Human Capital & Careers

Ruling Could Boost Underfunded Pensions

GM's court victory may inspire other government contractors to remedy some of the underfunding of pension funds that existed when the contractors c...
Stephen TaubJuly 6, 2005

General Motors Corp. won a court case that will enable the automaker to recover as much as $253 million from the U.S. government for one of its underfunded pension plans, according to The Wall Street Journal.

The decision by Judge Nancy Firestone of the U.S. Court of Federal Claims is the first of its kind, the Journal reported, and it could inspire other government contractors to try to remedy some of the underfunding of pension funds that existed when the contractors closed or sold divisions.

Here’s the crux of the issue: The government typically pays the salaries and part of the pension costs of employees of companies that have contracts with the government. If a company closes or sells a unit that holds such a contract and its pension plan is overfunded, explained the Journal, then the government generally recovers the portion of the pension surplus that represents the amounts it contributed to the fund,.

GM’s argument was that under this policy, the government was also obligated to contribute to an underfunded pension of one of its divisions — Allison Gas Turbine — which provided services to the government, the newspaper added. In other words, if the government takes a piece of the pie during good times, it should pay for some of the shortfall during the bad times.

GM sold Allison in 1993. In 1996, the automaker filed a claim for $253 million, and in early 2000 the company sued the government in the federal court of claims, reported the paper.

In her ruling, Judge Firestone stated that the government should pay the allocable amount of the pension underfunding, according to the report, but she did not specify a dollar amount. Since the government is likely to appeal the decision, noted the paper, it could be years before GM recovers any money.

The Journal also observed that if the ruling is upheld by the U.S. Court of Appeals, it could also establish a significant loophole: The decision says that ceilings on government spending under contracts would not apply to pension claims.