Troubled Asset Relief Program
Automaker Pension Funding and Multiple Federal Roles Pose Challenges for the Future Gao ID: GAO-10-492 April 6, 2010In Process
GAO-10-492, Troubled Asset Relief Program: Automaker Pension Funding and Multiple Federal Roles Pose Challenges for the Future
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
April 2010:
Troubled Asset Relief Program:
Automaker Pension Funding and Multiple Federal Roles Pose Challenges
for the Future:
GAO-10-492:
GAO Highlights:
Highlights of GAO-10-492, a report to congressional committees.
Why GAO Did This Study:
Over $81 billion has been committed under the Troubled Asset Relief
Program (TARP) to improve the domestic auto industry‘s competitiveness
and long-term viability. The bulk of this assistance has gone to
General Motors (GM) and Chrysler, who sponsor some of the largest
defined benefit pension plans insured by the federal Pension Benefit
Guaranty Corporation (PBGC). As part of GAO‘s statutorily mandated
oversight of TARP, this report examines:
(1) the impact of restructuring on GM‘s and Chrysler‘s pension plans;
(2) the impact of restructuring on auto supply sector pension plans;
(3) the impacts on PBGC and plan participants should auto industry
pension plans be terminated; and;
(4) how the federal government is dealing with the potential tensions
of its multiple roles as pension regulator, shareholder, and creditor.
To conduct this study, GAO interviewed officials at GM, Chrysler, a
labor union, a supplier association, the Departments of the Treasury
and Labor, and PBGC; and reviewed relevant statutes, reports, and
documents concerning the automakers‘ restructuring and pension plan
funding.
Treasury and PBGC generally agreed with the report‘s findings. Their
technical comments and the technical comments provided by GM,
Chrysler, and Delphi, were incorporated as appropriate.
What GAO Found:
The new GM and the new Chrysler that were established during each
company‘s bankruptcy process in the summer of 2009 assumed sponsorship
for all the old companies‘ U.S. defined benefit plans. Although the
pension plans have been maintained, their future remains uncertain.
According to current company projections, large contributions may be
needed to comply with federal pension funding requirements within the
next 5 years.
Figure: Projected Contributions Needed to Fund GM and Chrysler Pension
Plans (2010-2014):
[Refer to PDF for image: 2 vertical bar graphs]
Projected cash payments:
Year: 2010;
GM: $0;
Chrysler: $0.4 billion.
Year: 2011;
GM: $0;
Chrysler: $0.
Year: 2012;
GM: $0;
Chrysler: $0.04 billion.
Year: 2013;
GM: $5.9 billion;
Chrysler: $0.93 billion.
Year: 2014;
GM: $6.4 billion;
Chrysler: 1.25 billion.
Source: GAO analysis of GM and Chrysler funding projections for all
U.S. qualified defined benefit pension plans each sponsors,based on
valuation methods for required contributions defined under the Pension
Protection Act.
[End of figure]
Officials at the Department of the Treasury, which oversees TARP,
expect both GM and Chrysler to return to profitability. If this is the
case, then the companies will likely be able to make the required
payments and prevent their pension plans from being terminated.
However, if GM and Chrysler were not able to return to profitability
and their pension plans were terminated, PBGC would be hit hard both
financially and administratively. In early 2009, prior to the new
companies assuming sponsorship, PBGC estimated that its exposure to
potential losses for GM‘s and Chrysler‘s plans to be about $14.5
billion.
Meanwhile, automaker downsizing and the credit market crisis have
created significant stress for suppliers and their pensions. During
2009, there was a rise in the number of supplier bankruptcies,
liquidations, and pension plan terminations. In July, the nation‘s
largest auto parts supplier, Delphi Corporation, terminated its
pension plans with expected losses to PBGC of over $6.2 billion.
Across the auto sector as a whole, in January 2009, PBGC estimated
that unfunded pension liabilities totaled about $77 billion, with PBGC‘
s exposure for potential losses due to unfunded benefits of about $42
billion, leaving plan participants to bear the potential loss of the
$35 billion difference through reduced benefits.
Moreover, until Treasury either sells or liquidates the equity it
acquired in each of the companies in exchange for the TARP assistance,
its role as shareholder creates potential tensions with its role as
pension regulator and overseer of PBGC in its role as pension insurer.
In particular, tensions could arise if decisions must be made between
allocating funds to company assets (thereby protecting shareholders,
including taxpayers) or to pension fund assets (thereby protecting
plan participants). As GAO reported previously, better communication
with Congress and others about TARP interests could help mitigate such
tensions.
View [hyperlink, http://www.gao.gov/products/GAO-10-492] or key
components. For more information, contact Barbara Bovbjerg at (202)
512-7215 (bovbjergb@gao.gov); or A. Nicole Clowers at (202) 512-2834
(clowersa@gao.gov).
[End of section]
Contents:
Letter:
Background:
New GM and New Chrysler Assumed Sponsorship of Pension Plans in
Restructuring, but Face Future Funding Challenges:
Economic Stress in Auto Industry Has Endangered Auto Supplier Pensions:
Both PBGC and Plan Participants Incur Losses when Underfunded Plans
Are Terminated:
Balancing Multiple Federal Roles May Create Tensions and Challenges:
Concluding Observations:
Agency Comments and Our Evaluation:
Appendix I: The Delphi Story:
Appendix II: Legal Limits on PBGC Guaranteed Benefits:
Appendix III: Recent Attrition Programs at GM and Chrysler:
Appendix IV: Product Lines and Facilities Being Eliminated:
Appendix V: History of Major Acquisitions and Divestitures:
Appendix VI: Allocation of Assets to Participant Benefits:
Appendix VII: PBGC Example Benefit Calculations:
Appendix VIII: Comments from the Department of the Treasury:
Appendix IX: Comments from PBGC:
Appendix X: GAO Contacts and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Defined Benefit Plans Sponsored by New GM and New Chrysler:
Table 2: Benefit Restrictions Based on a Plan's Funded Status:
Table 3: Funded Status of Selected Suppliers' Defined Benefit Pension
Plans (2008):
Table 4: PBGC's Estimates of Potential Exposure for GM's and
Chrysler's Pension Plans in Early 2009:
Table 5: Auto Supplier Pension Plans Terminated and Trusteed by PBGC,
May 2009-January 2010:
Table 6: Recent Attrition Programs at GM:
Table 7: Recent Attrition Programs at Chrysler:
Table 8: GM Product Lines and Facilities Being Eliminated:
Table 9: Chrysler Product Lines and Facilities Being Eliminated:
Table 10: Priority Categories for Allocating Participant Benefits:
Table 11: Examples of Participants' Benefit Reductions If an Automaker
Hourly Plan Were Terminated:
Figures:
Figure 1: Trends in the Funded Status of GM's and Chrysler's Pension
Plans (2006-2009):
Figure 2: Trends in GM's Pension Plans' Liabilities and Assets:
Figure 3: Trends in Chrysler's Pension Plans' Liabilities and Assets:
Figure 4: Projected Calendar Year Contributions to GM's Pension Plans
(2009-2014):
Figure 5: Projected Calendar Year Contributions to Chrysler's Pension
Plans (2009-2015):
Figure 6: PBGC's Estimate of Possible Exposure to Loss by Industry:
Figure 7: Size of GM's and Chrysler's Plans Compared with Total PBGC-
Trusteed Plans:
Figure 8: Determining If a Participant's Guaranteed Benefit Is Subject
to Legal Limits:
Abbreviations:
AIFP: Automotive Industry Financing Program:
ERISA: Employee Retirement Income Security Act of 1974:
GM: General Motors Company:
IRS: Internal Revenue Service:
PBGC: Pension Benefit Guaranty Corporation:
PPA: Pension Protection Act of 2006:
TARP: Troubled Asset Relief Program:
UAW: International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America:
VEBA: Voluntary Employee Beneficiary Association:
[End of section]
United States Government Accountability Office: Washington, DC 20548:
April 6, 2010:
Congressional Committees:
Domestic auto manufacturers remain sponsors of some of the largest
private defined benefit plans in the United States. The fate of these
