Analyst: GM may buy out retiree pensions
January 12, 2012
Analyst: GM may buy out retiree pensions
By DAVID SHEPARDSON / Detroit News Washington Bureau
General Motors Co. might seek to buy out the pensions of some retirees in an effort to pare its unfunded liabilities, an industry analyst said Wednesday.
Barclays auto analyst Brian Johnson, in a research note to investors, said GM had “opened the door to reducing pension liabilities through a lump-sum buyout program.”
It’s unclear whether that might involve hourly workers, salaried employees or both — but it would be voluntary.
Johnson said GM could target “a significant portion of the retired population” that might be willing to accept lump-sum payments in exchange for giving up lifetime pension payments.
“Even a 40 percent take rate would reduce liabilities by about $40 billion,” Johnson said.
That would help the Detroit automaker reduce its large, underfunded worldwide pension plans that have concerned Wall Street and investors.
GM has global pension liabilities of $128 billion that were underfunded by $22 billion, including $12 billion in the U.S., at the end of 2010. GM Chief Financial Officer Dan Ammann told investors at a conference Tuesday that the company is considering its options.
On Wednesday, the Detroit-based automaker referred questions to Ammann’s presentation, which emphasized the company has made no decisions.
“We’ve made very good progress but still, given the size of the liability here, we have more work to do,” Ammann told investors. “We’re exploring other actions.”
Possible ‘voluntary option’
GM has nearly $40 billion in cash on its books, and is considering what to do with it.
Some investors are worried that GM’s pension plans eventually could eat up much of that.
Asked if the company is considering making a buyout offer to its estimated 500,000 union pension participants, Ammann gave no details. “There is a very strict set of guidelines as to what is and isn’t possible,” he said. “And as we have news to report on those, we will update you.”
In a side letter to GM’s four-year labor deal with the United Auto Workers union, approved in September, the company and the union opened the door to pension buyouts.
The company and the union “may mutually agree during the term of this agreement to amend the plan to add retirement options for some or all existing retirees,” GM Vice President of Labor Relations Cathy Clegg wrote to Joe Ashton, the UAW official in charge of GM negotiations. The letter said it would “benefit existing retirees by providing an additional voluntary option.”
GM has about 700,000 hourly and salaried pension plan participants in the United States. The UAW says a typical GM retiree receives about$18,000 a year in pension benefits. Younger retirees ineligible for Social Security get a higher pension until government payments begin.
GM’s pension deficit may appear larger than in the past because of more conservative assumptions about how much its pension plan investments will grow.
One analyst told Bloomberg News in September that GM’s pension shortfall could total $35 billion when the company releases its pension update, as part of fourth quarter earnings.
The Government Accountability Office said in a report in 2010 that GM’s pension plans in 2007 were by far the largest in the United States: 60 percent bigger than the runner-up. GM closed and froze its salaried pension plans in 2007.
If GM hadterminated its hourly and salaried pension plans as part of its restructuring, the Pension Benefit Guaranty Corp., the government’s pension insurer, would have assume $4 billion in costs.
GM’s legacy costs
GM’s stock price has flagged since it went public in November 2010 and is down about 35 percent over its $33 IPO price. GM closed up 5.3 percent, or $1.23, to $24.47 on Wednesday.
When GM polled financial analysts, Ammann said, the single biggest issue of interest was its pension liabilities.
GM’s so-called legacy costs weighed heavily and helped push the company into bankruptcy in 2009. In 2008, GM said it had spent $103 billion on pension and health care costs over 15 years.
In bankruptcy, it swapped some of its union retiree health care costs for company stock.
GM is still 26 percent owned by the federal government as part of its $49.5 billion bailout.
The largest of Detroit’s three automakers held the line on hourly pension costs in the new contract — and won agreement with the union to close its hourly pension plan to new entrants..
Any buyout offer, Ammann said, would be governed by federal pension laws.
“I don’t want to get into specific ideas or plans or actions or hypotheticals, other than to say there’s a very strict set of guidelines as to what is and isn’t possible and what the decision frameworks are. It’s very clearly laid out,” he told analysts Tuesday.
GM CEO Dan Akerson said in June that he wanted to get pensions under control. “I want to get the U.S. pension fund to fully funded and we’re making real progress there,” he said.