By on September 27, 2011

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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24 Comments on “With Liabilities Looming, GM And UAW Agree To Pension Buyouts. But What About The Workers?...”

  • avatar

    Shotwell is pretty articulate for a UAW guy. But he unwittingly presents a strong case for why the UAW will never be able to organize the transplant factories. The UAW gravy train has been derailed and it’s not getting back on track any time soon.

    • 0 avatar

      my friend Gregg is indeed articulate. witness his latest interpretation of GM’s motivations and collusion with Solidarity House:

      The Hidden Plan in UAW-GM Negotiations

      When you sign a blank check you have to expect the worse. Or at least admit,

      you agreed to take the ride.

      In 2003 the UAW agreed to meet with Delphi after the ratification and negotiate a two tier wage for new hires.

      Six months later the UAW agreed that new hires would start at $14.50 per hour and never receive a pension.

      No one imagined the ride would be that rough.

      In 2011 the UAW announced for the first time since 1950 a new agreement with GM that did not include a raise in pension

      for future retirees. One may argue that at a time when the pension is underfunded and GM is trying to hold down labor costs,

      the company and the union are justified in restricting raises on pensions.

      The problem is that argument lacks investment savvy. Top tier workers are replaced by second tier workers making less

      than half as much. The turn around on the investment is instantaneous. But GM wants more.

      GM doesn’t want to fund the pension. It’s a drain on liquidity. And they have a plan to plug the drain.

      In a letter buried in the pension supplement, which is not distributed to UAW members, the UAW agreed to meet

      with GM after ratification and amend the pension plan so as to help GM improve its equity and liquidity.

      If UAW members ratify the 2011 UAW-GM contract, they grant the union and the company permission to amend the pension.

      Just what that means is not clear because it is not spelled out. What is clear is that it is open ended and UAW members,

      if they ratify the con, have agreed to go for the ride.

      The letter states: “. . . 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 to help GM reduce the volatility and risk related to the plan

      and benefit existing retirees by providing an additional voluntary option.”

      [Pension De-Risk Consideration : 2011 UAW-GM Supplemental Agreement Exhibit A (Pension Plan) page 161.]

      The word volunteer leads to speculation that a buyout is on order. The danger with that scenario is that it may cause

      a run on the bank and then the pension wouldn’t be underfunded it would be underwater.

      But we shouldn’t be thrown by a single word. Once you open Pandora’s Box they can amend the plan

      however the “parties” agree to “mutually agree.”

      Isn’t that cheerful language for a union contract? Parties agreeing to mutually agree? As retired UAW International Executive

      Board member Jerry Tucker said, “Sounds like they are on the same page of the same hymn book.”

      It’s no wonder that when Reuters News Service wrote about this pension de-risk issue they cited the Bible.

      “To take it completely off the table, you’d have to convert everybody to a 401(k) plan,” said Peter Bible, a former GM chief accounting officer.

      He said such a deal would parallel the 2007 agreement with the union that relieved GM of its retiree healthcare obligations.

      “That’s black and white, and between there is somewhere where it will land,” Bible, now a partner-in-charge at accounting firm

      EisnerAmper LLP added. “The idea is to limit the employer’s exposure to the markets.”

      The somewhere between “where it will land” is a cash balance plan with buyouts as an alternative. What’s a cash balance plan?

      A cash balance plan is a legal maneuver for companies to reduce pension cost. Those eligible to retire will get a carrot that

      feels like a stick: get out now while the getting is good because the best of times are over. Workers who are eligible to retire

      but choose to keep working will not earn more pensions credits and they will lose out in the cash balance shuffle where

      time is stacked against them and the dealer cuts the deck.

      Don’t think they can do that? Why not? What’s to stop them? UAW members volunteered to let them amend the plan, didn’t they?

      A deal is a deal.

      Older workers are typically grandfathered out, but there’s always a lot of orphans when profiteers determine deferred compensation

      for workers is a promise worth breaking. Here’s how it broke down at I.B.M.

      “The I.B.M. plan allows the roughly 30,000 employees who have either 25 years at the company, or are 50 years old

      with a decade of service, to stick with the old plan.”

      Nonetheless, senior workers at IBM sought legal protection and lost. “The appeals court decision . . .

      is likely to give companies the green light to implement cash-balance plans without fear of litigation.”

      How it breaks down at GM is anybody’s guess. But three things are certain.

      (1) The UAW is not informing members what they intend to do with the pension.

      (2) Profit sharing is a hoax. Profit is what capital extracts from labor, not what it shares with labor.

      Shares are what CEOs are rewarded for screwing workers.