pension plans affects not only the benefits of current and future auto
company retirees, but also the financial well-being of the Pension
Benefit Guaranty Corporation (PBGC)[Footnote 1]--the federal
corporation that insures private sector defined benefit plans. During
the past year, the U.S. automotive industry has undergone major
restructuring, including the bankruptcy reorganization of two of the
country's largest auto manufacturers and re-emergence as new companies-
-General Motors Company (GM) and Chrysler Group, LLC (Chrysler)--and
the continued consolidation in the auto supply industry. Since 2008,
the federal government has committed to provide over $81 billion under
the Troubled Asset Relief Program (TARP) to assist the automobile
industry.[Footnote 2] These funds, along with loans from the Canadian
government and concessions from nearly every stakeholder (including
labor unions), were intended to allow the companies time to
restructure to improve their competitiveness and long-term viability,
which is critical to the future of both the companies and their
pension plans. In exchange for this funding, the federal government
acquired partial ownership in and made loans to the new GM and the new
Chrysler that were established during the bankruptcy process.
Treasury's new role as a shareholder adds an unprecedented and
extraordinary element to the previously established government
responsibilities of regulator and its relationship to PBGC as insurer.
Under our statutorily mandated responsibilities for providing timely
oversight of TARP, we are continuing to report on the federal
government's assistance to the U.S. automotive industry.[Footnote 3],
[Footnote 4] In this report, we focused on the impact of the recent
restructuring on auto industry pension plans and the government's role
in overseeing those plans and PBGC's role in insuring these plans.
Specifically, our review focused on the following questions:
(1)How has restructuring affected GM's and Chrysler's pension plans
and the outlook for the plans going forward?
(2)How has restructuring affected auto supply sector pension plans?
(3)What are the impacts on PBGC and plan participants should auto
industry pension plans be terminated in the next 5 years?
(4)How is the federal government dealing with the potential tensions
between its multiple roles as pension regulator and insurer, and its
new roles as shareholder and creditor?
To describe how restructuring has affected GM's and Chrysler's pension
plans and the plans' funding going forward,[Footnote 5] we interviewed
officials from each automaker. They provided us with an overview of
their pension plans as well as a number of documents, including
detailed actuarial information about their PBGC-insured pension plans.
We interviewed Department of Treasury (Treasury) officials who are
responsible for overseeing the assistance to GM and Chrysler (referred
to as Treasury's "auto team") in Treasury's program office for TARP,
the Office of Financial Stability. These officials provided
information on Treasury's involvement in the restructurings and how it
considered future plan funding when structuring the financing packages
for the companies. We interviewed other Treasury officials, as well as
officials at PBGC, and the Department of Labor (Labor). We also
interviewed the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America (UAW), which represents a
significant number of the participants in the collectively bargained
pension plans, and asked for their views on restructuring efforts and
their effect on pension plans. Additionally, we reviewed materials
related to restructurings, including corporate annual reports and
bankruptcy documents, as well as relevant federal laws and
regulations, and other materials related to defined benefit plans and
plan funding, such as pension consulting briefs.
To describe how restructuring has affected the auto supply sector and
its pensions, we interviewed officials from PBGC, Treasury, and the
Motor and Equipment Manufacturers Association. We also reviewed
materials related to key production parts suppliers in the auto
industry, including corporate annual reports, bankruptcy filings, PBGC
press releases, and industry publications.
To determine the potential consequences of plan termination for PBGC
and plan participants, and to describe the tensions and challenges
faced by the federal agencies responsible for the regulation and
oversight of qualified defined benefit plans,[Footnote 6] we
interviewed officials from GM, Chrysler, UAW, PBGC, and the board
representatives for PBGC's Board of Directors, comprised of the
Secretaries of Commerce, Labor, and Treasury, the primary agencies
charged with pension regulation and overseeing PBGC. We requested
additional actuarial information from the automakers in certain
instances and reviewed bankruptcy documents related to the individual
automaker restructurings. We also reviewed relevant federal laws and
regulations, and past GAO reports that addressed the topics of pension
plan termination and managing multiple roles under TARP.
To ensure the technical accuracy of the information contained in the
report, we asked representatives of GM, Chrysler, and Delphi to review
portions of a draft of this report. We conducted this performance
audit between September 2009 and April 2010, in accordance with
generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings
and conclusions based on our audit objectives. We believe the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
Background:
The domestic auto industry--including automakers, dealerships, and
automotive parts suppliers--contributes substantially to the U.S.
economy, but has faced financial challenges in recent years. According
to the Congressional Research Service, more than 435,000 U.S.
automotive manufacturing jobs have been eliminated since 2000--an
amount equal to about 3.3 percent of all manufacturing jobs in 2008.
[Footnote 7] The employment level first dipped below 1 million in 2007
and fell to 880,000 workers in 2008. The Detroit-based automotive
manufacturers--GM, Chrysler, and the Ford Motor Company--have seen
their share of the domestic market drop from 64.5 percent in 2001 to
47.5 percent in 2008. Prior to restructuring, GM and Chrysler reported
losses in 2008 totaling $31 billion and $8 billion, respectively.
TARP Assistance for the Auto Sector:
Concerned that the collapse of a major U.S. automaker could pose a
systemic risk to the nation's economy, in December 2008, Treasury
established the Automotive Industry Financing Program (AIFP) under
TARP. Through June 2009, $81.1 billion in AIFP funding has been made
available to assist the auto industry. The largest part of the
program's funding--about $62 billion--was provided to help GM and
Chrysler fund their operations while they restructured. In exchange
for this funding, the Treasury has become part-owner of the two new
companies that re-emerged, receiving 60.8 percent of the equity in the
new GM and 9.85 percent of the equity in the new Chrysler, and has a
debt interest of about $14 billion in loans between the two.[Footnote
8] Given the large taxpayer investments in GM and Chrysler, in a
recent report, we recommended that Treasury report to Congress on how
it plans to assess and monitor the companies' performance to help
ensure the companies are on track to repay their loans and to return
to profitability. In response, Treasury said the agency intends to
develop an approach for reporting on its investments in the auto
industry that strikes an appropriate balance between its goal of
transparency and the need to avoid compromising either the competitive
positions of these companies or Treasury's ability to recover taxpayer
funds.[Footnote 9] More broadly, we also previously recommended that
Treasury better communicate to external stakeholders, including
Congress, about its TARP strategies and activities to improve the
integrity, accountability, and transparency of the program. In
response to this recommendation, Treasury noted that it was
implementing a communication strategy to provide key congressional
stakeholders more current information about its TARP activities.
