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