The Detroit News is reporting that pensioners expect to take deep cuts if GM's pension plans are terminated in bankruptcy.  The irony is, GM actually behaved as a model of responsibility with its pension fund after the 2000 stock market crash opened up deep holes in its funding model:

The big mismatch of 2002 showed pension officials that stocks could produce more volatility than a mature pension fund like G.M.'s could bear. The company could not wait for stock prices to come back up eventually, because it had 400,000 retirees waiting to be paid about $7 billion every year.

With that in mind, G.M. sold more than $14 billion of bonds in 2003 and put the proceeds into its pension fund, making up for the preceding years' losses. It also put in the proceeds of the sale of its Hughes Electronics subsidiary, for a total contribution of more than $18 billion. That was far more than the minimum required that year.

The big contributions got rid of the fund's shortfall. (They also gave G.M.'s bottom line a lift, thanks to the accounting rule.)

Then, over several years, G.M. overhauled its investment portfolio, replacing billions of dollars worth of stocks with bonds, and adding derivatives to make the duration of the bonds better match the schedule of payments to retirees.

Bond prices can swing too, but G.M. plans to hold the bonds for their interest, not sell them. Ms. Everett said the company believed the interest payments would be more than enough to produce the $7 billion owed to retirees every year.

I reached out to GM's financial communications department, and they confirm that the bulk of their pension investments are now in debt or real estate, with about a third still in equities--a very sensible, conservative mix that hasn't saved them in an awful market.

Theoretically, the pension shortfall shouldn't matter that much, if it's simply a question of a depressed bond market.  But if the plan is terminated, both its assets and obligations go to the Pension Benefit Guaranty Corporation, which insures private pension in the United States.  And when that happens, the retirees become subject to the plan's maximum payouts.

For ordinary retirees, that is capped at $54,000, which may be a comedown for an auto worker, but should be enough for a retiree who owns their own home to live on.  But for early retirees, the caps are brutal:  less than $20,000 for a fifty-year old.  From what I understand, a lot of UAW workers started in high school, "did their thirty", and retired early.  A lot of others accepted buyout packages that will be liquidated in bankruptcy.  To be sure, they're probably mostly still able-bodied.  But as I've written elsewhere, fifty-five is a lousy time to be starting a new career.

At that, the salaried retirees say that they'll be even worse off than the UAW workers.  The head of their retiree association is quoted in the Detroit News as saying that he thinks they'll end up losing 50-60% of their pension if the plan is taken over by the PBGC.  I'm not sure exactly why--GM doesn't break the funds out separately, so it's not clear whether he thinks that there's a bigger funding shortfall in the salaried plans, or whether there's something different about salaried retirees:  more early retirements, say, or more pensions above that $54,000 cap.  The Detroit News has him implying that somehow the UAW will get a better deal for its members, which seems unlikely; the PBGC doesn't really negotiate.

This raises an interesting question, actually:  could the PBGC end up better off as the result of a GM bankruptcy?  What happens in a termination is that the assets and the liabilities get turned over to the PBGC.  But if the problem is an asset-value issue rather than a cash-flow problem, the PBGC will slash  benefits to the caps, but get an asset base which should, in a normal market, be adequate to meet the full obligations.  If the assets do deliver the planned cash flows (and the PBGC can manage them adequately), the bankruptcy could, paradoxically, boost the chronically underfunded insurer.

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