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Transportation equipment industry

Debt Downgrade Threatens US Carmakers' Pension Funds

Strategic Insights

— 1 min read

A proposal by President George W. Bush's administration aims to revamp the Pension Benefit Guaranty Corporation, which insures defined pension benefits. The plan could force General Motors and Ford Motor, both recently downgraded to junk debt status, to increase contributions to their pension funds and premiums paid to the PBGC. This could have significant implications for the companies' pension fund obligations.

Key Takeaways:

  • The administration's proposal would force GM and Ford to increase their contributions to their pension funds and premiums paid to the PBGC, due to their junk debt rating.
  • The PBGC reported a $23.3 billion deficit at the end of 2004, which the agency has warned will expand if more companies slip into bankruptcy.
  • Under current rules, non-investment grade companies are subject to the same funding requirements as healthy, investment-grade companies, which has contributed to the recent increase in underfunded pension funds.
  • The use of a junk credit rating trigger to force companies to make bigger contributions to their pension funds has been criticized by pro-business lobbyists.
  • Larry Zimpleman, president of retirement and investor services at The Principal Financial Group, testified before Congress in March that using a company's creditworthiness to determine pension funding rules would put "severe additional pressures" on companies.
  • The PBGC has estimated that non-investment grade companies sponsored pension plans with $96 billion in underfunding as of the end of fiscal 2004, almost three times the amount recorded at the end of 2002.
  • GM and Ford have been downgraded to junk status only by Standard & Poor's, and the administration's proposal would require a sub-investment grade rating by all four major rating agencies.
  • The proposal would not force companies to pay higher premiums for five years after the junk debt rating is assigned.

Statistics:

  • $23.3 billion: the PBGC's reported deficit at the end of 2004.
  • $96 billion: the estimated underfunding of non-investment grade companies' pension plans as of the end of fiscal 2004.
  • 90%: the percentage of companies with junk-bond ratings for 10 years prior to the termination of their plans.
  • 3: the multiple by which the amount of underfunding increased from 2002 to 2004.

Sources:

  • "Bush Debt Revamp Plan Hits Resistance from Business Groupings", The Financial Times, March 20, 2005.
  • "PBGC Warning: Companies with Junk Debt Face Higher Premiums", The New York Times, December 31, 2004.

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