The Truth About Cars » Pensions The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Mon, 28 Jul 2014 18:32:39 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » Pensions Report: Treasury Behind Delphi Pensions Debacle Tue, 07 Aug 2012 17:21:58 +0000

The Daily Caller says it has emails that prove that the pensions of 20,000 salaried retirees at Delphi were terminated “solely because those retirees were not members of labor unions.”

The emails, says the conservative website “contradict sworn testimony, in federal court and before Congress, given by several Obama administration figures. They also indicate that the administration misled lawmakers and the courts about the sequence of events surrounding the termination of those non-union pensions, and that administration figures violated federal law.”

In 1994, GM spun off its parts business into Delphi.  In 2005, the company went Chapter 11.  Later, parts of the business was sold, wound down, or sold back to GM. Says the Daily Caller:

“Twenty thousand of its workers lost nearly their entire pensions when the government bailed out GM. At the same time, Delphi employees who were members of the United Auto Workers union saw their pensions topped off and made whole.”

In sworn testimony, former Treasury official Matthew Feldman and former White House auto czar Ron Bloom, stated that the Pension Benefit Guaranty Corporation (PBGC), and not the administration, “led the effort to terminate the non-union Delphi workers’ pension plan,” the Daily Caller says. “The emails TheDC has obtained show that the Treasury Department, not the independent PBGC, was running the show.”

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GM Outsources Its Pensions To China Thu, 19 Jul 2012 17:15:54 +0000

General Motors pensioners should not worry about their underfunded pension plan. Its assets will be in safe hands. Those of the Chinese government. The Chinese government has agreed to buy large chunks of it, says Financial Times. According to the paper, China’s “State Administration of Foreign Exchange, which manages China’s more than $3 trillion in foreign exchange reserves, will pay $1.5bn-$2bn for GM’s positions in blue chip private equity funds.”

The FT quotes an investment adviser who said the deal was discreet, even by private equity standards, because “there is clearly concern about selling U.S. assets to China, especially in an election year.” Says the Financial Times:

“The private equity industry has emerged as a major issue in this year’s US presidential election. Mitt Romney, the Republican candidate and founder of Bain Capital, has had to fend off criticism that the companies it acquired actively outsourced US jobs.

Lexington Partners, a specialist investor in second-hand private equity stakes, is advising Safe and will administer the complex portfolio, one person briefed on the situation said. It may also buy some GM positions that Safe does not want. The New York-based investor was one of three firms mandated in 2010 to pick up $1.5bn of private equity investments for China Investment Corp, the country’s sovereign wealth fund.”

According to Reuters, China, which holds close to $1.2 trillion in U.S. treasuries, “has been looking to capitalize on the liquidity concerns of assets managers such as pension funds amid financial market volatility by snapping up their assets.”

GM’s underfunded pension plan and its floundering Opel units are seen as the two largest risks to the company. GM has $109 billion in assets in its global pension plan, which has Its obligations of $134 billion.

Says Reuters: “Pension funds and other institutional investors lock up their money for an average of 10 years when they invest in private equity. To exit these investments, they have to find someone willing to buy their private equity fund stakes, which could have gone up or down in value.”

That buyer was found in GM’s new home, China.


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General Motors Canada Pension Plan Faces $2.2 Billion Deficit Wed, 22 Feb 2012 20:02:27 +0000

Even after Canadian taxpayers contributed $3.2 billion (Canadian) to General Motors’ pension fund after GM’s bankruptcy proceedings in 2009, the company’s pension fund for unionized employees is still short $2.2 billion – a fair amount for a plan that’s responsible for 30,000 employees.

The pension plan deficit was a key factor in GM’s pitch to the Ontario and Canadian federal governments when asking for bailout funds. Canadian taxpayers ended up providing $10.6 billion out of the $60 billion bailout package. Before we get to cries of “Government Motors” and “picking winners”, the problem appears to be deeper than just GM’s own finances. Pension plans are a big players in Canada’s finance scene (the Ontario Teacher’s Pension Plan and the Canada Pension Plan are among the juggernauts) but lately, low interest rates and increasing lifespan have hampered the returns delivered by pension funds.

