GM Bankruptcy Would Expose $13.5 Billion Pension Liability

By Staff Report

Apr. 7, 2009

A General Motors bankruptcy could become a nightmare for the federal government’s Pension Benefit Guaranty Corp.

That’s because the automaker could dump as much as $13.5 billion in unfunded pension liabilities onto the U.S. agency that takes over troubled pension plans—the largest ever from a single company—if GM were unable to fund its U.S. defined-benefit plans and terminated them.

The claim would be almost twice as large as the current record of $7.5 billion from the 2005 termination of the Chicago-based UAL Corp.’s United Airlines pension plans.

For this to happen, GM would have to terminate its plans and PBGC officials would have to agree to cover all the unfunded pension liabilities of the company’s U.S. hourly and salaried plans. Together, the plans had a combined $84.5 billion in assets and $98.1 billion in liabilities as of December 31, according to its 10-K report.

GM officials are considering, among other options related to a restructuring, filing for Chapter 11 bankruptcy protection or some sort of specialized government-backed bankruptcy protection. That way, GM could slash its debt and seek concessions from the UAW, including cuts in its retiree-health obligation.

“GM is a benefits-paying organization masking itself as an auto company. The real function of the company is trying to pay pensions and retiree health care. They could produce a car to compete with Toyota but couldn’t pay the retiree liabilities they agreed to many years ago,” said Donald G.M. Coxe, chairman of Chicago-based Coxe Advisors. Coxe doesn’t invest in GM.

GM expects that it won’t have to contribute to its U.S. plans until 2013 or 2014, according to a Securities and Exchange Commission filing in February. Its U.S. plans were overfunded by a combined $20 billion as recently as December 31, 2007, according to the company’s annual report.

The GM defined-benefit plans have less than $1 million in GM stock, according to the report.

GM’s hourly and salaried 401(k) plans have combined assets of $20.3 billion, including $1.4 billion in GM stock, as of December 31, 2007, according to a report filed last June. Based on a 91 percent drop in the share price since then, that stock would be worth $126 million now.

Last November, State Street Bank & Trust, Boston, investment manager for the GM company stock fund in the 401(k) plans, stopped participants from purchasing stock in GM because of its financial difficulty.

The PBGC estimates its exposure to contingent liabilities of the Detroit 3 automakers— GM, Ford Motor Co. and Chrysler—totaled $41 billion as of January 31. The net claim exposure represents what the PBGC estimated it would have to cover.

The Detroit 3’s total pension liabilities have skyrocketed since September 30 because of the market meltdown, said Gary Pastorius, a PBGC spokesman. On that date, the PBGC had estimated total contingency liabilities of $46.7 billion, including $20.9 billion from automobile and other manufacturing companies. These liabilities represent the total unfunded vested benefits.

Ford had $37.4 billion in assets in its U.S. pension plans and $43.1 billion in liabilities as of December 31, according to its 10-K report. Ford this year expects to contribute $1.5 billion to its pension plans worldwide. It didn’t provide a U.S. plan breakout.

Chrysler had U.S. defined-benefit assets of $21.6 billion as of September 30, according to Pensions & Investments’ January 26 report on the largest U.S. retirement funds.

Chrysler’s pension plan was overfunded by $3.1 billion as of December 31, 2007. At that time, it was 113 percent funded with pension assets of $26.2 billion and pension liabilities of $23.1 billion. An updated funding level wasn’t available.

Cerberus Capital Management owns 80.1 percent of Chrysler.

As of September 30, the latest data available, the PBGC’s single-employer program has a $10.7 billion deficit, with $61.6 billion in assets and $72.3 billion in liabilities, Pastorius said.

The PBGC paid out $4.3 billion in benefits for the year ended September 30. It collected $1.5 billion in employer premiums in the same period, bolstering its financial position, he noted.

Coxe said GM stock and bond investors are in a weak situation.

“When you have a market cap at $1.074 billion, what you have is a low-cost leap” for potential investors speculating on a rise in value, he said. “The market is saying not many investors are willing to take it.”

Bondholders “would still be stuck trying to pay for all” the retiree health care liabilities unless a U.S. bankruptcy court would terminate the obligations, Coxe said, even if the bondholders secured the company or major assets in a potential bankruptcy reorganization.

Filed by Barry B. Burr of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail

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