Saturday, April 10, 2010

Major impact on PBGC if GM goes bust

From the NY Times:

April 6, 2010
Automaker Pensions Underfunded by $17 Billion

DETROIT — The pension plans at General Motors and Chrysler are
underfunded by a total of $17 billion and could fail if the automakers
do not return to profitability, according to a government report
released Tuesday.

Both companies need to make large payments into the plans within the
next five years — $12.3 billion by G.M. and $2.6 billion by Chrysler —
to reach minimum funding levels, according to the report, prepared by
the Government Accountability Office. Whether the companies will be able
to make the payments is uncertain, the report concluded, though Treasury
officials expect the automakers will become profitable enough to do so.

If either company’s plan must be terminated, the government would become
liable for paying benefits to hundreds of thousands of retirees. The
effect on the government’s pension insurer, the Pension Benefit Guaranty
Corporation, would be “unprecedented,” the report said. The agency
manages plans with assets totaling $68.7 billion, less than the $84.5
billion in G.M.’s plan alone.

The carmakers’ pension plans were jolted by the downturn, increased
liabilities and other factors. G.M.’s plan was overfunded by $18.8
billion in 2008, and was then underfunded by $13.6 billion last year,
the report said. Chrysler’s plan was overfunded by $2.9 billion in 2008
but underfunded by $3.4 billion last year.

The plans cover about 650,000 people at G.M. and 250,000 at Chrysler.

The Treasury Department owns 61 percent of G.M. and 10 percent of
Chrysler as a result of the emergency loans the carmakers received last
year. The government spent $81 billion bailing out the companies and
others in the auto industry.

The report issued Tuesday said Treasury officials were confident that
G.M. and Chrysler would earn enough to allow the government to gradually
sell its stakes. But the report warned that the government could push
the companies out of business, consequently terminating their pension
plans, if their recovery efforts failed.

“In the event that the companies do not return to profitability in a
reasonable time frame, Treasury officials said that they will consider
all commercial options for disposing of Treasury’s equity, including
forcing the companies into liquidation,” the report said.

In addition, the report said the government’s interests as a shareholder
of G.M. and Chrysler could clash with those of pension participants and
beneficiaries. “For example, Treasury could decide to sell its equity
stake at a time when it would maximize its return on investment, but
when the companies’ pension plans were still at risk,” the report said.

President Obama has said he wants to sell the government’s stakes in the
two companies as soon as is practicable. G.M. executives have said that
a public stock offering could happen this year but that the company
would need to be profitable and meet other criteria first.

G.M. is scheduled to release its financial results for 2009 on
Wednesday. Chrysler plans to provide an update on April 21.

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