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Automobile industry

General Motors Reaches $10 Billion Deal to Fund Underfunded Pension Plan

Strategic Insights

— 2 min read

General Motors reached a deal with the US government to pay $10 billion to replenish its underfunded pension plan. The agreement, made with the Pension Benefit Guaranty Corp, includes a $4 billion cash payment and $6.2 billion in stock. This deal addresses the massive underfunding of GM's pension plan, which covers over 600,000 hourly-paid workers and former workers worldwide. The Clinton administration is pushing for legislation to tighten pension laws after the trend of underfunding has doubled between 1987 and 1992 to $53 billion.

Key Takeaways:

  • The deal will substantially reduce GM's funding gap and provide the plan with additional funding for many years, according to Labour Secretary Robert Reich.
  • The underfunding of pension plans by 50 of America's largest companies totalled $38 billion in 1992, with GM responsible for more than $22 billion.
  • GM expects to fund its pension fund fully by the end of the decade, and the company could reach its goal even sooner if interest rates continue to rise.
  • For every 100-basis point rise in long-term interest rates, GM's pension liability shrinks by about $5 billion, according to Richard Wagoner, GM's chief financial officer.
  • GM's underfunded liability was $22.3 billion at the end of 1993, and the company must make estimated $8 billion in annual contributions to meet its pension requirements for the years 1994, 1995, and 1996.
  • GM has already paid $1.9 billion of the estimated $8 billion in the fourth quarter to meet its 1994 requirement.
  • The company expects to see its plan pretty much funded before the next downturn in the motor industry, which experts estimate could occur in 1997.

Statistics:

  • $10 billion: Amount GM agreed to pay to replenish its pension plan.
  • $4 billion: Cash payment made by GM.
  • $6.2 billion: Stock payment made by GM.
  • 600,000: Number of hourly-paid workers and former workers covered by GM's pension plan.
  • $38 billion: Total underfunding of pension plans by 50 of America's largest companies in 1992.
  • $22 billion: Amount of GM's underfunding.
  • $53 billion: Total amount of underfunding in US companies between 1987 and 1992.
  • $5 billion: Reduction in GM's pension liability for every 100-basis point rise in long-term interest rates.
  • $8 billion: Estimated annual contributions GM must make to meet its pension requirements for the years 1994, 1995, and 1996.
  • $1.9 billion: Amount GM has already paid in the fourth quarter to meet its 1994 requirement.
  • $22.3 billion: GM's underfunded liability at the end of 1993.

Sources:

  • General Motors press release, no date provided.
  • Statement by Robert Reich, Labour Secretary, no date provided.
  • Pension Benefit Guaranty Corp press release, no date provided.
  • Quote by Richard Wagoner, GM's chief financial officer, no date provided.
  • Quote by Heidi Kunz, GM's vice president and treasurer, no date provided.

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