Friday, April 17, 2009

Potential PBGC problem: $13.5 billion GM liability

Pension & Investments:

A GM bankruptcy could become the PBGC's biggest nightmare because the automaker could dump as much as $13.5 billion in unfunded pension liabilities onto the PBGC — the largest ever from a single company — if GM were unable to fund its US defined benefit plans and terminated them. The claim would be almost twice as large as the current record of $7.5 billion from the 2005 termination of United Airlines pension plans.


Decisions that the government will make soon on the future of GM and Chrysler could accelerate the decline of traditional pension plans. “If one of these companies solves its pension problem by shunting it off to the federal government, then for competitive reasons the others have to do the same thing,” said Zvi Bodie, a professor of finance at the Boston University School of Management and longtime observer of the government’s pension insurance system. “That is the death spiral.” For years, traditional pensions have been in a slow decline, with troubled sectors like aviation and steel shedding their plans in bankruptcy court as 401(k) plans have taken hold. But big sectors, particularly manufacturing and financial services, have clung to the old plans. The PBGC has roughly $67 billion in assets to cover the benefits of nearly 4,000 failed pension plans; GM has $84 billion just to cover promises to its own workers. For traditional pension plans, “maybe this is their last stand,” said Jeffrey Cohen, a partner with the law firm Ivins, Phillips & Barker in Washington who was chief counsel for the PBGC from 2005 to 2007. If the automakers’ plans fail, he added, “the biggest domino will have fallen for the PBGC.”

YRC aims to fund pensions with real estate

YRC Worldwide, the biggest trucking company in the US, is negotiating with its unions to allow it to suspend cash payments to its defined-benefit pension plan and to pledge real estate instead. It would be the first major US company to use its real estate to help meet its pension obligations.

I find this vaguely disturbing. Also, I'm surprised that no US source seems to be carrying this story.