David Zion, an analyst with Credit Suisse First Boston, said he thought GM's example might prompt other companies to consider whether they could sell bonds and put the proceeds in their pension funds.
"They've got a healthier pension plan, much healthier than it was at the end of last year," said Zion, who has specialized in studies of the pension obligations of companies in the S&P 500. "But they do have another form of debt that they've used to make the pension fund healthier. That's the balance."
The GM officials said their handling of the pension funds carried a number of advantages. The company still has a large debt that will come due over time; instead of having to divert a substantial share of its operating revenue to the pension funds, GM will now have to pay the investors who bought its bonds. But having bond debt instead of pension debt will improve GM's cash flow over the short term, said GM's treasurer, Walter Borst.
If GM had not issued bonds and made a giant pension contribution now, he said, the company would have had to make regular contributions each year for the next five years, totaling about US$17.2 billion, to keep the funds compliant with the law. And if GM had failed to make those contributions, it would have owed special fees to the government's pension insurance program.
Now, the company does not expect to be required to make any contributions for the rest of the decade, Borst said. Each year, GM's work force accumulates about US$6.3 billion of future pension benefits, he said, and the company expects its average investment returns on the pension portfolio to more than cover that amount. He said the company is assuming a 9 percent annual return on its pension portfolio over the long term, for an average annual investment gain of US$7.2 billion.
The company will reap tax deductions for the contributions. And an accounting rule allows it to include the hypothetical 9 percent return when calculating the effect of pension activity on its reported income.
Even with these improvements, the executives said pension activity would continue to depress earnings for a time. They said pretax pension expense would be US$1.5 billion next year, compared with an estimated US$2.6 billion this year.
While bolstering assets in the pension plans, GM officials said they were also taking new steps to reduce the volatility of those investments. Allen Reed, chief executive of GM Asset Management, which manages the pension funds, said that since 1987, GM's pension investments have gained as much as 23 percent in some years and lost as much as 7 percent in others. The company plans to change its investment strategy to reduce those sharp swings.
Reed said the fund could not increase its bond holdings, even though doing so might reduce volatility, because bond investments would not yield the sought-after 9 percent annual returns.
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