GM's pension liabilities

As I wrote yesterday, Germany's labor minister said "letting Opel die will be too expensive due to all those pension liabilities". I have no idea what Opel's pension liabilities are, as Opel doesn't publish stand-alone financials, but the statement prompted me to look up GM's overall financials. The 2008 annual report is not out yet, but the 31/12/2007 figures are revealing enough. Let's see:

Total pension obligations (incl. "other retirement benefits") were 220 bn $. That's quite a cool number, huh? It's much bigger than GM's whole balance-sheet (which was 149 bn $), because the funded part of the obligations is off-balance-sheet.

US pension obligations were actually overfunded as of 12/07. However, there were deficits for non-US pensions, as well as "other benefits" (both US and non-US). In total, underfunding was 39 bn $ (due to a massive 54 bn $ hole in "US other benefits", which presumably refers to health care).

This amount was recognised on the balance-sheet as a liability, i.e. it was part of the reason why GM had an equity of -37 bn $ as of 12/07. (That's right: GM officially posted a net equity of -37 bn $ already as of 12/07, before running up an additional 30 bn $ in losses during 2008!)

But we're not done here. In fact, we're only getting started:

According to recent press reports (Detroit Free Press Online), the accounting bucket containing US pensions went from +19 bn $ as of 12/07 (i.e. healthy overfunding) to -12 bn $ as of 12/08.

Ouch. How did that happen?

Apparently for several reasons. One reason is a drop in asset values. To their credit, GM's fund managers reduced their equity exposure sharply during 2007. They started the year with 36 % equities, and ended it with 26 %. Still, the stock market crash hurt, and overall 2008 fund return was -11 % (a loss of 11.3 bn $).

(I assume their stuff is mark-to-market, i.e. the 11 % drop includes the equity crash, value gains on high-quality fixed-income, and losses on lower-quality fixed-income. It probably does not include revaluations on real estate and alternative investments, which amount to more than 20 % of fund assets)

So where did the other missing 20 bn $ go? Apparently, they went into all sorts of efforts, such as funding attrition programs, enticing employees to accept health-care cuts, funding all sorts of health-care holes, etc. In any case, they are gone now. (If we want to be optimistic, we can assume they somehow reduced the massive hole of the "other benefits" bucket)

But we're still far from done:

GM's pension obligations are calculated using a discount-rate of 6.35 % as of 12/07. Why 6.35 %? According to the financial statements, that's the yield on high-quality fixed-income investments. Hmmm. That's kind of interesting, because 30y treasuries yielded 4.5 % as of 12/07, so their high-quality fixed-income included a nice little spread of 225 bp over treasuries. And in any case, yields have dropped: As of today, 30y treasuries yield 3.7 %, and 10y treasuries yield 2.6 %.

Let's recalculate pension obligations based on more realistic yields:

Assuming a 20 year duration, and a yield of 4 %, the present value rises by 22 % compared to GM's balance-sheet. That's 39 bn $ more.

Or maybe duration is 30 years, and the appropriate yield only 3.5 %? That would increase the present value by 40 %, or 69 bn $.

So, let's summarize:

1. "Official" underfunding as of 12/07 was 39 bn $

2. Market value losses during 2008 were 11 bn $

3. Increase in present value of obligations due to lower interest-rates is 39-69 bn $, depending on the assumptions

4. Plus hard-to-quantify amounts related to the various reallocations of pension funds during 2008, as well as fair-value-losses on real estate and alternative investments. Let's be nice and only assign 10 bn $ to those miscellaneous issues

=> Sum total of the "hole": 100-130 bn $ (of which 39 bn $ already shown in the 12/07 financial statements, but not covered by assets due to the negative equity). Roughly 80 % of this amount is related to US workers, the rest to foreign employees (Canada, Germany, Belgium, UK, etc.).

I wonder who'll end up paying all of that. Pension entitlements will presumably be picked up by the various pension guarantee funds (i.e. the relevant governments and/or companies contributing to those funds). I'm not too sure about US health care. Presumably much of that would be lost/eliminated in case of bankruptcy.