[Footnote 10]
AIFP also established the Auto Supplier Support Program--a mechanism
to extend credit to auto suppliers. Under this program, Treasury
committed to fund up to $3.5 billion in loans to special purpose
entities created by new GM and new Chrysler for the purpose of
ensuring payment to suppliers. The program was designed to ensure that
automakers receive the parts and components they need to manufacture
vehicles and that suppliers have access to liquidity on their
receivables.[Footnote 11] According to Treasury officials, the program
will terminate in April 2010.
Restructuring in the Auto Sector:
As a condition of receiving federal financial assistance, GM and
Chrysler were also required to develop restructuring plans to identify
how the companies planned to achieve and sustain long-term financial
viability.[Footnote 12] To implement the restructuring plans, both
companies filed voluntary petitions for reorganization under Chapter
11 of the U.S. Bankruptcy Code. During the bankruptcy process, newly
organized companies for both GM and Chrysler were established in the
summer of 2009. These new companies purchased substantially all of the
operating assets of the previous companies, while the old companies,
which retained very few assets but most of the liabilities, continued
in bankruptcy. The new companies also streamlined operations and
substantially reduced their debt. Changes included reductions in the
number of brands and models, closing factories and dealerships, and
reducing their hourly and salaried workforces through early
retirements, buyouts, and layoffs.
[Side bar:
GM:
Prior to restructuring, GM was a publicly traded company that employed
about 240,000 people worldwide. It had manufacturing facilities in 34
countries and sold more than a dozen brands of vehicles in about 140
countries. GM‘s core U.S. brands are Buick, Cadillac, Chevrolet, and
GMC; other brands included Daewoo, Holden, Hummer, Opel, Pontiac,
Saab, Saturn, Vauxhall, and Wuling. GM filed for Chapter 11 bankruptcy
protection on June 1, 2009, and on July 5, 2009, the bankruptcy court
approved the sale of substantially all of old GM‘s assets to a newly
formed company, referred to as ’new GM.“ The new GM assumed
sponsorship of both of old GM‘s U.S. qualified defined benefit plans.
Chrysler:
Prior to restructuring, Chrysler was a privately held company that
employed about 54,000 people worldwide, including manufacturing
facilities in four countries and vehicles assembled under contract in
four others. Chrysler‘s major brands include Dodge, Chrysler, and
Jeep. Chrysler filed for Chapter 11 bankruptcy protection on April 30,
2009, and on June 9, 2009, the bankruptcy court approved the sale of
substantially all of old Chrysler‘s assets to a newly formed company,
referred to as ’new Chrysler.“ The new Chrysler assumed sponsorship of
all Chrysler‘s U.S. qualified defined benefit plans. End of side bar]
Automakers are highly dependent on a large motor vehicle parts supply
industry. The auto supply chain consists of networks of suppliers,
transportation carriers, fabrication sites, assembly locations,
distribution centers, and locations by which components, services,
information and products flow. The supply chain starts with suppliers
who assemble raw components into more complex components which are
processed or combined with additional components and eventually
brought together by top-level suppliers to manufacture end products
for use by the automaker. Each level in the supply chain depends on
the financial health of the other for its survival.
The U.S. auto supply sector became unstable as the domestic market
share of the global automotive marketplace declined, prices for raw
materials and petroleum increased, and production cuts ensued. These
financial pressures affected various levels of the supply chain,
leading some suppliers to file for bankruptcy, including the nation's
largest U.S. auto supplier, Delphi Corporation (a spin off of GM),
which filed for bankruptcy in 2005.[Footnote 13]
Private Sector Pension Plans:
About one-half of all U.S. workers participate in some form of
employer-sponsored retirement plan, typically classified either as a
defined benefit or as a defined contribution plan. Defined benefit
plans generally offer a fixed level of monthly retirement income based
upon a participant's salary, years of service, and age at retirement,
regardless of how the plan's investments perform. In contrast, benefit
levels for those with defined contribution plans depend on the
contributions made to individual accounts (such as 401(k) plans) and
the performance of the investments in those accounts, which may
fluctuate in value. Over the last two decades, much of the private
sector pension coverage has moved away from traditional defined
benefit plans in favor of defined contribution plans and hybrid
defined benefit plans,[Footnote 14] thereby increasing portability for
workers as they change jobs, but also shifting the risk and burden of
financing retirement from employers to employees.
[Side bar:
Delphi:
Delphi evolved as part of GM until it was spun off as a separate
entity in 1999. By 2005, the company employed more than 185,000
workers in 38 countries, making it one of the largest suppliers in the
world. However, on October 8, 2005, Delphi Corporation and its U.S.
subsidiaries filed for Chapter 11 bankruptcy protection. Four years
later, most of Delphi‘s U.S. and foreign operations were sold to a new
entity, known as ’new Delphi,“ on October 6, 2009. The former Delphi
Corporation sponsored six defined benefit plans for its U.S.-based
workers. Despite efforts to keep the pension plans ongoing, on July
31, 2009, PBGC terminated all six of Delphi‘s U.S. qualified defined
benefit plans. For more details on Delphi, see appendix I. End of side
bar]
Domestic automakers sponsor some of the largest private sector defined
benefit plans. According to a financial publication, as of year-end
2007, GM sponsored the largest defined benefit plans by a considerable
margin, with nearly 60 percent more benefit obligations than the plan
sponsor ranked second: AT&T, Inc[Footnote 15]. The Ford Motor Company
ranked fifth. At the time, Delphi, the auto supplier that spun off
from GM in 1999, ranked 18TH. Chrysler was not included in the
publication's list, but, as of the beginning of 2008, it had about one-
fourth of GM's benefit obligations, and would have ranked in the top
10 if its total benefit obligations were included on this list. Based
on data gathered for previous GAO reports, in 2004, the plans
sponsored by GM and Chrysler represented roughly 7 percent of the
liabilities, 7 percent of the assets, and 2.5 percent of the total
participants of the entire defined benefit system.[Footnote 16] The
defined benefit plans that continue to be sponsored by the new GM and
the new Chrysler are summarized in table 1. Unlike the new GM and new
Chrysler, the "new Delphi" that emerged from Delphi's bankruptcy
reorganization did not assume sponsorship of the company's pension
plans. After Delphi froze its hourly pension plan in November
20[Footnote 17]08, some Delphi hourly employees began to accrue
credited service in the GM hourly pension plan according to the terms
of agreements negotiated with various unions, while other Delphi
employees did not receive similar treatment. PBGC terminated all six
of Delphi's U.S. qualified defined benefit plans in July 2009.
