Auto Pensions Next Big PBGC Bomb?

April 5, 2005 ( - The $45 billion to $50 billion collective pension underfunding in the US auto industry could very well be the next ticking time bomb heading for the nation's insurer of private sector pensions.

With rampant fiscal woes in the steel and airline sectors already having exacted their toll on the Pension Benefit Guaranty Corporation (PBGC) (See   PBGC Exec: Pension Insurer Hit by ‘Perfect Storm’ ), the collective auto sector pension shortfall far outstrips the collective $31-billion underfunding in the airline industry (See  PBGC Posts Record Deficit in FY2004 ), according to a Wall Street Journal report.

“Beyond the airline industry,” asserted PBGC executive director Bradley Belt in the Journal report, “the insurance program faces tremendous exposure from the auto sector.”

In fact, a Credit Suisse First Boston analysis of pension plans in 54 industries, based on 2003 public filings, ranks the auto industry’s plans the weakest, according to the Journal. A half-dozen auto-supply companies recently have sought Chapter 11 bankruptcy-law protection, which is likely to result in $837 million in unfunded pension obligations being transferred to the agency while 26 companies in the auto industry have pension plans with assets that fall at least $50 million short of obligations, the news report said.

So far, the agency has taken over the pension plans of 141 steel companies, which were underfunded by $10.2 billion, and 12 airlines, which were underfunded by $5.2 billion. The PBGC said it expects to assume a further $6.4 billion from UAL Corp.’s United Airlines.

The auto sector company that worries the pension agency the most is Delphi Corp., the Troy, Michigan parts operation of General Motors Corp. that was spun off in 1999 (See  Report: Pension Accounting Targets Chosen for Size  ). Delphi’s plans have pension promises valued at $11.4 billion but assets of only $7.4 billion, according to the most recent company information. The PBGC says that if Delphi were to turn over its pension plan to the agency today, the underfunding would total $5.1 billion rather than the roughly $4 billion indicated by Delphi.

According to the Journal, auto-industry analysts don’t believe that the supplier is likely to slide into bankruptcy soon. The agency’s Mr. Belt said the idea of a Delphi bankruptcy “sent shudders” through the PBGC, in part because the agency fears it would trigger bankruptcy filings by others in an industry battered by soaring prices of steel and petroleum, which drives the cost of plastics and by shrinking sales to US manufacturers.

Three large auto parts makers have filed for bankruptcy protection in the past six months: Intermet Corp. of Troy, Mich.; Citation Corp. of Birmingham, Ala.; and Tower Automotive (See   Tower Automotive Files Chapter 11, Being Investigated for ERISA Breach ) Inc. of Detroit. All three are trying to offload their pension plans onto the agency.

Intermet’s pension fund is short $71 million, and Citation’s $12.1 million, the PBGC says. Tower’s underfunding hasn’t been determined. In addition, Amcast Industrial Corp. of Dayton, Ohio, is asking a bankruptcy court to terminate a pension plan that is $83 million short of assets needed to fulfill promises.