Five or so years ago, when General Motors was simply financially challenged rather than bankrupt, financial writers joked that GM was in truth a huge pension plan, funded by an automobile operation. It wasn't far off the mark: in 2004, each active worker was outnumbered by 2.5 GM retirees, and each Chevy or Pontiac coming off the line had $1,900 of legacy retiree income and health benefits welded, painted and bolted in. In 2003, the company floated a $19 billion bond issue just to top up its pension plan.
Fast forward to 2009, and last week's bankruptcy. The GM pension fund, one of the largest U.S. corporate plans, is 14 percent underfunded: pension assets were worth $85 billion at year end 2008, against pension liabilities of $98 billion.
When a company files Chapter 11, one typical measure to unburden the new entity is handing over the pension plan to the Pension Benefit Guaranty Corporation (PBGC), an insurance fund comparable to the FDIC.
But the PBGC has decided to let the auto companies keep running the funds for now. There's a comment on the PBGC web site, but it doesn't explain how these frail companies can support their enormous pension costs.
Why?, asks Tony Jackson, astute columnist at the Financial Times, who enlists UK pension expert John Ralfe:
Because, Mr Ralfe suggests, of the legal terms under which the PBGC operates.The U.K has a pension system similar to ours, but corporate leaders got the message about five years earlier that companies in the twilight of life had no business trying to support these enormous benefit plans.
Its maximum annual payment is $54,000 for a 65-year-old, but only $20,000 for a 50-year-old. And in Detroit, it is commonplace for car workers to retire on full pension at 50.
The PBGC has calculated that if it took over all the auto industry's pensions, members would lose 40 per cent on average.
A 50-year-old GM pensioner with a $54,000 annual entitlement, Mr Ralfe reckons, would lose 60 per cent. Add that all up, and GM's annual $9bn pension bill would be cut by $3.5bn.
And so, in an exercise which has inflicted various degrees of loss on GM's shareholders and bondholders, the 670,000 members of the pension fund are protected. Anything else, it seems, would be politically impossible.
In response to those plan closings, the U.K. financial industry developed a new specialized type of investment company to buy pension plans, satisfy the obligations to retirees, and eventually wind them down. But that financial evolution has yet to reach the U.S., and with risk-taking capital so scarce these days, I don't think we'll see pension buyout firms any time soon.
Back to the FT's Tony Jackson:
The snag is, of course, that if new GM goes bust a few years from now, the bill to the PBGC will have gone up to the tune of the $3.5bn a year that would otherwise have been saved. When we put that in the context of a GM fund with assets of $91bn at the last count, it is not trivial.If GM disappears, the possibility of which I considered a few days ago, its pension plan will fall to the PBGC, and by that time a number of other big pension plans will have reverted to the hands of the government too. Moreover, state and local government pension plans are in big trouble too, and states likely won't be able to raise taxes enough to carry them all, so they will need a PBGC of their own (they're not included in the current program).
Nor is it trivial in the context of the PBGC, which - as I have written in this column before - is seriously underfunded, and has just reported a deficit of $33.5bn for the year to March. The whole problem, in short, has not been addressed, just kicked down the road.
The nagging question that remains is whether the whole system or corporate pensions can be rescued. Increasingly, the external risks and volatility of these schemes cannot be afforded by the companies themselves. And the official rescue schemes set up in both the US and UK are nowhere near big enough to shoulder the burden.
Fast forward five years more, and we could be looking at a whole new wave of bailouts - for the retired Baby Boomers.