Why General Motors Company's Progress On Its Pension Is Overstated

One of the most overlooked problems with Ford (NYSE: F  ) and General Motors (NYSE: GM  ) in recent history was their massively underfunded pension plans. Consider that at the end of 2012 Ford's global pension plan was underfunded by $18.7 billion -- that's more than its total automotive debt of $14.3 billion! GM put that figure to shame with a pension plan underfunded to the tune of $27 billion. In the past year, I've read numerous headlines regarding how America's two largest automakers have drastically improved their pension funds, but I'd argue that one of them has not made as much progress as you might think.

Starting from the top
Pension obligations are defined from discount rates, which swing with interest rates, causing massive pension plans to be drastically underfunded during times of low interest rates, and potentially rise to a surplus, where assets exceed future obligations to employees, when interest rates rise. When interest rates are low, as they have been recentlyand likely will continue to be, companies put more cash into pension plans to make up the difference -- cash they could use elsewhere to grow business.

I think Ford has tackled the problem much more effectively than General Motors, and the latter's "improvement" seems to be overstated.

There are multiple ways a company's pension fund can improve its funded status. The simplest is to contribute more cash to your asset plan. Ford has dropped $8.4 billion into its pension plan over the last two years, far more than GM. Second, Ford was a step ahead of GM in another aspect: it began a sizable de-risking strategy in which it offered more than 90,000 U.S. salaried retirees and former employees an opportunity to take a cash lump-sum payment. That strategy essentially would wipe Ford's future risk off its books and lower its total obligation figure. Third, as previously mentioned, discount rates are rising which is lowering overall pension obligations. 

Ford has taken full advantage of all three options and has reduced by about half its global plan's underfunded status, from $18.7 billion at the end of 2012 to roughly $9 billion at present. GM, however, has contributed much less cash to its global plan, relying instead on rising discount rates and de-risking strategies to lower its pension obligations. The result is as you would expect: its overall obligation amount has declined but with only a minimal improvement to the pension plan's funded status.


Percentages are GM's funded status, assets/total obligation. Source: General Motors' fourth-quarter presentation.

Near the end of 2013, Morgan Stanley's credit strategy team estimated that the 100 largest U.S. corporate pension plans on average were 90% funded. I believe Ford to be at or near that mark; this is backed up by the fact that the company plans to contribute only $1 billion to its asset plan in 2014, compared to $5 billion last year. We'll know for sure soon when Ford releases its overall obligation figures. GM hasn't made much progress since 2010 and remains at 80% funded – not the drastic improvement the media is making it out to be. 

Foolish takeaway
General Motors has a lot of positive things going for it, despite a disappointing fourth-quarter-earnings result. I've bought into GM because I believe the company is taking the right steps to improve its business and pricing with a whole slate of new or redesigned vehicles over the next couple years. I also believe its margins will continue to trend upward to 10% in the U.S. by mid-decade with the overhaul of its vehicle lineup, including two of its most profitable products, the Silverado and Sierra trucks. In addition, GM plans to triple sales of its Cadillac brand in China which should help boost top and bottom lines in its second most profitable segment, GM International Operations.

GM's lack of "drastic" progress doesn't make it less of a valuable investment, although I would love to see its pension plan 90% funded sooner rather than later. The company's pension status is definitely one aspect investors will need to watch in the coming years. 

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2014, at 4:19 PM, SkepikI wrote:

    Dan: Thanks for an extraordinarily clear, concise and straightforward article on a complex subject with many moving parts. This is the "sleeper" issue that keeps me a fan of Ford management and a critic of Government Motors. What interests me most however, is the resolve of Ford to attack a lurking, festering problem that few were after them to attack, while GM let it fester. Correcting the problem at least partly from cashflow, while recovering, and investing heavily in a new strategy is nothing short of remarkable. Ignoring it would be sheer foolhardiness, which I cannot tag GM with. However, GM treating it with such casual attention in my book is/was and act of cowardice by its management. Just what I expect from a group of people who took $10 Billion from US Taxpayers and have yet to express any desire to return it, because they don't HAVE to.

  • Report this Comment On February 07, 2014, at 4:45 PM, TMFTwoCoins wrote:

    Thank you, sir.

    I agree 100% that this is a sleeper issue that most miss -- I mean it was more than Ford's auto debt obligations in 2012! Crazy.

