Pension Returns Dent Ford Bottom Line

Ford’s pension assets are down 15% as of September 30, leaving the automaker’s pension plan 81% funded with a $6.5 billion shortfall, according to the firm.   As recently as  last quarter , Ford said that should conditions hold constant, actuarial assumption and investment return, there will not have to be additional cash contributed to pension plans in the immediate future.   But the pension plan has declined even further since that release causing some concern.

Thepension fund’s performance has weighed on Standard & Poor’s Ratings Services who said it may cut the long-term ratings of Ford citing concerns over the deterioration in its pension funding levels due to poor investment portfolio performance among other factors.  

Ford Motor Co. and General Motors Corp. lead the trend of increasing pension funding gaps, according to a recent report by  Fitch . It was estimated that Ford’s funding shortfall will be at least $5 billion by the end of its plan year (versus being over funded in 2001)

GM’s will go from a $9.1-billion deficit in 2001 to an anywhere from a $17 to$23 billion deficit by the end of the year.   This led to a projection that efforts to close the funding gap could lop $1 billion from earnings in 2003.   However, GM still expects to meet its sales target, while Ford’s problem could be more problematic.  Other factors may also be related to under funded pension plans.   Automakers may now have less money to put into areas such as new capital investments, which affects new product development.  

With the decline in equity markets, automakers may move towards stronger cash positions to alleviate some market risk in their current pension funds.   For example, Ford now has a cash position of about $25.7 billion.

However, as recently as 1993 GM ‘s US pension fund was under funded by $18.5 billion, causing GM to contribute $22 billion to the plan from 1993 to 1995.   The plan was in an overfunded status as recently as two years ago.