Human Capital & Careers

GM, PBGC May Spar over GMAC Proceeds

When a company's debt ratings are below investment grade and its pension fund is underfunded, the agency has some leverage on proceeds from asset s...
Stephen TaubNovember 9, 2005

If General Motors sells its consumer finance subsidiary, who gets the proceeds? The company? Shareholders? The folks who guarantee pension funds may have something to say about this, observed The Wall Street Journal.

If GM were to terminate its $100 billion pension plan, the Pension Benefit Guaranty Corp. would be faced with an obligation larger than the total of all the previous claims on the agency since it was created in 1974, the newspaper pointed out.

When a company’s debt ratings are below investment grade and its pension fund is underfunded, noted the Journal, the PBGC has leverage to demand that the company contribute proceeds from asset sales to its pension funds, according to the report, which cited the agency’s website.

“The PBGC could get some agreement on what GM will do with the proceeds from GMAC in return for protecting the buyer or approving the transaction,” Sanford C. Bernstein & Co. analyst Brian Johnson told the paper.

GM maintains that its domestic pension plans were fully funded at the end of last year, according to the Journal, but the PBGC believes the plans are currently underfunded by roughly $31 billion. Why the discrepancy? The PBGC estimates liabilities based on the cost of paying retirement benefits if the plans were terminated today, explains the newspaper, while GM uses generally accepted standards for valuing assets and liabilities that can make its plan look stronger.

Pension accounting in general has become a major controversy as many old-line companies have run into financial trouble and tried to terminate their defined-benefit plans and stick the PBGC with their liabilities. The Journal also noted that the Securities and Exchange Commission is investigating whether GM used overly optimistic assumptions when it calculated its pension liabilities.

On Thursday, at a closely watched meeting of the Financial Accounting Standards Board, members will discuss whether to add a project to the FASB agenda to reconsider the provisions of Statement 87, Employers’ Accounting for Pensions, and 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.