The deficit was calculated by an actuary commissioned by the Canadian Auto Workers Union. Based on the value of the plan’s assets and liabilities if it were to be wound down during the date of calculation. Benefits for workers, retirees and surviving spouses would have been slashed by over 33 percent. To make matters worse, GM has seen the number of active workers fall as its number of retirees collecting benefits has risen, a ratio that will only increase in the future.

This trend is not confined solely to GM. Companies like Air Canada and Canadian Pacific Railway are facing similar issues relating to worker/retiree ratios, and GM’s story is indicative of another disturbing precedent – that the public may be forced to foot the bill for a bankrupt corporation’s weak pension plan, whether directly or through the government administered Ontario Pension Benefits Guarantee Fund. GM and the CAW are due to start labor negotiations this summer – look for the issue of pensions to be a major one.

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With Liabilities Looming, GM And UAW Agree To Pension Buyouts. But What About The Workers? Tue, 27 Sep 2011 19:27:45 +0000

One of the legacy costs that GM was not able to reduce in the bailout was pension costs, a whopping $128b obligation as of the end of 2010. And though the plan is “only” underfunded by $10.8b at the end of June according to GM, Kenneth Hackel, president of CT Capital LLC (and author of two textbooks on valuing securities) recently told Bloomberg

The financial risk because of [GM's pension liability] is higher than people understand. The cold reality is if you used a conservative discount rate and you wanted to close out the plans, you would have to raise about $35 billion.

With GM’s market cap sagging into the low-$30b range (currently around $34b), the risk of pension liabilities growing larger than GM’s market capitalization is very real. And as lower interest rates and a weak stock market reduce pension fund returns, the obligations grow, in turn putting pressure on GM’s stock price. And it’s not like nobody saw this coming: a GAO report released in April 2010 issued dire warnings about the state of GM and Chrysler’s pension obligations. Now, according to the ace reporters at Reuters, GM and the UAW have hashed out a buyout deal giving workers the option of being bought out of their pensions. Which has us dying to know: what’s a UAW pension worth in cash?

Details like buyout amounts and the size of dent they’ll leave on “Fortress Balance Sheet” are not specified, as Reuters has only a negotiating letter to go on. The quote in question is posted in its entirety at the forum, and reads

The parties further discussed the possibility of amending the Plan to provide additional options for certain current retirees that would help GM manage its pension risk and
benefit such retirees that voluntarily agree to participate. To this end, the parties agreed that the National Parties may mutually agree during the term of this Agreement to
amend the Plan to add retirement options for some or all existing retirees that help GM reduce the volatility and risk related to the Plan and benefit existing retirees by providing
an additional voluntary option.

But the union dissidents who leaked the letter seem to be as angry about the possibility of a voluntary buyout offer as mistrustful of any agreement that could be reached without a vote by the union membership. In the words of Greg Shotwell,

the UAW colluded with the company to amend the plan after ratification to reduce the cost for GM… GM not only underfunded the pension, GM took lump sum bonuses and retirement incentives from the pension fund. Now GM and the UAW conspire to further drain the pension by offering retirees buyouts from the pension. Assuming that buyouts would come from the pension, a mass exodus for the buyout door would further erode the pension plan’s feasibility.

LaborNotes puts the paranoia into perspective

Gary Walkowicz, a bargaining committeeperson at Ford, said workers need to look for hidden concessions or loopholes not explained in the union’s “Highlights” handout.

At GM in 2009, for example, a seemingly harmless clause said the parties “will work together…to arrive at innovative ways to staff [small car] operations.” That language was used to justify slashing wages at a Michigan small-car plant, where 40 percent of the workforce was placed on permanent second-tier wages—without a vote.

Though a voluntary buyout seems like the most innocuous option, there are clearly downsides… and by not publicizing the agreement, the UAW is fanning the flames of dissent. In response to the union’s ubiquitous “Contract Highlights” pamphlets, the forum has created its own Contract Lowlights pamphlet [PDF], detailing the major grievances of mainstream UAW dissent. It can be easy to only look at a business from 40,000 feet, especially on the internet, so reading about the view from the ground level is definitely worth a few minutes of your time. Meanwhile, bailout-strengthened “Fortress Balance Sheet” and vague agreement notwithstanding, GM’s pension situation still looks to be stuck between a rock and a hard place.

