Health Benefits

GM Settles SEC Pension Allegations

The automaker's internal controls failed when it came to choosing a discount rate for plans it sponsored, according to the Securities and Exchange ...
Stephen TaubJanuary 22, 2009

General Motors has agreed to settle Securities and Exchange Commission charges that the struggling automaker violated pension and derivative-accounting laws.

According to the SEC’s complaint, GM violated the issuer reporting, books-and-records, and internal controls provisions of the federal securities laws. GM settled the charges without admitting or denying them.

The SEC’s complaint alleges that GM made material misstatements or omissions about its pensions in its 2002 10-K. The errors, the commission says, involved the disclosure of two critical pension accounting estimates: the pension discount rate for 2002 and its expected return on pension assets for 2003.

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GM allegedly stated publicly in an August 2002 pension conference call with analysts that it used a duration-matched approach to chosing its discount rate. The company failed, however, to disclose in its 2002 report that its use of a 6.75 percent discount rate was developed from a non-duration-matched approach. And that approach was materially higher than the rate developed from a duration-matched model, the commission contended.

The SEC also charged that GM’s internal controls failed to assure that transactions involving pension discount rates would be recorded in compliance with generally accepted accounting principles. It lacked a way to review and adopt discount-rate recommendations “in a reasoned and unbiased manner,” according to the commission’s complaint.

At least since the mid-80s, GM’s “expected return” assumption had never been higher than its most recent 10-year average return. In its 2001 annual report and during the August 2002 pension call, GM referred to its rolling 10-year historical average return of 10 percent or better as support for the reasonableness of its 10 percent expected return assumption, the regulator notes.

In its 2002 annual report, however, GM failed to state that its most recent 10-year average return was below the new assumption it set at year-end, according to the complaint. If GM had used an expected return consistent with its 10-year historical average, it would have reduced its 2003 pre-tax earnings by $680 million, the SEC asserts.

The complaint also alleges that in that same 2002 annual report and in three quarterly filings, GM failed to disclose material information about the timing and amount of its projected cash contributions to its pension plans to avoid variable rate premiums to the Pension Benefit Guaranty Corporation and the impact the contributions might have on its liquidity and capital resources.

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