    I also am surprised GM hasn't tackled this better, especially considering the huge cash pile the company has. Perhaps they feel within striking distance of being fully funded -- amid rising discount rates -- and if they ever needed to pull the trigger with its cash pile they could do so. Until then GM see's fit to keep its cash while it refreshes/redesigns/replaces 90% of its vehicles over the next couple of years, in case costs come in over budget. It's something I'll be investigating further.

    Thanks for reading, and TGIF,

    Daniel

  • Report this Comment On February 07, 2014, at 4:51 PM, SkepikI wrote:

    ^ The only problem with that "lazy" GM strategy is that GM missed out on some really low risk appreciation and earnings- which F got by making the contributions earlier. Then there is the diversification risk...ALL that cash burning a hole in GM's pocket instead of in the pension funds diversified portfolio...NOT GOOD.

    No I don't have a GM pension nor know anyone who does..but if I were a GM pensioner, I would not be counting on another bailout from the Taxpayers to save my pension.

  • Report this Comment On February 09, 2014, at 9:43 PM, AmericanFirst wrote:

    TwoCoins,

    Maybe your having a memory lapse on how GM acquired their "cash pile:

    1) $50B taxpayer cash, where GM only bought back approx.$7.3B of their stk. from the gov.

    2) Fleecing bondholders for $30B, plus $B's in associated interest payments

    3) $45B in corp, income tax benefits per the gov./GM Bailout.

    The above equals over 2x their current market cap. They should have a cash pile!

  • Report this Comment On February 10, 2014, at 11:23 AM, SkepikI wrote:

    ^ Thanks for that AmericanFirst. This is the very issue I was commenting about on one of J R articles and this is the very first time I've seen any sort of "balance sheet" approach to the whole GM "transactions with taxpayers" issue. I'm not sure I can buy all your accounting (and not sure I cannot) but it is excellent food for thought and the most simple way for all of us to contemplate what we have allowed to be wrought in our name....

  • Report this Comment On February 10, 2014, at 2:15 PM, TMFTwoCoins wrote:

    My dad taught me a very important lesson when I was younger. His business faced sudden and difficult changes in the way the government worked with industry standards, and his company. While all his competitors complained and fell behind, he found a way to incorporate the changes and make a profit.

    I understand your frustration with GM, I'm also a taxpayer, and I disagreed with much of the situation -- and I know I've linked you my articles that said as much. However, what does complaining get you? If mentioning that fact on every GM article makes you happy, have at it. However, I've moved on, and found a way to profit from GM's unfair situation. For the same reason most refuse to invest in GM, because of their advantage from wiping tens of billions of debt and being gifted tens of billions of tax losses, I invested for those same reasons. I got some of my taxpayer money back; has complaining in the comments everyday won back some of yours?

    Just because I don't mention it everyday doesn't mean I've had a memory lapse.

    Have a good day,

    Daniel.

  • Report this Comment On February 10, 2014, at 2:38 PM, SkepikI wrote:

    Hmmm... Food for more thought, but you might entertain another perspective here Dan... I won't try to convince you that GM should not get your money, BUT there are lots of other investments out there which DO deserve your money and may well be lower risk.

    Even if I turn out to be wrong about GM, I look at "government help" as a handicap. Sort of like somebody helping you out when you are weightlifting, you miss out on the benefit of the hard work AND weaken yourself for the future. We did a similar thing with Chrysler, with MUCH less transfer of $, about 4 decades ago and look how that worked out long term...Chrysler is now a two time loser and I wouldn't put my hard earned money in them (or Fiat) for short term premium returns. As a long term investor, had I not been out of Chrysler in the 90's, I would have considered all the returns to 2009 insufficient compensation for my losses plus angst.

    I will say, what your dad accomplished if I understand it properly, is entirely different and more like weightlifting. Putting your money at risk in GM may pay off for you, and I may be wrong about the financial risk. But what happens the next time if GM has learned nothing (just like Chrysler) in the long term? Then not only will you find yourself financially worse off, but you will have contributed support to execs and an organization that existed merely to hoodwink the unwary- ie Congress and Government employees....

    Its a risk I don't care to take. And one you should take care in accepting.

    Its not quite as bad as giving money to Bernie Madoff because of good (fake) returns so far, since I don't view GM's current management as crooks (yet). But if there is one thing I will ALWAYS recall about the Madoff scam its the fact that many of his clients had no illusions that Bernie was engaged in technically illegal activities, and they were OK with it because BERNIE was doing the illegal acts, not THEM. And they were shocked and outraged when Bernie had the temerity to crook them.....

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