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Inspired By Quadrangle Scandal, Republicans Call For Investigation Into Rattner’s Delphi Dealings Fri, 30 Apr 2010 01:14:05 +0000

When former auto task force boss Steve Rattner’s former firm Quadrangle recently settled a “pay-to-play” corruption investigation, it threw Rattner under the bus, saying:

We wholly disavow the conduct engaged in by Steve Rattner, who hired the New York State Comptroller’s political consultant, Hank Morris, to arrange an investment from the New York State Common Retirement Fund. It is our understanding that Mr. Rattner also arranged a DVD distribution deal for a movie produced by the Chief Investment Officer’s brother in the middle of the investment decision-making process. That conduct was inappropriate, wrong, and unethical. Mr. Rattner is no longer with the firm and is not a part of today’s settlement. Quadrangle will fully cooperate in the Attorney General’s ongoing investigation of Mr. Rattner and others.

According to the DetN, that stinging indictment by Rattner’s former firm has inspired House Republicans to call for an investigation into whether Rattner was behind a deal in which some Delphi retirees lost their pensions while others didn’t.

A letter from Reps Mike Rogers (R-MI) and Christopher Lee (R-NY) to the House Oversight Committee argues that the investigation of Rattner:

[calls] into question the integrity and objectivity of Mr. Rattner’s panel, particularly the decision to allow some Delphi Corp. retirees, including many salaried retirees, to lose their pension benefits through the Pension Benefit Guaranty Corporation while simultaneously protecting the benefits of other Delphi retirees.

However, that deal hardly needs a lot of in-depth investigation to get to the bottom of. As The Milwaukee Journal Sentinel explains, GM agreed to “top off” UAW pensions when it spun Delphi off in 1999. However:

The salaried retirees had no such agreement – and, it turns out, neither did employees who belonged to some other unions, including the International Brotherhood of Electrical Workers, the International Association of Machinists and Aerospace Workers, and the International Union of Operating Engineers.

When Delphi dropped those pensions on the PBGC, the 70,000 non-UAW retirees saw their benefits drop by $800m. And why would Steve Rattner have changed any of that? Rogers and Lee are trying to investigate a sin of omission rather than a sin of commission. The original sin in the sad story of Delphi was GM and the UAWs… all Rattner had to do was not fix it.

We sympathize when Rogers says:

It was completely unfair how they were treated… We need to ask some really hard questions about how this happened.

But just because Rattner screwed up at Quadrangle doesn’t prove anything about Delphi. That situation was screwed up long before Steve Rattner arrived.

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GAO: Pension Plans Will Kill Detroit. Again. Wed, 07 Apr 2010 15:13:00 +0000

It would be impossible to blame Detroit’s decades-long decline on a single factor, but if one were to make a list, defined pension obligations to workers would be somewhere very near the top. Thanks in large part to the unionization of America’s auto industry, Detroit has groaned under the weight of crushing pension obligations since time immemorial. And, according to a new report by the Goveernment Accountability Office [full report in PDF format available here], last year’s bailout of GM and Chrysler has not eliminated the existential threat that these obligations pose to the industry. In fact, the taxpayer’s “investment” in GM and Chrysler appears only to have exposed the public to even an greater risk of catastrophic pension plan failure.

The underlying problem is not even that GM and Chrysler continue to shoulder an unsustainable load of pension obligations, it’s that the bailout itself has created no guarantee that GM and Chrysler will become profitable enough to shoulder the obligations. As the report’s conclusion notes:

Treasury’s substantial investment and other assistance, as well as loans from the Canadian government and concessions from nearly every stakeholder, including the unions, have made it possible for Chrysler and GM to stabilize and survive years of declining market share and the deepest recession since the Great Depression. However, because of the ongoing challenges facing the auto industry—including the still recovering economy and weak demand for new vehicles—the ultimate impact that the assistance will have on the companies’ profitability and long-term viability remains uncertain. This, too, is the case for the companies’ pensions. The companies’ ability to make the large contributions that would be required based on current projections is mostly dependent on their profitability.