Table 1: Defined Benefit Plans Sponsored by New GM and New Chrysler:
GM's plans:
Short plan name: Hourly Plan;
Full plan name: General Motors Hourly-Rate Employees Pension Plan;
Number of participants[A]: 505,289;
Collectively bargained plan[B]: Yes;
Plan liabilities[C]: (plan-level data not publicly available);
Plan status[D]: Open, but plan terms modified for certain new hires as
of 10/15/2007[E].
Short plan name: Salaried Plan;
Full plan name: General Motors Retirement Program for Salaried
Employees;
Number of participants[A]: 197,098;
Collectively bargained plan[B]: No;
Plan liabilities[C]: (plan-level data not publicly available);
Plan status[D]: Plan closed and frozen for certain participants;
1/1/2007[F].
Short plan name: Total GM;
Number of participants[A]: 702,387;
Plan liabilities[C]: $98.1 million[G].
Chrysler's plans:
Short plan name: UAW Pension Plan;
Full plan name: Pension Agreement between Chrysler LLC and the UAW;
Number of participants[A]: 134,689;
Collectively bargained plan[B]: Yes;
Plan liabilities[C]: $14,003 million;
Plan status[D]: Open.
Short plan name: Chrysler Pension Plan;
Full plan name: Chrysler LLC Pension Plan;
Number of participants[A]: 44,329;
Collectively bargained plan[B]: No;
Plan liabilities[C]: $2,973 million;
Plan status[D]: Closed 12/31/2003.
Short plan name: Salaried Employees' Retirement Plan;
Full plan name: Chrysler LLC Salaried Employees' Retirement Plan;
Number of participants[A]: 46,217;
Collectively bargained plan[B]: Yes (for some);
Plan liabilities[C]: $2,567 million;
Plan status[D]: Closed 12/31/2003.
Short plan name: AMC Plan;
Full plan name: American Motors Union Retirement Income Plan;
Number of participants[A]: 10,693;
Collectively bargained plan[B]: Yes;
Plan liabilities[C]: $809 million;
Plan status[D]: Closed 12/31/1996.
Short plan name: Jeep Plan;
Full plan name: Jeep Corporation - UAW Retirement Income Plan;
Number of participants[A]: 8,960;
Collectively bargained plan[B]: Yes;
Plan liabilities[C]: $1,288 million;
Plan status[D]: Open.
Short plan name: Chrysler IUE Pension Plan;
Full plan name: Pension Agreement Between Chrysler LLC and the
International Union of Electronic, Electrical, Salaried, Machine and
Furniture Workers;
Number of participants[A]: 4,011;
Collectively bargained plan[B]: Yes;
Plan liabilities[C]: $205 million;
Plan status[D]: Frozen 3/31/2002.
Short plan name: Executive Salaried Employees' Retirement Plan;
Full plan name: Chrysler LLC Executive Salaried Employee's Retirement
Plan;
Number of participants[A]: 2,867;
Collectively bargained plan[B]: No;
Plan liabilities[C]: $1,478 million;
Plan status[D]: Closed 12/31/2003.
Short plan name: Subsidiaries' Pension Plan;
Full plan name: Chrysler LLC Subsidiaries' Pension Plan;
Number of participants[A]: 1,693;
Collectively bargained plan[B]: No;
Plan liabilities[C]: $22 million;
Plan status[D]: Open.
Short plan name: Chrysler UPGWA/Guards Pension Plan;
Full plan name: Pension Agreement between Chrysler LLC and the United
Plant Guard Workers of America;
Number of participants[A]: 985;
Collectively bargained plan[B]: Yes;
Plan liabilities[C]: $41 million;
Plan status[D]: Frozen 9/30/2005.
Short plan name: GEMA UAW Pension Plan;
Full plan name: Global Engine Manufacturing Alliance UAW Pension Plan;
Number of participants[A]: 220;
Collectively bargained plan[B]: Yes;
Plan liabilities[C]: $1 million;
Plan status[D]: Open.
Short plan name: Total Chrysler;
Number of participants[A]: 254,664[H];
Plan liabilities[C]: $23,387 million.
Source: GM and Chrysler documents.
[A] GM participant data are as of September 30, 2008, and Chrysler
participant data are as of January 1, 2008, (the most recent data
available at the time of our study).
[B] A collectively bargained plan is a plan in which contributions to
the plan or benefits paid by the plan (or both) are subject to the
collective bargaining process. At least some or all of the employees
covered by the plan are members of a collective bargaining unit that
negotiates the contributions or benefits (or both).
[C] Data on plan liabilities are based on "projected benefit
obligations" as measured in accordance with Financial Accounting
Standards. GM data are as of December 31, 2008, and Chrysler data are
as of January 1, 2009.
[D] "Closed" indicates closed to new hires, but active employees
continue to accrue benefits; "frozen" indicates no employees are
actively accruing benefits, sometimes called a "hard freeze"; future
benefit accruals ceased as of the date indicated (unless otherwise
noted). In all cases, the plan has not been terminated.
[E] The hourly plan was amended to provide a new cash balance benefit
for all hourly new hires (except skilled trades) after October 15,
2007.
[F] Employees hired between January 1, 2001, and December 31, 2006,
participated in a cash balance benefit under the plan, and this
benefit was frozen as of December 31, 2006. Employees hired before
January 1, 2001, received accrued defined benefits, and such benefits
were frozen as of January 1, 2007, when a new lower defined benefit
formula was implemented.
[G] Total includes a small amount of obligations (1-2 percent) for
GM's unqualified salaried plan, but are the only GM data publicly
available.
[H] Total simply sums participant totals across each plan and does not
represent unique participants within Chrysler plans. For example,
according to Chrysler officials, most Chrysler Pension Plan
participants also participate in the Salaried Employees Retirement
Plan and, thus, would be counted twice in the data.
[End of table]
Federal Oversight of Private Sector Pensions:
Three federal agencies are charged with responsibility for overseeing
and regulating tax-qualified private sector pension plans: the
Internal Revenue Service (IRS), an agency within Treasury; the
Employee Benefits Security Administration, an agency within Labor; and
PBGC, a government corporation[Footnote 18]. Two overlapping statutory
sources provide the basis for this oversight: the Internal Revenue
Code,[Footnote 19] and the Employee Retirement Income Security Act of
1974 (ERISA).[Footnote 20] These laws specify, among other things, the
standards of fiduciary responsibility for managing these plans,
minimum funding requirements, the requirements for reporting
information to the federal government and plan participants, and plan
termination insurance.
