(By
David Whiston, CFA, CPA, CFE) General Motors' (
GM)
pension plan has been the subject of concern for investors multiple
times throughout 2011. At issue is how much its underfunding will
increase because of current ultra-low interest rates and lower plan
assets (due mostly to the equities sell-off last summer). A lower
interest rate increases the projected benefit obligation, or PBO,
calculation performed by an actuary. GM's 2010 10-K filing indicates
total pension underfunding of about $22.3 billion ($12.4 billion in the
U.S. plan and $9.9 billion in the non-U.S. plan) as of Dec. 31, 2010. An
updated disclosure shows the Sept. 30, 2011, U.S. qualified and
unqualified plan underfunding to be $9.6 billion. The decline is
partially attributable to the voluntary contribution of GM common stock
in January 2011 of about $2.2 billion; accounting rules required the
stock not to count toward plan assets until July 2011, at which time
plan assets were increased by $1.9 billion.
Over the past several years, Congress passed two significant pieces
of pension legislation that affect GM's plans: the Pension Protection
Act of 2006, or PPA, and the Pension Relief Act of 2010. We don't think
the 2010 Act will require GM to make an additional minimum contribution.
Also, we believe GM should make voluntary cash contributions to its
plan in the future rather than pay a common stock dividend with its
ever-growing cash hoard.
The Great Recession caused Congress to backtrack on the hard line it
took in its prior attempt to mandate larger funding requirements
outlined in the PPA. As such, the 2010 Act was issued to ensure many
firms with defined benefit plans were not hit with large mandatory
funding amounts shortly after Lehman's collapse. It is important to
understand that pension funding rules and calculations are not a matter
of generally accepted accounting principles. Congress passes legislation
and then final pension funding rules come from the Internal Revenue
Service. According to Prudential's Pension Analyst publication, under
the PPA, if a company's plan assets are less than the funding target
(100% of the present value of all benefit liabilities accrued to date),
the minimum required contribution for the year is equal to the plan's
target normal cost (the present value of benefit liabilities expected to
accrue during the plan year, including increases in past service
benefits attributable to current-year increases in compensation ) plus
the annual amortization of the funding shortfall.
Extra Required Contribution Not Likely
Per its latest 10-Q, GM has opted to take the 15-year shortfall
amortization provision allowed by the 2010 Act, which we think makes an
additional mandatory contribution highly unlikely. We expect GM's
required pension contribution to be in the low- to mid-single-digit
billion-dollar range for 2012 before any installment acceleration, which
we expect to be modest if anything at all. Actual contributions will
probably be somewhat higher this year and next because we expect GM to
make voluntary cash contributions above the minimum required funding
amount.
We do not expect GM to be required to make a surprise contribution in
2012 just to satisfy minimum funding requirements. The shortfall
amortization extension to 15 years gives the company plenty of time to
make up the current underfunding. Furthermore, it is likely that the
discount rate shown in the 10-K in early 2012 will not have declined
drastically.