GM's Pension Fund Problems
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Case Code : HROB077
Case Length : 21 Pages
Period : 1995 - 2005
Pub. Date : 2006
Teaching Note :Not Available
Organization : GM
Industry : Automobile
Countries : US
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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GM Wipes Out Pension Deficit
In 2003, GM gambled again by launching Project Alpha to eliminate its pension woes completely, as further increase in pension liabilities would require GM to pay risk premiums that were imposed by the PBGC.
In July 2003, GM and GMAC borrowed US$ 18 billion through the biggest bond offering ever by a US-based company. GM also raised US$ 5 billion by selling its stake in GMHE. GM was to pay 7% interest on its bonds while it expected its pension assets to consistently yield 9% over the next few years. The average maturity of the bonds was 20 years. GM's pension plan assets yielded 19% in returns in 2003. For the year 2003, GM invested put US$ 18.5 billion into its pension fund.
However, GM was not interested in using the money obtained from spin offs to fund its retiree healthcare liabilities. Commenting on this, Devine said, "We're pretty much down to an auto company here, and that's what we plan to keep for the foreseeable future"...
Accounting Problems Surface
In July 2004, the US Securities and Exchange Commission (SEC) started investigating the accounting practices of Delphi. The charges against the company were that it had committed fraud in a US$ 20 million transaction in 2001 with its technology services provider Electronic Data Systems Corporation (EDS). This also led to doubts regarding Delphi's transactions with GM who was Delphi's major customer. In October 2004, the SEC requested GM, along with Ford and other companies, to provide information about its pension and OPEB plans...
The Road Ahead
While some analysts felt that it was necessary for GM to take strong measures to reduce its healthcare, pension and OPEB benefits provided to workers, a few of them felt that the legacy costs were just one of the major problems that GM had been affected with. They said that one of the main problems for GM since the 1970s had been its falling market share which was due to problems in product development.
They said that though GM had too many non-performing brands, it was unwilling to phase them out. GM vehicles were not attractive, fuel-efficient high performers and compared badly to the Japanese manufacturers like Toyota or Honda, on these counts. It was also much less efficient in production...
Exhibit I: GM's Financial Performance
Exhibit II: GM's Market Share in the US During Last Two Decades
Exhibit III: Oil Price in the US (July 2003 - November 2005)
Exhibit IV: World Oil Price (1970 - 2005)
Exhibit V: GM's Growing Healthcare Costs
Exhibit VI: GM's Benefit Provision for Employees
Exhibit VII: GM's US Pension Plan Funded Status History
Exhibit VIII: Performance of GM Plan Assets (1987-2003)
Exhibit IX: GM's Pension Fund Contribution (1992- 2003)