PBGC was created by ERISA in 1974 as a federal guarantor of most
private sector defined benefit plans and currently insures the pension
income of nearly 44 million workers in over 29,000 plans. PBGC is a
self-financing entity, funding its operations through insurance
premiums paid by the plan sponsors, money earned from investments, and
funds received from terminated pension plans. It is governed by a
three-member board of directors consisting of the Secretary of Labor
as the Chair, and the Secretaries of Commerce and Treasury as the
remaining members. The board of directors is ultimately responsible
for providing policy direction and oversight of PBGC's finances and
operations, but the board members often rely on their representatives
to conduct much of the work on their behalf. Currently, the board
representatives for the members are the Assistant Secretary of Labor
for the Employee Benefits Security Administration, the Under Secretary
for Economic Affairs at the Department of Commerce, and the Assistant
Secretary of the Treasury for Financial Institutions.
PBGC administers two separate insurance programs for private sector
defined benefit plans: a single-employer program and a multiemployer
program.[Footnote 21] The single-employer program covers about 34
million participants in about 28,000 plans.[Footnote 22] The
multiemployer program covers about 10 million participants in about
1,500 collectively bargained plans that are maintained by two or more
unrelated employers. If a multiemployer pension plan is underfunded
and unable to pay guaranteed benefits when due, PBGC will provide
financial assistance to the plan, usually a loan, so that retirees
continue receiving their benefits. However, if a single-employer
pension plan is underfunded and certain criteria are met, the plan
sponsor may request termination of the plan (referred to as a
"distress" termination),[Footnote 23] and PBGC will pay retirees'
benefits as they become due, up to certain limits as prescribed under
statute and related regulations (see appendix II). PBGC may also
initiate an "involuntary" termination under certain circumstances,
such as when the possible long-run loss to PBGC is expected to
increase unreasonably if the plan is not terminated.[Footnote 24] As
of the end of fiscal year 2009, PBGC had terminated and trusteed a
total of 4,003 single-employer plans.[Footnote 25]
We designated PBGC's single-employer pension insurance program as
"high risk" in 2003, including it on our list of major programs that
need urgent attention and transformation.[Footnote 26] The program
remains high risk due to an ongoing threat of losses from the
termination of underfunded plans. As of September 2009, PBGC had an
accumulated deficit that totaled $22 billion, a $10.8 billion increase
since September 2008.
New GM and New Chrysler Assumed Sponsorship of Pension Plans in
Restructuring, but Face Future Funding Challenges:
As new companies, GM and Chrysler have streamlined their operations
and have substantially less debt than their predecessors;
nevertheless, the future viability of the companies and their pension
plans is unclear. The bankruptcy agreements that provided for
establishment of the new companies specified that they would assume
sponsorship of the previous companies' U.S. qualified defined benefit
plans, and made only one significant change to pension benefits.
However, prior to the change in sponsorship, many of the pension plans
had been closed to new hires or had ceased benefit accruals.[Footnote
27] Moreover, since 2008, the funded status of the pension plans has
been declining, and within the next 5 years, both companies project
that, based on current estimates, they may need to make large
contributions to their plans to comply with federal minimum funding
requirements.
Restructuring Shifted Sponsorship of GM and Chrysler Defined Benefit
Plans with Prior Changes Mostly Intact:
As a result of restructuring, sponsorship for all GM and Chrysler U.S.
defined benefit plans shifted to the new companies. But beyond the
shift in sponsorship, the only significant change to pension benefits
that occurred was the elimination of a future pension benefit increase
that was to compensate UAW retirees for increased required
contributions to their retiree health care plans, beginning in
2010.[Footnote 28] For the most part, the terms of the restructuring
called for current levels of employee benefits--including pension
benefits--to remain in place for at least 1 year. Specifically, the
master sale agreements for both companies stipulate that, in general,
union employees are to be provided employee benefits that are "not
less favorable in the aggregate" than the benefits provided under the
employee pension and welfare benefit plans, and contracts and
arrangements currently in place; nonunion employees are to receive
current levels of compensation and benefits until at least 1 year
after the date the agreements are signed.
More significant changes affecting GM's and Chrysler's pensions were
made prior to last year's restructuring. For example, over the past
decade, several of GM's and Chrysler's pension plans had been modified
or closed to new hires, or had stopped allowing further benefit
accruals. GM's salaried plan was closed and benefit accruals ceased
for certain employees, while 4 of Chrysler's ten plans have been
closed to new hires, and 2 other Chrysler plans have ceased benefit
accruals (also referred to as being "hard frozen").[Footnote 29]
Nevertheless, new collective bargaining agreements were put in place
in 2007 for both GM's and Chrysler's UAW-negotiated plans, calling for
annual increases to the pension benefits for their participants.
[Footnote 30] In addition, both GM and Chrysler had implemented
numerous attrition programs for both union and nonunion employees that
provided various opportunities for early retirement and other types of
added benefits as incentives to help mitigate the effects of
downsizing. For a listing of attrition programs offered by these
companies since 2004, see appendix III.
Funded Status of GM and Chrysler Pension Plans Has Been Declining:
As illustrated in figure 1, the funded status of GM and Chrysler
pension plans has been declining since 2008. This is due, in part, to
the economic downturn, which has brought significant financial stress
to many sectors of the economy, including the auto industry. The
significant decline in the stock market decreased the value of certain
assets (such as equities) and increased the value of others (such as
bonds), while low interest rates tended to increase liabilities.
[Footnote 31] Fluctuations in liabilities may also be caused by
changes to actuarial assumptions or other types of gains and losses.
[Footnote 32] However, in the case of GM and Chrysler, certain other
factors are at play as well.
Figure 1: Trends in the Funded Status of GM's and Chrysler's Pension
Plans (2006-2009):
[Refer to PDF for image: vertical bar graph]
Year: 2006;
GM: $5.9 billion;
Chrysler: -$1.6 billion.
Year: 2007;
GM: $16.0 billion;
Chrysler: $2.5 billion.
Year: 2008;
GM: $18.1 billion;
Chrysler: $2.9 billion.
Year: 2009;
GM: -$13.6 billion;
Chrysler: -$3.4 billion.
Source: GAO analysis of documents provided by the automakers for all
U.S. qualified defined benefit plans each sponsors.
Note: Funded status reflects measurements in accordance with Financial
Accounting Standards. For each year, the data for GM's plans are as of
December 31 of the preceding year; the data for Chrysler's plans are
as of January 1 of the year cited. GM's data include a small amount of
obligations (1-2 percent) for the unqualified salaried plan, but are
the only GM data publicly available.
[End of figure]
For example, a reduction in the number of workers is one key factor
affecting the funded status of both companies' plans. Large numbers of
workers have left employment as product lines are eliminated and
plants are shut down. When workers are forced to leave their jobs
before becoming eligible to retire, the liabilities for their expected
future benefits will usually be less than previously recorded.
However, for those workers who are eligible to retire early and choose
to do so under the enhanced provisions of one of the numerous
attrition programs, the liabilities for their expected future benefits
will usually be greater than previously recorded. In other words, more
workers will retire early and with more benefits than previously
anticipated in the company's valuation of future benefit obligations.
