Ford Motor Co. and General Motors Corp. lead the trend of increasing pension funding gaps, according to Fitch. Fitch estimated that Ford’s funding shortfall will be at least $5 billion by the end of its plan year (versus being overfunded in 2001) while GM’s will go from a $9.1-billion deficit in 2001 to an approximately $17-billion shortfall by YE 2002.
Even though GM’s liability is larger, Fitch said Ford’s is actually more problematic due to the automaker’s recent weak operating performance.
DaimlerChrysler is in the best position of the Big Three, principally from the strong operating performance of its Mercedes brand, the report said. Fitch said DaimlerChrysler likely wouldn’t have to make ERISA-required pension payments until 2005.
“One important consideration is that pension benefits paid to retirees, especially in the case of Ford and GM, represent an annual meaningful drain on pension-plan assets,” Fitch researchers wrote in the report. “In normal markets, this reduction in asset is either partially or completely offset by market gains and by the associated reduction in the pension obligation. Over the last several years, this has not been the case as asset bases have dwindled while the pension obligation increased.”
Among the 22 auto-sector companies analyzed, Fitch said the firms had a combined projected benefit obligation of approximately $150 billion at the end of their 1999 fiscal years and was offset by a combined $174 billion in assets – a $23.9 billion overfunding.
By the end of FY 2001, the total obligations had grown to $166 billion with a drop in the asset base to $152.1 billion – a 96% funding level. By the end of FY 2002, Fitch predicted a $16.1-billion hike of the funding gap to more than $30 billion.
Fitch said the widespread weakness in many companies’ pension programs have caused pension considerations to become “a much larger factor” in ratings considerations, but wouldn’t cause a downgrade by themselves.
The report also discusses how the Ford, GM and DaimlerChrysler pension obligations represent a significant competitive disadvantage versus the other automakers . For example, more money spent for pensions means less is available for capital investment, which, in turn, can hurt new product development, the Fitch report pointed out.