Automotive Pension Disaster; $42 Billion in Pension Promises Completely Unfunded

Pensions are a critical unresolved issue in the upcoming GM bankruptcy. Either GM's unfunded pension obligations get dumped on taxpayers, GM pensioners see their benefits cut, or some combination thereof.

Moreover, even though GM has yet to declare bankruptcy, note the Pension Benefit Guaranty’s Deficit Triples to $33.5 Billion.

Pension Benefit Guaranty Corp.’s deficit tripled to $33.5 billion in the past six months as more companies canceled retirement plans amid the U.S. recession, according to the head of the government-owned corporation.

The PBGC, set up to protect the employee pensions of bankrupt companies, will tell Congress that its financial condition may worsen amid the likelihood for more pension plan failures. In the first half of the fiscal year that began in October, the PBGC took on almost four times the number of participants as it did in all of 2008.

The potential for General Motors Corp. and Chrysler LLC to end their plans has left the PBGC facing the prospect of adding 900,000 current and future beneficiaries. The PBGC, which pays retirement income to almost 44 million Americans, estimates that $77 billion of the automotive industry’s pensions are underfunded, with about $42 billion of that not funded at all.

The PBGC’s board approved in February 2008 a new investment strategy to shift more money from safer Treasury securities to stocks, real-estate and private-equity with the potential for greater returns. The change was pushed by former Director Charles E.F. Millard, who is now under congressional investigation for his ties to Wall Street.

“Millard’s actions were questionable and should be investigated further, but our main concern is that they are symptomatic of a much bigger problem,” Senator Herb Kohl, a Wisconsin Democrat and chairman of the Special Committee on Aging, said in a statement. “PBGC oversight structure is obviously inadequate if one person’s authority goes unchecked. At a time when we need PBGC more than ever, we have got to take concrete steps to strengthen the agency.”

Hopeless Timing At PBGC

Please consider Pension insurer shifted to stocks.

Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn.

"The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency.

However, Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20, dismissed such concerns. Millard, a former managing director of Lehman Brothers, said flatly that "the new investment policy is not riskier than the old one."

He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Millard said.

Asked whether the strategy was a mistake, given the subsequent declines in stocks and real estate, Millard said, "Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it."

But Bodie, the BU professor who advised the agency, questioned why a government entity that is supposed to be insuring pension funds should be investing in stocks and real estate at all.

GM retirees facing cuts in pensions

The Akron Beacon Journal is reporting GM retirees facing cuts in pensions.

Workers and retirees are bracing for what might be $16 billion in pension losses if the Pension Benefit Guaranty Corp. has to take over the plans, according to the agency.

As many as half of GM's 670,000 pension-plan participants might see their benefits trimmed if that happened, an actuary familiar with the company's retirement programs estimates.

Measured by participants, GM's pension plan would be the largest taken over by the Pension Benefit Guaranty, a quasi-government corporation created by Congress in 1974 to protect pension programs of bankrupt companies.

Dealing with pensions could be a thorny issue facing President Barack Obama in a GM bankruptcy. Unions including the United Auto Workers rallied behind his candidacy, spending $52 million to help elect him last year, according to Washington-based OpenSecrets.org, which tracks campaign spending.

GM's pension system had a $20 billion shortfall as of Nov. 30, based on numbers the company provided, said Jeffrey Speicher, a Pension Benefit Guaranty spokesman. By law, the agency would be able to make up only $4 billion of that, he said.

"The rest would be lost," Speicher said.

Current and future retirees of Chrysler LLC, the other U.S. automaker on life support, would forgo $7.1 billion, Speicher said. Chrysler's plan is underfunded by $9.3 billion, and the agency would cover $2.2 billion, he said.

Whatever GM's unfunded liability was on November 30, it is far worse now. Rubbing salt in to the wound, GM was stupid enough to purchase GM shares for its pension funding program.

In April, the GM Employee Stock Fund Dumped All GM Shares figuring $1 per share or whatever was better than nothing. This is what I said at the time:

GM Weekly Chart



click on chart for sharper image

GM started dumping in March, the first blue circle in the above chart, and just now finished. Congratulations of sorts go to GM and State Street Bank and Trust Co., the plan's financial manager, for one final display of ineptitude.

Is this a case of better late than never, or a case of why even bother?

What it does show is why company plans, especially plans for struggling companies ought not be in their own shares. GM employees will be out of a job and any shares owned are essentially worthless.

Now, in all likelihood, GM's pension plan will be dumped to the Pension Benefit Guaranty Corporation (PBGC) which is another way of saying US taxpayers.

Who Foots The Bill?

If the PBGC will only pick up $4 billion out of the November $20 billion shortfall, how much will it pick up out of the current total of $77 billion in underfunded liabilities of which $42 billion is not funded at all?

This is not a pretty picture for GM employees, Chrysler employees, or US taxpayers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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