TheStar.com | Business | GM pension faces huge shortfall
GM pension faces huge shortfall
FRED THORNHILL FOR THE TORONTO STAR
GM retiree Karl Zimmerman at his Oakwood, Ont., home Aug. 1, 2008. If GM goes bankrupt, his pension could be cut in half.
Email Story
Report Typo
AddThis

 

Actuaries say workers' plan in Canada would be in serious trouble should car maker fail
Aug 02, 2008 04:30 AM


Business Reporters

As General Motors Corp. struggles with its massive financial problems, concern and anxiety are rippling through the ranks of company pensioners and senior employees in Canada.

Despite assurances from GM and the CAW that their pension plan is safe, many fear monthly payouts would be slashed dramatically if the auto giant's drastic moves to cut costs and reinvent itself fail.

"My concern is that, if GM goes into Chapter 11 bankruptcy protection in the U.S. or they go bankrupt altogether and out of Canada ... my pension is going to be cut nearly in half," said Karl Zimmerman, a 73-year-old retiree and stroke survivor.

Plant workers facing layoffs in Oshawa expressed similar sentiments at a union membership meeting this week, and Canadian Auto Workers president Buzz Hargrove concedes his calls and messages suggest pension fears are on the rise.

According to documents available only to plan members and regulatory officials, actuaries estimate GM's pension plan for 43,717 hourly rated employees, retirees and survivors in Canada would be short 43.5 per cent of the money needed to pay all pension promises if GM failed, based on estimates as of November of 2006.

If GM could make no further contributions, the deficiency would be $4.9 billion, or the equivalent of about $112,000 per plan member. This so-called solvency or windup shortfall was about $1 billion more than in 2004 and five times the shortfall estimated as of 2000. This compares with a 9.3 per cent shortfall at Chrysler Canada as of May last year.

GM Corp.'s financial situation deteriorated further yesterday. It reported a second-quarter loss of $15.5 billion (U.S.), the third biggest in its 100-year history, because of plunging sales south of the border and the declining value of truck leases. The company does not publicly release results for its Canadian operations.

GM has posted $69.8 billion in losses since 2004 and is trying to raise as much as $17 billion in cash as reserves fall.

But Hargrove and GM executives insist pension fears are unwarranted. A worst-case scenario that would trigger pension reductions is "so remote a possibility it's not worth speculating on," said Hargrove.

David Paterson, vice-president of corporate affairs for GM Canada, agrees: "No, (pensioners should not be concerned) he said. We are confident about the future of the business and the cash situation .... We are going to be here for another 100 years."

Yet some pensioners are concerned because they know, if the company and union are wrong, they would be more vulnerable to substantial reductions than pensioners of other car makers.

GM's pension plans in the U.S. have a stronger funding than plans for its foreign operations, including Canada. The company took steps in 2003 to eliminate a $19 billion shortfall by selling a subsidiary and raising $18.5 billion by selling bonds to outside investors. GM has reported to shareholders the plans had 22 per cent more assets than benefit obligations at the end of 2007, while non-U.S. plans were 44 per cent short of funds, based on accounting rules that differ somewhat from actuarial reports.

Chrysler, Ford Canada and all other sponsors of defined-benefit pensions in Ontario – except GM – are required by pension law to eliminate solvency deficiencies within five years. GM is the only remaining company eligible to take advantage of a special exemption inserted into legislation during the deep recession of 1992, government officials confirm.

The condition of the GM pension plan could also have deteriorated since 2006, said Zimmerman, a resident of Oakwood, about 50 kilometres north of Oshawa, home to the company's last remaining vehicle assembly operation in Canada.

The next actuarial report is to be released in September. It will reveal whether the plan has suffered from its heavy exposure to foreign bond and stock markets. But the report will not incorporate the impact of recent layoff announcements, which will put further stress on the plan.

Zimmerman has been among a small group of disgruntled workers and pensioners who were uncomfortable about Ontario letting GM ignore the more stringent pension funding rules on the grounds it was too big to fail – and that its investments in factories here were too important to jeopardize.

He has seen the value of benefits under Ontario's Pension Benefits Guarantee Fund dwindle relative to his cost of living. Meanwhile, the government has asked a pension reform commission to make recommendations about the guarantee fund's future.

A failure by GM would drain the guarantee fund unless the government lent it money. The cost of a GM failure to the fund could be as high as $2.5 billion (Canadian), one actuary estimates.

The province has had to bail out the guarantee fund in the past. In 2003 it provided a $330 million, interest-free loan repayable over 30 years. "It seems to me (the GM shortfall) is far beyond anything the government would want to cover," said actuary Paul Duxbury of Cambridge.

GM is required to set aside enough funds to pay pensions as long as it continues to operate here. It had enough money in 2001 and 2002 to take a contribution holiday.

But, by last year, fund actuaries were estimating GM would have to put in an extra $1.2 billion over the next 15 years after the company contributed $254 million in 2006.

The $4.9 billion shortfall would only be relevant if GM was forced out of business.

Hargrove wrote to GM Canada's vice-president of labour relations in 2006 after GM moved to bolster the pension fund for U.S. workers. "We need to jointly consider how best to improve that security through assuring appropriate financing of (CAW members') pensions," he wrote.

This week, he said the union won no major commitment, but the executive assured him GM is not worried about surviving, or the state of the pension plan here.

He said his union's leadership is confident GM will not need to file for bankruptcy protection here. He insists GM's manufacturing and sales operations are profitable, although Paterson said "we are not making money in Canada now."

"I think it's inevitable GM will file for Chapter 11 (bankruptcy protection) in the U.S., but that doesn't mean that all the GM plants will close," said Hargrove.

"It simply means they are operated by a trustee and GM will start bargaining with everyone, the union and banks and bondholders; but the operations will continue. They don't cut off pensions. (They may very well) negotiate with the UAW in the U.S. to (change the pension plan from a defined benefit) but we would never agree to that in Canada."

When the former NDP government under Bob Rae exempted GM from funding its solvency or windup deficiency, its contributions to Ontario's Pension Benefits Guarantee Fund were to increase to 2.5 per cent of the solvency deficiency, or to a maximum of $5 million per year.

If not for the caps, GM would have to pay the guaranteed fund nearly $81 million a year, according to actuary Duxbury.

The guarantee fund is intended to cover any shortfall for the first $1,000 of a monthly pension, excluding increases granted in the three years before a company fails. If the province continued to stand behind that guarantee, it would have to top up most of the average GM retiree's pension, which was $15,724 in 2006. But recent retirees from GM are drawing much larger pensions.

So, if GM were to fail the portion of any pension greater than $12,000 a year would be cut by the 43.5 per cent, based on the calculations done last year. If the province ended its pension guarantees, a retiree's entire pension would be reduced by that much.

Advertisement
Advertisement
SPECIAL
A guide to what's open and what's closed on Family Day, Monday February 16.
What do you do when you are hit by Cupid's arrow from a foreign land? Do you simply follow your object of affection?
Your guide to the must-see vehicles at the 2009 Canadian International AutoShow.