The $50.3 billion General Motors Corp. pension fund, the nation's largest corporate pension fund and long the most underfunded, has made a stunning turnaround.
In fact, but for the interest rate declines between October 1994 and June 1995, the GM fund would now be fully funded, helped by the recently announced split off of Electronic Data Systems Corp.
In just 18 months, GM has cut the underfunding of its $24.6 billion hourly plan from a high of $22.3 billion at the end of 1993 to less than $5 billion. (The salaried plan has a surplus of about $1.6 billion, according to GM's annual report.)
Funding the plan has been like building a sand castle on the beach. Every time GM makes progress, a new wave of interest rate declines washes away part of its efforts.
As a general rule of thumb, for every 100 basis-point drop in interest rates, GM's unfunded liability jumps $5 billion, a GM spokeswoman said. And that's just about what happened; long-term interest rates on the benchmark U.S. Treasury bond were at 7.89% on Dec. 30, 1994, and since then have dropped more than 100 basis points to about 6.86% at the end of July.
Nevertheless, the company expects its pension plans to be fully funded no later than 1996.
According to GM's 1994 annual report, the automaker had pared down its unfunded liability for its hourly domestic plan to $10.9 billion by the end of 1994, on a projected benefit obligation basis.
Then GM made the largest ever one-time contribution to its pension plan in March, when the Labor Department allowed it to make a combined $9.6 billion stock/cash contribution to the fund. GM contributed Class E stock, which is tied to the performance of EDS.
This would have left only $1.3 billion to clear up for the hourly plan. That would have been eliminated by the gain on Class E stock after GM announced the spinoff.
But because of the significant drop in long-term interest rates since December, GM's unfunded liability probably bounced back up to more than $6 billion.
Then, GM announced the EDS deal. The GM pension fund made an estimated $1.4 billion paper profit on the 135 million contributed shares of Class E stock it still held (40 million shares were sold in June). That probably bumped the unfunded liability back down to about $4.6 billion.
When GM announced the split off Aug. 7, the Class E stock shot up to $47 per share. When GM first contributed the shares in March, the stock was worth about $36 per share.
"We've made a lot of progress," the spokeswoman said. "Interest rates are tending to offset the contributions we're making."
The final word won't be out on GM's unfunded liability until it reassesses liabilities at the end of this year.
The GM spokeswoman said the company might make more cash contributions before the end of this year.
At this point, it's unclear what will be done with the E shares. As part of the agreement allowing GM to make the stock contribution, GM hired United States Trust Co. of New York as the independent fiduciary for the contributed Class E shares. A spokeswoman said U.S. Trust will decide what to do with the shares once the EDS split off is complete.
Several observers, who could not be named because their firms do business with GM, said the paper profit seems as if it would be a great boost for the plan's unfunded liability. But they noted GM also has high return expectations for assets in the plan.
According to the 1994 annual report, GM assumes a 10% long-term rate of return on assets. Therefore, "it wasn't a pure $1.6 billion gain," one expert said. He added the plan will probably need to gain an extra 5% in its investment return to wipe out its unfunded liability.
But GM's luck with interest rates may change. Interest rates may start rising on evidence of higher-than-expected economic growth in the second half of this year, economists say.