 2015, from YahooFinance: http://finance.yahoo.com/q/pr?s=dvn

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