Though the Treasury’s auto team believes that both GM and Chrysler are able to achieve break-even performance in the short- to medium-term, they point out that such a performance will require a larger turnaround in the economy and demand for automobiles. What goes largely unsaid is that demand for GM and Chrysler-built vehicles in specific must recover before these companies are able to face their looming pension obligations, and that 2010 sales to date indicate that Chrysler is certainly behind the curve for achieving break-even volumes. Whether GM is approaching a break-even performance will become clear later today, when the firm reports its first post-bankruptcy, GAAP-approved earnings.

But had the auto bailout actually made progress on GM and Chrysler’s obligation load, this pressure for short-term results would be less pressing than it is. Unfortunately, because of the size of these obligations, a government bailout of Detroit’s pension obligations could have nearly doubled the rescue’s $81b pricetag. According to the GAO:

PBGC estimated its exposure for unfunded guaranteed benefits across the sector to be about $42 billion as of January 31, 2009, and the exposure for plan participants for unfunded nonguaranteed benefits to be about $35 billion.

Ironically, pre-bailout restructuring and attrition efforts by GM and Chrysler have actually worsened their pension obligation pictures. Though cutting workers and slimming down overcapacity was necessary for GM and Chrysler to even have a shot at medium- to long-term profitability, the fact that the bailout babies made these cuts at a time when it was starved for cash meant that they actually raided their pension funds for cash buyouts to workers.

GM began its downsizing even before its TARP-related restructuring efforts reduced the number of its North American brands from eight to four. According to a GM news release, approximately 66,000 U.S. hourly workers left the company under a special attrition program between 2006 and 2009. Often the lump-sum payments and buyouts offered by these programs were paid from company assets, but when these benefits are paid from pension assets, there can be an impact on the plan’s financial status. GM noted that the attrition programs implemented between 2006 and 2009 contributed to an increase of estimated plan obligations during this period and—along with other factors, such as discount rate changes— played a role in the recent increase in GM’s pension liabilities

Similarly, Chrysler’s downsizing efforts also predate TARP… Due in part to these programs, over the past few years, Chrysler’s pension liabilities have fluctuated while plan assets have been declining. For example, Chrysler’s UAW plan reported a $900 million increase in liabilities from 2007 to 2008, and the plan’s 2008 valuation report noted that the cost of special termination benefits during 2008 were nearly $390 million. Total liabilities for the Chrysler Pension Plan increased by a smaller margin overall from 2007 to 2008, but the plan’s 2008 valuation report noted that nearly $195 million in additional costs were being recorded due to special early retirements, added service costs, and curtailment loss.

In addition, GM’s jiggery-pokery with Delphi’s pension obligations (first spinning its own obligations off into its once-captive supplier, then re-assuming some last summer when Delphi struggled to emerge from bankruptcy) have added $2.1b to The General’s pension deficit. In visual terms, the impact of these “slimming” efforts looks something like this:

In both cases, it doesn’t take a financial genius to understand the scope of the problem. For an even simpler understanding of Detroit’s pension problem, we must look to GM and Chrysler’s estimates of future contributions required to maintain minimum funding levels for its pension plans, as required under law. Both bailed-out automakers are currently above minimum levels, however starting in 2013, large contributions are expected to be needed.

As of October 1, 2008, GM had about $36 billion of credit balance in its hourly plan and about $10 billion in its salaried plan. However, once these credit balances are exhausted, GM projects that the contributions needed to meet its defined benefit plan funding requirements will total about $12.3 billion for the years 2013 and 2014, and additional contributions may be required thereafter. In its 2008 year-end report, GM noted that due to significant declines in financial markets and deterioration in the value of its plans’ assets, as well as the coverage of additional retirees, including Delphi employees, it may need to make significant contributions to its U.S. plans in 2013 and beyond.

That’s $5.9b in 2013, and $6.4b in 2014, a significant cost to be incurred in such a short time, given GM’s current inability to earn a profit. Chrysler, meanwhile faces smaller payments over the short term, of $400m in 2010 and $40m in 2012, but payments to maintain minimum funding levels will increase to $930m in 2013 and $1.25b in 2014.

