G.M. Warns of $2 Billion in Added Expenses From Pensions

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Companies Fight Shortfalls in Pension Funds (January 13, 2003)

G.M. Warns of $2 Billion in Added Expenses From Pensions

By DANNY HAKIM, NY Times

January 10, 2003

DETROIT, Jan. 9 — General Motors said today that expenses related to its pension plan would triple from $1 billion to nearly $3 billion this year. As a result, the company said, its operating earnings would fall about 25 percent from last year, to $5 a share.

"We know we have to feed this and feed it cash over time, and that's exactly what we'll do," said John Devine, G.M.'s chief financial officer, in a conference call. "We do have a substantial pension drag on both earnings and cash flow. This will improve over time. We will eventually get through this."

Wall Street had expected the drop in earnings, as well as rising pension obligations. G.M. stock was up $1.29 today, or 3.4 percent, to $39.50, on a bullish day for the market. The stock fell about 4 percent on Wednesday, when it was reported that the company would lower its expectations for the investment performance of the pension plan. "They have discussed this pension thing in detail many times," said David Healy, an analyst at Burnham Securities. "It's been factored in by most people."

The news follows an announcement on Wednesday by DaimlerChrysler that its pension costs would increase by $730 million this year. The Ford Motor Company is expected to discuss its pension status in a conference with analysts on Friday.

G.M.'s pension plan, which had $67 billion in assets at the end of 2001, is the largest corporate pension plan in the nation. As the company's share of the domestic market has declined to 29 percent last year from as much as 60 percent in the 1960's, the ranks of retirees now outnumber blue-collar workers two and a half to one, and financing the plan has become increasingly burdensome.

Because of the weak performance of the financial markets, the company's pension liabilities exceeded the plan's assets last year by $19.3 billion, compared with a gap of $9.1 billion the year before. If that spread becomes too wide, companies are required to pay penalties to the Pension Benefit Guaranty Corporation, a government agency.

To avoid such payments, G.M. contributed $4.8 billion to its pension plan last year. G.M. executives said the company was lowering its projected pension fund return this year to 9 percent from 10 percent because of diminished expectations for the financial markets and also an adjustment in the discount rate it uses to calculate the current value of future pension obligations. Part of the roughly $2 billion increase in pension expenses came because the plan lost 7 percent last year, while the company had been assuming a 10 percent annual gain.

G.M. executives said they would continue to cut costs and improve the performance in automotive operations. Rick Wagoner, G.M.'s chief executive, also said that factors like the scuttled acquisition of the company's Hughes Electronics unit by EchoStar — the subject of a challenge by government regulators — and G.M.'s relationship with the troubled Italian conglomerate Fiat hung over the company as trouble spots, along with the company's pensions.

"Our balance sheet has challenges, there's no question," he said. "We've got a hole on the pension side due to the weak equity markets three years in a row."