GM began its downsizing even before its TARP-related restructuring
efforts reduced the number of its North American brands from eight to
four. According to a GM news release, approximately 66,000 U.S. hourly
workers left the company under a special attrition program between
2006 and 2009.[Footnote 33] Often the lump-sum payments and buyouts
offered by these programs were paid from company assets, but when
these benefits are paid from pension assets, there can be an impact on
the plan's financial status.[Footnote 34] GM noted that the attrition
programs implemented between 2006 and 2009 contributed to an increase
of estimated plan obligations during this period and--along with other
factors, such as discount rate changes--played a role in the recent
increase in GM's pension liabilities (see figure 2).
Figure 2: Trends in GM's Pension Plans' Liabilities and Assets:
[Refer to PDF for image: horizontal bar graph]
Year: 2006;
Liabilities: -$89.1 billion;
Assets: $94.9 billion.
Year: 2007;
Liabilities: -$85.4 billion;
Assets: $101.4 billion.
Year: 2008;
Liabilities: -$85.3 billion;
Assets: $104.1 billion.
Year: 2009;
Liabilities: -$98.1 billion;
Assets: $84.5 billion.
Source: GAO analysis of GM documents for both U.S. qualified defined
benefit plans sponsored by GM.
Note: Plan liabilities (based on "projected benefit obligations") and
assets reflect measurements in accordance with Financial Accounting
Standards. For each year, the data are as of December 31 of the
preceding year. Data include a small amount of obligations (1-2
percent) for GM's unqualified salaried plan, but are the only GM data
publicly available.
[End of figure]
Similarly, Chrysler's downsizing efforts also predate TARP. For
example, its decision to eliminate four models within its three
primary brands dates back to November 2007, and the company has
implemented various attrition programs to accomplish this.[Footnote
35] Due in part to these programs, over the past few years, Chrysler's
pension liabilities have fluctuated while plan assets have been
declining (see figure 3). For example, Chrysler's UAW plan reported a
$900 million increase in liabilities from 2007 to 2008, and the plan's
2008 valuation report noted that the cost of special termination
benefits during 2008 were nearly $390 million. Total liabilities for
the Chrysler Pension Plan increased by a smaller margin overall from
2007 to 2008, but the plan's 2008 valuation report noted that nearly
$195 million in additional costs were being recorded due to special
early retirements, added service costs, and curtailment loss.
Figure 3: Trends in Chrysler's Pension Plans' Liabilities and Assets:
[Refer to PDF for image: horizontal bar graph]
Year: 2006;
Liabilities: -$23.5 billion;
Assets: $21.9 billion.
Year: 2007;
Liabilities: -$21.7 billion;
Assets: $24.2 billion.
Year: 2008;
Liabilities: -$22.8 billion;
Assets: $25.6 billion.
Year: 2009;
Liabilities: -$23.4 billion;
Assets: $19.9 billion.
Source: GAO analysis of Chrysler documents for all U.S. qualified
defined benefit plans sponsored by Chrysler.
Note: Plan liabilities (based on "projected benefit obligations") and
assets reflect measurements in accordance with Financial Accounting
Standards. For each year, the data are as of January 1 of the year
cited.
[End of figure]
Other factors that have affected the funded status of both GM's and
Chrysler's plans are the special arrangements made with other
companies in conjunction with acquisitions and divestitures.[Footnote
36] For example, when an auto parts supplier, the former Delphi
Corporation, was spun off from GM in 1999, the transaction included a
negotiated agreement with various unions for a benefit guarantee for
certain employees in the event that Delphi's hourly pension plan would
be frozen or terminated.[Footnote 37] When the company froze its
hourly plan on November 30, 2008, as agreed, GM began providing
covered employees with up to 7 years of credited service in the GM
hourly plan while they continued to work at Delphi. Under this
negotiated benefit guarantee, GM also agreed that upon plan
termination, once PBGC determined the benefit to be paid subject to
its guarantee limits, GM would pay eligible covered employees the
difference to "top up" the benefit to the level provided under
Delphi's hourly plan. Following the termination of Delphi's hourly
plan in July 2009, GM estimated that the cost of implementing this
benefit guarantee for all covered unions would be approximately $1.0
billion. In addition to the benefit guarantee for Delphi employees
still in the Delphi hourly plan, in the fall of 2008, GM's hourly plan
assumed responsibility for $2.7 billion in liabilities and $0.6
billion in assets from Delphi's plan, thereby increasing the GM plan's
funding deficit by $2.1 billion.[Footnote 38]
When Chrysler was sold by Daimler in 2007, the transaction included an
agreement with Daimler to help protect the funded status of Chrysler's
pension plans.[Footnote 39] As part of this transaction, PBGC
negotiated an agreement whereby Daimler provided a $1 billion
termination guarantee and Chrysler made $200 million in additional
pension contributions. Subsequently, in April 2009, this agreement was
replaced by a new arrangement requiring Daimler to begin making annual
contributions, even though the plans had not terminated. Under this
arrangement, Daimler agreed to make payments totaling $600 million to
Chrysler's pension plans over a 3-year period, with $200 million due
in June 2009, 2010, and 2011. In addition, if the Chrysler pension
plans were to terminate before August 2012 and are trusteed by PBGC,
Daimler is to pay an additional $200 million to the PBGC insurance
program.
Both Automakers Project Large Contributions to Plans Will Be Required
within the Next Five Years:
Although projections of plan funding are inherently sensitive to
underlying assumptions, GM and Chrysler currently estimate that they
may need to make large contributions to their pension plans within the
next 5 years in order to meet minimum funding requirements.[Footnote
40] They also may need to manage the funded status of their plans in
order to avoid certain plan benefit restrictions and potential
additional liabilities that may occur if the plans are determined to
be "at risk."[Footnote 41]
While useful as indicators of the financial pressures that could lie
ahead, the funding projections provided by GM and Chrysler are subject
to much uncertainty because of factors that could result in changes in
the size or timing of needed contributions to meet future years'
funding requirements. For example, projections are particularly
sensitive to the future economic environment, especially with respect
to future interest rates and asset returns. Also, GM or Chrysler could
make additional voluntary contributions to their plans, or funding
rules could be affected by changes in legislation.
