Questions arise from GM's use of pension for buyouts, VEBA trust

Questions arise from GM's use of pension for buyouts, VEBA trust http://tinyurl.com/cbteq6
Details are emerging about how General Motors Corp.'s U.S. pension funds
went from a $20-billion surplus at the end of 2007 to a $12.4-billion deficit 12 months later.
Newly released numbers show that the funds, which help support more than 650,000 Americans, were tapped for billions of dollars over the past year for employee buyout programs, benefit increases and as part of the UAW's retiree health care trust deal.
While pension experts have said using pension funds for headcount reduction is common in some industries, some said it also raises questions.
"To the extent it is consistent with the law, the question is: Is it really consistent with the promise?" asked Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania and executive director of the Pension Research Council.
"Workers deferred part of their compensation to get a pension later, and to the extent that salary deferral is going to somebody else, it's going to be a big disappointment," she said.
The Pension Benefit Guaranty Corp., the federal corporation that insures retirement plans, last fall raised concerns about how GM and other Detroit automakers were spending their pension funds, warning that using money for buyouts and employee-reduction programs "may undermine the state of the plans."
GM numbers released last week verified some reason for concern.
The GM pension funds' erosion last year included $11.3 billion in value because of investment losses; $2.9 billion for hourly and salaried attrition programs, and another $8.7 billion for increases in benefit payments as part of changes to retiree health care and a deal regarding Delphi's bankruptcy.
Bob Kemp, a pension expert at the University of Virginia, said many companies made decisions when their pensions were overfunded that looked good at the time.
"No one saw that all of a sudden the market would drop 40%-50%," Kemp said. "I wouldn't criticize GM one bit for those types of actions."
Adding to financial woes
GM warned in its recent viability plan submitted to the U.S. Treasury that it may need additional government help in 2013 and 2014 to cover the pension requirements.
The underfunded pension just adds to GM's financial troubles as it asks Washington for as much as $16.6 billion in government loans on top of the $13.4 billion already provided.
On Thursday, GM reported a $30.9-billion loss for 2008, second only to GM's 2007 loss of $38.7 billion.
GM ended 2007 with its U.S. hourly and salaried pension funds holding $104.1 billion -- a funding status of 124%.
According to GM's numbers, the company's U.S. hourly and salaried pension funds ended 2008 with around $84 billion in assets -- 87% funded.
Meanwhile, the Pension Benefit Guaranty Corp. estimates GM's pension funds are underfunded by $20 billion, a larger number because it uses different calculations than the company.
GM said the investment returns for the funds were a negative 11% -- causing an $11.3-billion loss in value.
Kemp said GM's return on investments of negative 11% is not that bad.
"When the rest of the world is experiencing" negative "30% and 40%, I think that is some really good investment management," he said. "I wish I would have done the same on my portfolio."
Deficit size surprises GM
When GM filed its recent viability plan, company executives indicated that the size of the deficit surprised them, noting that in its Dec. 2 report to Congress, the company estimated its 2008 pension fund was underfunded by only $1.8 billion.
Now, GM is saying the underfunding is greater than originally thought.
GM said it used $2.3 billion from the hourly pension fund to pay for buyouts in its UAW special attrition program, which encouraged thousands of workers to voluntarily leave the company as a cost-cutting move. The company also used $2.7 billion for the retiree health care trust -- called a VEBA, or voluntary employee beneficiary association. GM spent another $2.3 billion for Delphi's hourly pension program.
Also, as part of GM's decision to cut company health care benefits for salaried retirees 65 or older, it increased pension benefits to retirees at a cost of $3.7 billion. The company spent another $600 million on white-collar retirement incentives.
The rest of the pension funds' declines were attributed to service and interest costs, as well as changes in the discount rate and actuarial assumptions ($2.2 billion because people are living longer than expected).
Future funding uncertain
In February, GM Chief Financial Officer Ray Young said the company needs to examine its pension funding situation.
"We've made the assumption that the pension funding in the future will be financed by debt," Young said. "It's still very, very premature on our part in trying to understand what our options" are "to address the pension funding in '13, '14. There are a lot of variables that impact that."
The Free Press first reported last March that GM was using its pension fund to pay for buyout packages. At the time, a GM spokesman said it was using its pension for lump-sum payments of $45,000 and $62,500 to retirement-eligible production workers and skilled-trade workers, respectively.
"We're taking advantage of the overfunded status, and it certainly helps with regard to not having to tap into corporate cash," a company spokesman said at the time.
As GM's business has declined, the automaker has been struggling to cut costs.
"They're obviously in a difficult position. They need to downsize, and they have to pay people to leave," said pension expert James Wooten, a professor at the University at Buffalo Law School. "One thing that they can know, and that the union knows, if things do fall through, the Pension Guaranty Corp. is there to pay some of the benefits that are not funded."
Retirees are concerned, however.
"They robbed it blind to pay off the people to get them to leave," said Paul Heller, a GM salaried retiree from Washington, Mich. "I've got a retiree club that's absolutely sick about it."
Gerald Patrick, a salaried worker from Shelby Township, was equally worried. "I'm very concerned about this," he said. "It's something I don't think they should be doing. I thought our pension funds were protected."
--
Civis Romanus Sum

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On Sun, 01 Mar 2009 08:26:20 -0500, Jim Higgins

Oh no. The "pension expert" wouldn't criticize GM for blowing the pension with busted Wall Street investments. Some "pension expert." Some fiduciary responsibility. With goofballs like this in universities, is it any wonder the country is bankrupt?
--Vic
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And owned by China, Japan, Saudi Arbia, mostly.
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You believe that because you apparently do no know HOW a well run pension fund BECOMES OVER funded, under the federal laws requiring a pension plan to be funded. ;)
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I worked for a large very successful company at one time which had a very overfunded pension fund - unfortunately at a time when stock values were low.
A raider, whose name I will not mention, engineered a leveraged buyout of the company, raided the pension funds, broke up the company into pieces and sold it off.
Employees were thrown to the dogs.
Surely our great capitalist system wouldnt let such a thing repeat.
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That can not be true. One can not 'raid the pension funds' to insolvency! They will by law taken over by the pension trust when they become underfunded and long BEFORE they can become insolent. Search the various US steel companies, pension trusts for the facts, WBMA.
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Some years back, former Detroit Tigers pitcher Denny McLain did just that to the employees of the Peet meat packing company of Chesaning, Michigan. He drained the pension fund & the company treasury and walked away, leaving the employees and retirees with nothing. IIRC, he was released from prison not too long ago.
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