Using Time Value Of Money

Recently, GM decided to remove future pension liabilities from its balance sheet. To accomplish this, GM gave its salaried employees a choice: keep the pension payments as promised, although the pension payments would be made by Prudential, not GM, or take a lump sum payment now. So what information is necessary to make a decision such as this? The main components are the interest rate offered by the pension payments, the rate of return an employee could earn on the lump sum, and the difference in the risk between these two options, including the likelihood of default on the pension payments. While we doubt many GM employees made such a comprehensive analysis, 30 percent of the salaried employees took the lump sum option.