To strengthen pension funding, the Pension Protection Act of 2006
(PPA) made sweeping changes to plan funding requirements, effective
for plan years beginning in 2008.[Footnote 42] For example, the act
included provisions that raised the funding targets for defined
benefit plans, reduced the period for "smoothing" assets and
liabilities, and restricted sponsors' ability to substitute credit
balances for cash contributions. At the same time, as we have reported
previously, the act did not fully close potential plan funding gaps,
and it provided funding relief to plan sponsors in troubled
industries.[Footnote 43] In addition, in the face of a weakened
economy, the Worker, Retiree, and Employer Recovery Act of 2008
provided plan sponsors with further relief from the changes,[Footnote
44] as did IRS guidance in 2009 concerning interest rates that could
be used to value plan liabilities in some cases.[Footnote 45]
Legislative proposals that would make additional changes to funding
requirements are currently being considered.[Footnote 46]
Nevertheless, according to GM's projections utilizing valuation
methods defined under PPA, large cash contributions may be needed to
meet its funding obligations to its U.S. pension plans beginning in
2013 (see figure 4). GM officials told us that cash contributions are
not expected to be needed for the next few years because it has a
relatively large "credit balance" based on contributions made in prior
years that can be used to offset cash contribution requirements that
would otherwise be required until that time.[Footnote 47] As of
October 1, 2008, GM had about $36 billion of credit balance in its
hourly plan and about $10 billion in its salaried plan. However, once
these credit balances are exhausted, GM projects that the
contributions needed to meet its defined benefit plan funding
requirements will total about $12.3 billion for the years 2013 and
2014, and additional contributions may be required thereafter. In its
2008 year-end report, GM noted that due to significant declines in
financial markets and deterioration in the value of its plans' assets,
as well as the coverage of additional retirees, including Delphi
employees, it may need to make significant contributions to its U.S.
plans in 2013 and beyond.[Footnote 48]
Figure 4: Projected Calendar Year Contributions to GM's Pension Plans
(2009-2014):
[Refer to PDF for image: vertical bar graph]
Year: 2009;
Projected cash payments: $0.
Year: 2010;
Projected cash payments: $0.
Year: 2011;
Projected cash payments: $0.
Year: 2012;
Projected cash payments: $0.
Year: 2013;
Projected cash payments: $5.9 billion.
Year: 2014;
Projected cash payments: $6.4 billion.
Source: GAO analysis of GM planned funding projections for both U.S.
qualified defined benefit plans sponsored by GM.
Note: Funding projections reflect audited data as of December 31, 2008
(the most recent publicly available at the time of our study).
Projections utilize valuation methods for required contributions
defined under PPA, and include any temporary funding relief as
provided by the Worker, Retiree, and Employer Recovery Act of 2008.
[End of figure]
Similarly, Chrysler's management expects that contributions to meet
minimum funding requirements may begin to increase significantly in
2013, but are projected to be relatively minimal until then (see
figure 5). Chrysler, like GM, intends to use credit balances to offset
the contribution requirements for some of its plans. As of end-of-year
2009, Chrysler had credit balances of about $3.5 billion for its UAW
Pension Plan and about $1.9 billion across the other eight plans for
which it provided funding information. In addition, Chrysler also has
$600 million in payments from Daimler to help meet its funding
requirements over the next few years.[Footnote 49] Nevertheless,
Chrysler's funding projections reveal that about $3.4 billion in
contributions may be needed to meet its funding requirements over the
2009 to 2015 period.[Footnote 50]
Figure 5: Projected Calendar Year Contributions to Chrysler's Pension
Plans (2009-2015):
[Refer to PDF for image: vertical bar graph]
Year: 2009;
Projected cash payments: $0.2 billion.
Year: 2010;
Projected cash payments: $0.41 billion.
Year: 2011;
Projected cash payments: $0.
Year: 2012;
Projected cash payments: $0.04 billion.
Year: 2013;
Projected cash payments: $0.93 billion.
Year: 2014;
Projected cash payments: $1.25 billion.
Year: 2015;
Projected cash payments: $0.54 billion.
Source: GAO analysis of Chrysler planned funding projections for all
U.S. qualified defined benefit plans sponsored by Chrysler.
Note: Funding projections include unaudited data for nine of
Chrysler's ten plans provided to GAO in February 2010 (no information
was provided for one plan). Projections utilize valuation methods for
required contributions defined under PPA. For six of the nine plans
with data, the projections explicitly included any temporary funding
relief as provided by the Worker, Retiree, and Employer Act of 2008,
except for a provision relating to adjustments, or "smoothing," to the
value of plan assets.
[End of figure]
In addition, both GM and Chrysler may need to manage the funded status
of their plans in order to avoid incurring an "at-risk" status or
triggering certain benefit restrictions. If a plan's funding level
falls below certain specified thresholds, then it must use special "at-
risk" actuarial assumptions to determine its minimum funding
requirements and, in most cases, increase its contributions.[Footnote
51] For example, the most recent annual funding notice for the GM
hourly plan reveals that the plan is in at-risk status for plan year
2008.[Footnote 52],[Footnote 53]
Also, if a plan's funding level falls below certain specified
thresholds, then certain restrictions may be placed on the benefits
provided by the plan, such as lump sum withdrawals and plant shutdown
benefits (see table 2).[Footnote 54]
Table 2: Benefit Restrictions Based on a Plan's Funded Status:
If a plan's funded status is:[A]: At least 80 percent, but would be
less than 80 percent taking the amendment into account;
Then, there is a restriction against:
* plan amendments to increase benefits.
If a plan's funded status is:[A]: At least 60 percent, but less than
80 percent;
Then, there is a restriction against:
* 50 percent benefits paid in a lump sum (i.e., accelerated benefit
payments).
If a plan's funded status is:[A]: At least 60 percent, but would be
less than 60 percent, taking the unpredictable contingent event
benefit into account;
Then, there is a restriction against:
* unpredictable contingent event benefits (i.e., shutdown benefits).
If a plan's funded status is:[A]: Less than 60 percent;
Then, there is a restriction against:
* future benefit accruals (i.e., accruals are frozen);
* all lump sum payments (i.e., accelerated benefit payments);
* unpredictable contingent event benefits (i.e., shutdown benefits).
Source: GAO analysis.
[A] Funded status described here is based on the "adjusted funding
target attainment percentage." This percentage is the ratio of a
plan's assets, reduced by any credit balances, to the value of the
plan's liabilities (referred to as the "funding target attainment
percentage") adjusted by adding the value of certain annuities.
Special rules apply in bankruptcy.
[End of table]
Economic Stress in Auto Industry Has Endangered Auto Supplier Pensions:
Automaker restructuring, the credit market crisis, and the global
recession have created significant economic stress across the auto
supply industry. Federal efforts to aid the supply sector through a
program that provided GM and Chrysler with funding to guarantee
supplier payments benefited the automakers' top-level direct
suppliers, but did little to support component and raw material
suppliers. The restructuring of GM and Chrysler amid this difficult
economic environment has had a ripple effect throughout the auto
supply sector, likely contributing to the recent wave of supplier
bankruptcies and pension plan terminations.
Automaker Restructuring and Current Economic Conditions Have Created
Significant Financial Stress for Suppliers:
The auto supply sector is highly dependent on the success of the
automakers that it supplies. For years, the auto supply sector has
felt the impact of the problems facing the domestic auto market,
including declining vehicle sales, and deep production cuts--resulting
in overcapacity within the industry. In 2004, the Department of
Commerce reported that the possibility of relying on increased auto
sales that automatically translate into increased orders and
components for U.S. suppliers no longer existed because U.S.
automobile manufacturers had shifted from providing a ready market for
many domestic suppliers of parts and components to operating on a
global basis. The result of this shift was that automotive parts
suppliers had to find niches in the global supply chains of U.S. auto
companies or their foreign competitors to succeed.
Many auto suppliers broadened their sales base to remain competitive.