      (3) A union leader who promotes profit sharing as a way for workers to achieve economic justice

      is nothing but a corporate shill mutually agreeing to mutually screw both workers and retirees.

      • 0 avatar

        Companies have ditched pensions and converted people to 401(k) plans for years, relieving them of any liabilities and exposing the retirements to savaging in the market. The only reason GM and the rest haven’t done it yet are these contracts, which the UAW is now working on redoing.

        Welcome to the world the rest of us inhabit where you are responsible for your retirement funds. The good news is you may do better and have something you own, rather than hope it’s there. The bad news is you have to make good decisions, hire professionals that are sharp, and think about what you are going to do when you hang up your shoes.

      • 0 avatar

        @ Buickman…..Great post, like yourself, Shotwell tells it like it is. No icing no b.s.

      • 0 avatar
        doctor olds

        “Profit sharing is a hoax.”

        The GM UAW folks who received record $4,500 profit sharing checks last year might beg to differ!

        Profit sharing is a reasonable way to share success, AND failure with employees and supports them having an ownership mentality. Unionist entitlement thinking calls for a guaranteed upside without the potential downside. That’s how the domestic industry became so financially depleted before the ’08 collapse of the U.S. market. Labor costs were continuously ratcheted upward far beyond sustainable levels.

      • 0 avatar

        Great comments by you BUICKMAN and by Grgg.
        If you think things can’t get worse, look at what happened to the salaried retirees from Delphi. With no contract (or in this case what will be a bogus contract) the execs will do as they please until they bleed every penny possible from the UAW members. They view retirees as having no commercial value. Think about what that means to them.
        Something like another bankruptcy wcould allow the pensions to be turned over the PBGC and result in a SIGNIFICANT cut (like 30%-70%) to the already existing and future pensions….Oh yeah, don’t forget the total loss of healthcare and life insurance.
        It has happened.
        And to those who say suck it up and make you own investment so you own your own future…it’s a little late to start that after you’re 60 and have believed the promises for 30 years.
        I hope the rank and file of the UAW can find the strong leadership to make the right choices and keep the members out of the poor house (I’m living there now and it’s already getting crowded with Delphi Salaried Retirees).

  • avatar

    So now that teh UAW owns a big chunk of GM they pulled this on the members. Maybe NOW they will see the light and realize who they work for and what the UAW stands for.

    Transplants take note, these gangsters are not to get involved with.

    The rank and file should line up and cash out while cash is available. When the music stops there will be no chairs. I bet Rabid Rick’s bank account is comfortably plump, no worries for the former execs.

    i’m not sure i would buy a car made by people this pissed off at their union or GM. if you think about it, isn’t a huge part of the car the quality and pride by which it is built? I know robots do most of the work these days but there is still a human element to the process.

    I’d like something I paid 35K for and depended on for years to be made by content people who aren’t thinking about the desperate situation they find themselves in over wages, retirement, and status.

    As always, finding another line of work should become a priority.

    • 0 avatar

      That was one advantage of the UAW (and the workers) being part owners. They have to be more realistic. GS650G – I assume you agree the gap should be closed, this is one way to do it.

      Also it looks like GM has near $40billion in liquid reserves – that eliminates the entire gap. Market capitalisation is not therefore that important, or have I missed something?

      • 0 avatar

        Spending down the reserves is always an option. In the face of softening demand for cars, a second recession, and contract negotiations I’d ask for the money and not take any wooden nickles.

      • 0 avatar

        Market cap is basically what the market determines a company is worth, assets minus liabilities. If GM has 40b in cash (where are you getting that number?), and a market cap of 30b, then there are probably 10b of liabilities somewhere.

      • 0 avatar

        korvetkeith – I agree but the market is not always rational and the share price can be too high (as with lots of tech stocks in 1999/2000) or too low. So I wouldn`t automatically jump to the conclusion there is $10 billion of liabilities.

      • 0 avatar

        A market cap of 30 billion, cash on hand of 40 billion, and liabilities of 10 billion assumes GM is worth absolutely nothing. More realistically, GM’s physical assets, turnover volume, and intellectual property are worth something and their liabilities FAR exceed 10 billion dollars.

      • 0 avatar
        doctor olds

        @SJ in SD- Flawed thinking.
        $39.7B in cash less $4.7B in debt and $10B in pension liabilities means GM is worth $25B, PLUS the immense physical assets of the business. A market cap of $30B means GM stock is a bargain at today’s price. All of the physical assets could be bought for a net of $5B.

  • avatar

    Wow. I guess I’ve had it pretty bad in the tech industry in central Texas.