Worst of all, this entire mess is playing out against the backdrop of a larger crisis in the US government’s pension guarantee system. As of last September, the Pension Benefit Guarantee Corporation had an accumulated deficit of a staggering $22b, largely due to the assumption of of pension obligations in the manufacturing section. Nearly half of that deficit has been accumulated since September 2008, and another $14b of unfunded obligations currently hang in the balance from auto supplier firms alone. Furthermore,

Each year, PBGC assesses its exposure to losses from underfunded pension plans sponsored by financially weak companies… At the end of fiscal year 2009, PBGC estimated that its exposure from reasonably possible terminations was approximately $168 billion, up from $47 billion a year earlier.63 A significant part of this increase was due to the dramatic increase in exposure related to manufacturing, which PBGC attributed primarily to changes in the auto industry

In short, if GM or Chrysler fail to make their minimum payments, and default on their obligations, an already-staggering PBGC could collapse into complete insolvency.

This intense pressure on the PBGC combined with continued weakness in the auto sector puts worker benefits (particularly for high earners and those nearing retirement) into jeopardy, without a functioning federal safety net. As suppliers continue to fail, these obligations and risks will continue to mount, all of which will hurt GM and Chrysler’s chances at a successful IPO, and force the treasury to balance the government’s pension guarantee problems against the financial health of the two automakers it hopes to shortly cash out of. That, according to the report, is a recipe for “tensions” and “conflict” for everyone involved in the auto bailout. The GAO concludes:

The federal government and its institutions, the automakers, and the unions have all made a concerted effort to ensure that GM and Chrysler do not fail. But, should the automakers not return to profitability, interests may no longer be aligned. Treasury officials said that they will consider all commercial options for disposing of Treasury’s equity, including liquidation; this would likely mean terminating the companies’ pension plans, and allocating remaining company assets. In such circumstances, it would be difficult for Treasury to make any decisions that would trade off the value of its investment against the expense of the pension funds, potentially exposing the government either to loss of its TARP investment or to significant worsening of PBGC’s financial condition. This is not a choice the government wants to face, but this risk and its attendant challenges remain real.

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GM “Accelerates” $50m Payment to Delphi; Delphi Cuts Health Care Fri, 06 Feb 2009 13:51:46 +0000

If you’re familiar with Delphi—a former GM division with the words “bankrupt since October 10, 2005” over the door—then you’ll know that they’re a not-so-hidden cancer on GM cancerous corpse. Even as The General seeks to survive with a federal IV stuck in its metaphorical artery, it continues to peel off just enough cash—now your cash—to keep the parts maker making parts. For vehicles no one’s buying; but that’s how the industry doesn’t roll these days. So, some bad news from the oracle then. First, GM’s told their pals at the SEC (accounting scandal forgotten) that they’re accelerating a $50m payment to Delphi. [NB: Delphi had asked GM for a $100m hurry-up.] Can you say running on fumes? Delphi can. “The Company believes the amendment and accelerated GM support will enable it to preserve available liquidity given the difficult economic environment, particularly in the global automotive industry,” Delphi said in a filing with their pals over at the federal bankruptcy court. Judge Robert Drain, no less. And the cutbacks keep on happening!

The Detroit News reports that both of Delphi’s remaining U.S.-based white collar workers are about—or in DetN-speak “may”—lose their health care benefits. Just joking. Some 10k workers face this grim prospect. As Warren Zevon says, it ain’t that funny at all. [Speaking of "shared sacrifice," Delphi's UAW workers are exempt from this one.] Here’s the skinny.

Troy-based Delphi Corp. sought permission Wednesday from a federal bankruptcy court in New York to cancel retiree health benefits for current and future salaried retirees, a move that it says would save the company $200 million from 2009 through 2011.

The auto parts supplier also sought to end post-retirement basic life insurance benefits for current and future retirees.

The moves would allow Delphi to reduce its balance sheet liabilities by $1.1 billion. About 15,000 salaried retirees with medical and insurance benefits would lose coverage. The company wants to end coverage “as soon as (it is able) after March 31.”

Can they do that? They can do that. We’ve got several insiders within Delphi. It’s bleak. Unless the company gets a turn at the multi-billion dollar federal bailout buffet, Chapter 7 is only a matter of time, and not much of it.

And yes, Delphi still makes enough parts for GM to stop GM making cars if they stop making them. Which doesn’t seem quite as terminal as before, what with Uncle Sugar keeping the cash flowing. Until and unless your legislators pull the plug on GM. And then the whole house of cards will come crashing down.

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