Are Detroit's bold moves on pension liabilities in trouble?
Both companies responded to these concerns in recent months with dramatic moves to reduce their outstanding pension liabilities, and further moves have been widely expected. But in both cases, pressure from affected employees and retirees could be throwing a wrench into the works.
Big moves to ease big liabilities
Ford made headlines in April when it announced that it would offer lump-sum pension "buyouts" to 90,000 of its current and retired employees. With a global pension liability estimated at $15.4 billion as of the end of 2011, the need for dramatic action was clear -- and to Ford's credit, the buyout offer was a bold move.
General Motors, never afraid to steal a good idea from their ancient rivals in Dearborn, followed suit with a similar offer to their salaried employees and retirees -- and an additional move to convert that plan's remaining assets to a giant annuity managed by Prudential Financial.
While GM's move just scratches the surface of addressing its massive pension shortfall -- $25.4 billion as of the end of 2011 -- it was widely seen as a template for action on its (much larger) hourly workers' plans. Both companies' moves were well-received by investors and were praised here and elsewhere as good solid steps toward mitigating the risks of these liabilities.
But it turns out that the folks affected by these proposals are viewing them a little differently.
Harsh words and serious concerns
Earlier this month, General Motors Retirees Association President Jim Shepherd sent a letter to GM CEO Dan Akerson expressing concerns about GM's plan. He didn't mince words: "Never, even in our wildest imagination, could we ever have foreseen that GM would then turn around and treat its retirees with such little regard and with such disdain as GM is doing now," Shepherd wrote, accusing the automaker of "abdicating its promise" to provide retirees with a lifetime pension.
To some extent, harsh language like that is par for the course in Detroit employee-management relations. But Shepherd's concerns are real, and while GM's HR chief Cindy Brinkley responded with a cordial letter addressing each of them in turn, they're unlikely to go away.
Meanwhile, a new group called the FAIR Alliance ("Ford Actions Impacting Retirees") sent a letter to its members earlier this month in which it said Ford's offer would benefit the automaker -- but was a clear loss for retirees.
The group says it has hired experts to review and opine on Ford's plan. Ford responded by pointing out that the offer was voluntary: Those affected will be free to choose to remain in the plan, or to receive a lump-sum buyout.
Specifics of the concerns vary. A key concern of GM's retirees is the uninsured nature of the Prudential annuity -- essentially, that GM is replacing a federally insured retirement plan with one that is, at least theoretically, at risk. Pensions like GM are insured by the U.S. government's Pension Benefit Guaranty Corp. up to about $56,000 a year for workers who begin receiving payments at age 65.
The Ford group, meanwhile, says that retirees' chances of matching the plan's payments by investing the lump sum are low -- and that many retirees lack the knowledge or expertise to invest well.
Concerns as the offers unfold
Ford hasn't actually made any buyout offers yet. The automaker plans to send out the first batch -- 12,000 to 15,000 -- to randomly selected participants by the end of the summer, and will roll out the remainder in waves over the next year. GM is in the process of making its offers to 42,000 workers who retired between 1997 and 2011, and those affected have until July 20 to decide.
This is something for Ford and GM shareholders to watch closely. If a majority of participants decide to accept the buyouts, that will decrease each automakers' pension risk -- in Ford's case, significantly. At GM, a successful effort with salaried employees may encourage it to take a similar approach with the much larger, and much more politically volatile, hourly employees' pensions.
Progress on pension liability concerns should help share prices. Indeed, both Ford and GM stock gained ground when the initiatives were first announced. But significant resistance to the buyout offers among affected participants could spell trouble. Stay tuned.
While successful pension buyout efforts could help boost prices for GM and Ford, we've run across another stock pick that has so much promise that we've dubbed it "The Motley Fool's Top Stock for 2012." This company is revolutionizing commerce in Latin America and could be a golden opportunity for savvy investors. You can get instant access to the name of this company and the full story -- download it now.
Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.