    Nobody ever promised me dental, vision, and Christmas bonuses even after I stopped working. I never got the day after Easter or the Friday before Memorial day without using a vacation/personal day.

    Granted, the BIG problem is that promises to workers were made, and now the companies are trying to weasel out of those promises. Maybe the tech industry is a poor example of current business practices, but the union hollering is really starting to sound like a bunch of spoiled brats.

    The rules of the game keep changing underneath us workers.
    It’s too late to stop, and nobody likes a crybaby. All we can do is move on, continue to invest our own time and money in acquiring relevant/marketable knowledge and skills, and pay attention to our 401(K) accounts every once in a while.

    Then suck it up and have a beer (not during lunch in the company parking lot), cuz that’s just the way it is.

  • avatar

    This was, and is public knowledge. Under Ontario law GM was obligated to offer us,a full buy out on our pension.

    Option A…Hourly workers in 2008, had a five week window to accept a full pension, with benifits. The package included a $100,000 cash buyout, and a $35000 car voucher. Every thing taxable.

    Option B… With 36.4 years of service I qualified for $635,000…No benifits no car.

    I had 48 hours to make a decision.

    As I mentioned earlier. This was all public knowledge. Union workers have no privacy. It was front page news, in the buisness section of both the right wing, and left wing papers.

    I took option A , but not before I lost my lunch on the side of the road. I’m fairly sure that didn’t make the papers. My hand shook as I signed the final paper work.

    Anyway after two shots of J.D Number 7, and Labatts 50 for a chaser. I walked out the door on Dec 19 2008, {the very day George W wrote the first check} and I never looked back.

    What will be, will be.

    • 0 avatar

      Ours wasn’t as good, but my dh signed for the $45,000 option. There are some regrets, but we don’t talk about it. How are you doing?

      I’m stressed, mostly because the pension looks so shaky. Do you think it’s going to disappear in a few years?

      Take care.

  • avatar

    This also doesn’t include what happens to the white collar workers (those that don’t happen to be in management, and have no union labor contract to protect them). There was a story two years ago where many of these people, with 25+ years in (and eligible for pensions at 30) were given the “opportunity” to be bought out of their pension obligation for a lump sum now. As you may imagine, many did not see the train coming, and declined. Before they got to thirty years, they were called to their boss’s office and summarily fired–and had their pension benefits vanish without a trace (though they were given one month’s salary for every year they worked).

  • avatar
    doctor olds

    I know many love these conspiracy theories, but the truth is quite simple and much less exciting.

    GM is offering UAW members the opportunity to volunteer for these buyouts. They are not and have never been forced on any UAW worker.
    The article’s implication that Orion Plant workers were forced to take Tier 2 wages is inaccurate, though initially reported by journalists. The truth is that retirements and local transfers brought Tier 1 numbers down far enough to enable Sonic to be the only subcompact vehicle manufactured in America today.

    This is being done for several reasons, and pension obligations are not the most important.
    Separation/retirement of Tier 1 wage workers opens the door for hiring more Tier 2 wage workers at far lower cost today and in the future.

    Buyouts do reduce future pension obligations, but each worker has the choice to accept or decline.

    • 0 avatar

      @doctor olds…..For sure, nobody held a gun to my head. General Motors Canada and the CAW agreed to set deadlines. However both GM and the CAW made it very clear. Once the offer was accepted there was no turning back.

      I have both salary, and hourly, retired friends. Sure, there is always a little grumbling. But at the end of the day,most of us feel we were treated quite well by GM and the CAW.

  • avatar
    doctor olds

    GM’s pension underfunding status would disappear with a modest recovery of the economy and resulting return on fund investments.

    • 0 avatar

      That would be potentially possible, but with GM’s stock trading well below IPO (closed down on 2011/09/30 -0.58/-2.79%) to USD$20.18 and has been below IPO for a few weeks. Any modest gains on the stock has had a severe pushdown when the markets go crazy and people panic. If the stock keeps heading south and falls below USD$20.00, most investors may just dump it at a loss before it it has any chance to gain.

      If that happens, the underfunded pension fund will be the least of their worries.

  • avatar

    the website for employee discounts is too bad it’s only a URL and not also a philosophy.

  • avatar

    Sounds like they’re getting ready to throw EVERYBODY under the bus, both workers AND retirees!!! i thought that once the pension funds were in fidelity, that they were untouchable by GM, totally SAFE from GM’s current situation… to be used for retirees only??? WTF????? how are those funds affected by GM, thought it was a separate interest bearing account that has NOTHING to do with GM??? or am i misunderstanding something here??? please let me know, somebody???????

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