Furthermore, GM says that it does not believe that a “wholesale reform” of pension funding rules is required, noting that it and other S&P 500 firms have taken steps to close funding gaps. “GM has moved aggressively to address its pension funding deficit in 2003,” GM Vice Chairman and Chief Financial Officer John Devine said. “These actions provide GM with significantly improved financial flexibility going forward to continue to execute our business strategy.”
Nearly Caught Up
In a conference call today, GM said the company plans to contribute an additional $4.1 billion in cash to its US pension plans by the end of 2003 IF GM is able to complete the Hughes transactions by year end (see GM To Benefit From Hughes Share Transfer ) – and that would bring GM’s total contributions in calendar year 2003 to $18.5 billion (much of that came from a record $13.5 billion bond sale in June – see GM Driving Debt Proceeds To Pension Liabilities ). Based on these contributions and what it described as “normal” asset returns, GM does not expect to be required to make additional cash contributions to the pension plans until at least 2010.
However, If the Hughes deal doesn’t go through, Devine said that while GM doesn’t have a backup plan, the automaker “…doesn’t expect to need one.”
GM’s forecast is based on 2003 asset returns of 18% (its return for 2003 through the end of November), and a discount rate of 6.25%. A year ago, the GM pension plans were underfunded by more than $19 billion (see GM: Pension Costs Will Be Up in 2003 ).
GMAM President and CEO W Allen Reed noted that traditionally GM has based a 10% return assumption based on a current asset allocation of:
- 55-60% in stocks,
- 30-35% in bonds
- 10-15% in other assets (real estate, private equity, etc.)
However, Reed says that analysis suggested that an increased allocation to asset classes where active management had generated “significant excess returns.” Additionally, Reed said that GMAM had determined that a further shift from equity to bond exposure was not an “optimal” approach, due to low fixed income returns. Instead, GMAM believes that a reduced exposure to large-cap equity markets, coupled with increased allocations to asset classes that are not highly correlated, as well as use of various risk mitigation strategies, should result in less volatile asset returns – as much as 40% less, once fully implemented – compared with the current allocations.
Despite - or perhaps as a result of - its current investment experience, General Motors Asset Management (GMAM) said it plans to expand its current investment strategy to include an increased allocation to asset classes such as emerging market debt, high-yield bonds, real estate and other asset classes, further diversifying its pension portfolio while reducing global equity allocation to less than 50%. Taken together, GM believes that these actions will reduce the volatility of annual asset returns while still achieving its targeted return of 9%.
GMAM says that, when fully implemented, their proposed strategy would result in a decreased allocation to:
- 41-49% for global equity (from 46-54% currently)
- 24-28% for US equities (from 29-33% currently)
While the following would receive a larger allocation:
- 8-12% for real estate (versus 7-11% at present)
- 9-13% for alternatives (versus 6-8% at present)
Current allocations would be maintained for the following classes:
- 32-36% for global bonds
- 17-21% for foreign equities
GM said that it supports the proposed change in the 30-year Treasury bond pension benchmark, but was opposed to some of the broad-based proposals currently touted by some in Washington. "Problems with specific companies should be dealt with specifically," Devine noted, "...not broadly based." The PBGC (Pension Benefit Guaranty Corporation) has that assignment, and they are doing a good job of it, he said. New funding requirements would take money away from GM's ability to invest in new products, he said, and those measures shouldn't be applied to firms like GM that have aggressively move to close their funding gap. "We think we have a good handle on it," Devine said.
Asked about their reaction to soon-to-be published pension reporting rule changes from the Financial Accounting Standards Board (FASB) (see Details Emerge on FASB Pension Disclosure Proposal ), Devine noted, "We've been at the front of that line", saying that by the conclusion of the conference call participants knew as much about GM's pension plan as did the presenters. Earlier in the year, GM had expressed concerns about proposals floated by FASB (see GM Announces Opposition To FASB Pension Reporting Proposal ).
A taped replay of the conference call will be made available from 1:00 p.m. EST, December 12, 2003 until 1:00 p.m. EST, December 13, 2003. Dial 1-800-633-8284 (1-402-977-9140 for international access) and enter reservation number 21166068 to access the taped replay. Additionally, the audio webcast will be archived on GM's investor Web site and will be available for replay. Presentation materials will be available on GM's investor Web site in the Events & Presentations section.