Big 3 pension gap grows

Feds warn of risks in rising $41B shortfall

David Shepardson / Detroit News Washington Bureau

WASHINGTON -- The outgoing director of the U.S. Pension Benefit Guaranty Corp. warned Friday that Detroit's Big Three automakers face a $41 billion pension shortfall.

While the companies continue to meet government funding requirements, the situation raises concerns for the agency, which takes over pensions when companies fail, given the financial problems facing the struggling auto industry.

"We're not trying to tell people that the pension house is on fire," Charles E.F. Millard said in an interview. "The point is that in many ways this has a similar look to other situations, such as a Bethlehem Steel."

The pension corporation assumed the pensions of 95,000 people at Bethlehem Steel in 2002, when the company filed for bankruptcy, and ended up on the hook for $3.7 billion in pension costs. That plan was underfunded by $4.2 billion.

Millard said policymakers need "a clear understanding of the magnitude of the numbers and the risks" associated with the automakers.

In total, the Big Three pensions cover nearly 1.3 million people. If all three automakers were to collapse and turn their plans over to the pension corporation, the agency estimates it would pay out $13 billion of the $41 billion, because of limits set by Congress on how much the pension corporation can cover. The agency generally has a yearly cap of $54,000 in benefits for people who are 65.

A $13 billion payout would more than double the agency's $11 billion deficit.

"It is certainly possible that none of these companies ever files for bankruptcy," Millard said. "It is certainly possible that they all do." He said the risk to the agency "is significantly greater than it was six or seven months ago."

As of Nov. 30, the pension plans for hourly and salaried workers at General Motors Corp. had a combined deficit of $20 billion and Ford Motor Co. had an $11.7 billion deficit, according to Millard; Chrysler LLC had a $9.3 billion deficit as of Jan. 1.

The three automakers reported $130.5 billion in pension assets, which represents only 76 percent of their combined liabilities. GM's pension is 20 percent underfunded, Chrysler's is 34 percent underfunded, and Ford is short by 27 percent.

Those figures alone aren't cause for alarm, Millard said.

"If GM were a healthy company with positive cash flow, able to meet all of its obligations and future funding obligations," then the underfunded status wouldn't be a significant issue, he said.

The pension plans have been hit by three factors: heavy losses in investment portfolios, declining interest rates paid on assets, and the use of pension funds to pay for early retirement incentives.

GM used its pension plan to pay for attrition benefits to reduce its salaried work force by 15 percent last year.

GM spokeswoman Renee Rashid-Merem said the company would not comment on the status of its pensions until it releases financial results for last year's fourth quarter. In its most recent quarterly statement, GM said its hourly pension was overfunded and its salaried pension was slightly underfunded. She said the company has made changes to its pension investment portfolio.

Ford spokesman Bill Collins said that last year the company reported its U.S. pension plans were 103 percent funded with $45.8 billion in assets but have since seen significant losses.

"In regards to our pension plans, we take our obligations very seriously, managing our plans with integrity and prudence even during difficult times," he said.

Ford told Congress in December that its pension plans had seen a "significant unexpected reduction" in funding as a result of stock market losses. Ford said that if the economy doesn't improve it would have to contribute about $3 billion to $4 billion to its pension plans next year.

Chrysler declined to comment.

Millard noted that the recent loan agreements with GM, Chrysler and the U.S. Treasury Department bar the automakers from increasing pension benefits during the term of the loans.

President George W. Bush last month agreed to lend GM up to $13.4 billion and Chrysler $4 billion. The automakers must submit detailed restructuring plans and show they've made significant progress by March 31 or the loans could be called back.

The pension corporation said that adding the largest 46 auto suppliers to the pension plans of Detroit's Big Three gives the domestic auto industry a $65 billion pension deficit, covering 2.1 million workers.

"Current and future pension recipients of the auto companies should take some comfort in knowing that PBGC has never missed a payment," Millard said. "Should these companies come to us, (we) will have significant assets to allow us to make payments for many years going forward."

The agency insures the pensions of 1.5 million Michigan residents in more than 1,000 plans.

Western Michigan University business professor Dan Farrell, who is an expert on compensation and pension issues, said the stock market fell 36 percent last year.

"Everybody's retirement accounts are way down" Farrell said. "As long as we don't have a lot of people rushing into retirement at the autos, I think those figures will bounce back."

Millard, a former New York City council member, will head the quasi-governmental agency that guarantees the pensions of 44 million Americans until President-elect Barack Obama takes office Jan. 20.

In total, the system is underfunded by about $409 billion, according to a study out this week. That's largely because of heavy losses in the stock market -- the highest ever -- and the auto industry accounts for at least 10 percent of the total.

"We hope time is our friend," Millard said. "I think for the overall pension system it probably is -- whether it is for autos is hard to be as confident."

You can reach David Shepardson at (202) 662-8735 or dshepardson@detnews.com.