A huge problem facing many large corporations today is the underfunding of pension plans. Consider this: As of last quarter, Ford's (NYSE:F) automotive debt totaled $15.8 billion but its pension plan ended last year underfunded to the tune of $18.7 billion. It's the same story across town at General Motors (NYSE:GM), which was underfunded by a staggering $27.8 billion. Those are huge sums of money needing to be put into the pension plan that could otherwise be spent to grow the business. Ford has made real progress this year at tackling this problem head on, and plans to have the pension fully funded by mid-decade.
By the numbers
In 2011 Ford only contributed $1.1 billion into its pension plan, but increased its pay-in significantly last year to $3.4 billion. Much of Ford's contribution last year was discretionary; it was only required to put in $1.4 billion. Ford is continuing that trend and bumping up its contributions even more this year for a total of $5 billion. The equivalent of all of 2012's contributions ($3.4 billion) will be discretionary this year as only $1.6 billion was required.
In addition to paying in more than required to try and fix the underfunded pension problem, Ford has been executing a de-risking plan. It's basically offering some employees a lump-sum option, and has completed about 60% of its expected settlements, wiping $2.7 billion in obligations off the books.
One factor that is out of Ford and GM's hands is the discount rate. As discount rates rise, obligations to the pension fund drop, and vice versa. Since rates had been sitting at very low levels it's caused the underfunded pension figures to balloon, but that's beginning to change.
In fact even a small change in the discount rate makes a huge difference. A 70-80 basis point increase would reduce Ford's pension gap by 42%, down to $10.8 billion by the end of this year, said Matthew Stover, an auto analyst with Guggenheim Securities, according to Automotive News.
Due to Ford contributing billions of dollars more than required, enacting a successful de-risking plan, and taking advantage of a rising discount rate, the company should meet its goal to fully fund its pension plan by mid-decade. That's great news for its investors who would much rather see those billions go to returning value to shareholders.
As Ford races toward 2015 there are many positive catalysts that should enable its success story to continue. Consider that in 2015 Ford plans to be profitable in Europe again, double its market share in China, reduce automotive debt from $15.8 billion to roughly $10 billion, and have a fully funded pension plan. That's a list of impressive goals; if achieved as planned, it will boost Ford's stock price much higher.
Fool contributor Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.