With the domestic share of the market in decline, these suppliers
diversified their business models to include just-in-time
manufacturing capacity or sold their products to multiple automakers
in North America, Europe, and Asia. For example, at the time it filed
for bankruptcy, the U.S. auto parts supplier, Delphi Corporation,
employed more than 185,000 workers in 38 countries in 2004, making it
one of the largest suppliers in the world.[Footnote 55] Still,
according to a 2009 industry report, just 7 of the 29 U.S.-based
suppliers listed among the top 100 global suppliers sold the majority
of their products in North America. Suppliers serving the large U.S.
automakers also have considerable overlap, with as many as 80 percent
supplying parts to one or more automaker. For example, Chrysler
reported that 96 percent of its top 100 suppliers also served either
GM or Ford. Similarly, 27 of GM's top 39 suppliers also served as
major suppliers for Chrysler. While this crossover allowed suppliers
to spread their risk among domestic automakers, the impact of the
global economic downturn affected many suppliers, and left suppliers
that sold primarily to GM and Chrysler particularly vulnerable when
the automakers filed for bankruptcy.
The recent global credit crisis and the rapid decline in auto sales
left many of the nation's auto parts suppliers under significant
stress with limited access to credit and facing growing uncertainty
about their future business prospects. For example, GM's and
Chrysler's decision to slow production by temporarily shutting down
some U.S. operations in late 2008 led to interruptions in suppliers'
operations and cash flow. As a result, many suppliers were left with
excess inventory, were not paid for products they had shipped to
automakers, and lacked the liquidity needed to settle their debts with
their raw material and component suppliers. Concerns over the ability
of the organizations to continue operations and, among other things,
collect their receivables and pay their bills when due, led some
suppliers to receive a "going concern" qualification from their
auditors.[Footnote 56] Lenders restricted credit and cash flow to
suppliers, limiting their liquidity at the time when it was needed
most. With limited cash flow, the suppliers experienced increasing
pressure from their raw material and component suppliers. According to
Chrysler, 43 percent of its suppliers had received requests from their
suppliers for some form of payment term compression. Chrysler
recognized the liquidity shortfall in the supplier network as a
significant threat to its successful restructuring, and identified
supplier insolvencies and supply chain disruptions as key risks to the
critical assumptions in its restructuring plan. Another industry
report indicated that at least 500 suppliers in North America (or 30
percent of the estimated 1,700 direct suppliers in the U.S.) may be at
high risk of insolvency due to the effect of reduced volumes and the
lack of credit availability. This credit crunch also affected bankrupt
companies, which found securing financing to restructure their
companies increasingly difficult.
Federal Assistance Program Helped Avert Catastrophe, but Provided
Limited Support to Smaller Suppliers:
In an effort to help stabilize the auto supply base, in March 2009,
also under TARP, Treasury established the Auto Supplier Support
Program, which initially dedicated up to $5 billion in government-
backed guarantees to GM and Chrysler for supplier payments in order to
give suppliers the confidence they needed to keep shipping parts,
paying their employees, and continuing operations. Treasury had
rejected appeals from the auto supply sector for direct aid to assist
a broader portion of the supplier industry because, according to
Treasury officials, it had become clear that the vast network of
suppliers had to engage in a substantial restructuring and capacity
reduction to achieve long-term viability. The program was to ensure
that GM and Chrysler received the parts and components they needed to
manufacture vehicles and suppliers had access to credit from lenders.
Under the program, any supplier that shipped directly to GM or
Chrysler on qualifying commercial terms could be eligible to
participate. Treasury left it up to the automakers to determine which
suppliers qualified for the assistance. According to GM, 74 percent of
its 1,300 suppliers were eligible for the program, but only 28 percent
of its suppliers (38 percent of its eligible suppliers) received funds
under the program.[Footnote 57] Nearly half of the $947.8 million in
program funds that GM dispersed went to 31 of its top 40 suppliers.
[Footnote 58] Shortly after the program began, Treasury reduced the
amount of funding available under this program to $3.5 billion, at the
request of the automakers. According to Treasury officials, the
automakers made this request because conditions had changed: they no
longer needed to maintain their prebankruptcy supply capacity, credit
markets had opened up, and suppliers' access to capital had improved.
The program, as administered, helped a portion of the industry survive
the downturn in production and vehicle sales, but did little to
improve supplier access to traditional sources of capital, according
to a leading auto supply industry group. The group noted that the
program supported suppliers by making funds available to purchase
receivables for parts already shipped by participating suppliers, but
that many troubled suppliers who had no outstanding debts to the
automakers were excluded. According to Treasury officials, the program
was not designed to address liquidity for troubled suppliers who were
unable to move their inventory and had no receivables, including from
GM and Chrysler, due to the extended shutdowns at the manufacturing
plants. However, the group also noted that the suppliers who
participated in the program were generally satisfied with the outcome,
and that the supply sector as a whole believed that without the
government's action, the effect of automakers' restructuring would
have been catastrophic for suppliers.
Suppliers Have Experienced a Wave of Bankruptcies and Pension Plan
Terminations:
Bankruptcy reorganizations and liquidations occur frequently in the
volatile automotive supply sector, but the number of bankruptcies has
recently increased. Some suppliers have gone bankrupt multiple times
in a decade, while other suppliers have remained in bankruptcy
proceedings for years before successfully emerging as a new entity.
For example, the "new Delphi" (Delphi Automotive, LLP) emerged in 2009
after the former Delphi had been in bankruptcy proceedings for 4
years. Auto suppliers experienced a rise in the number of
bankruptcies, liquidations, and pension plan terminations in 2008 and
2009. In November 2009, a survey by the Original Equipment Suppliers
Association (Association)--a leading auto supply industry group--found
that a majority of suppliers anticipated a 20 percent decline in their
revenue and operating profits on a year-to-year basis. The Association
also reported that at least 43 U.S. based auto suppliers had filed for
Chapter 11 bankruptcy protection between January and December 2009.
Moreover, it was reported that an additional 200 U.S. suppliers had
begun the liquidation process by selling off their assets to other
suppliers or private equity companies. Chrysler reported that the
proportion of its suppliers that were financially troubled had more
than doubled, from 10 percent in October 2008 to 22 percent in
February 2009, with the troubled suppliers accounting for $6.6 billion
of the company's annual business. In addition, in the summer of 2009,
a consultant group estimated that as many as 30 percent of North
American suppliers were at high risk of failure. According to Treasury
officials, many of Chrysler's troubled suppliers had difficulty
accessing credit because of their concentrated exposure to Chrysler.
In the summer of 2009, the auto supply sector was also expected to
shrink significantly through mergers and consolidation in order to
survive. According to the Association's survey of its membership in
June 2009, auto suppliers were operating at 46.4 percent capacity. In
its restructuring plan, Chrysler stated that industry conditions
required substantial and coordinated restructuring of the supply base,
and that automakers must concentrate their business in "surviving"
suppliers. GM projected a 30 percent reduction in the number of
suppliers, stating that such compression would allow GM to build and
manage a competitive supply base. Several industry consultants noted
that the path to long-term viability would require suppliers to reduce
their number by 30 to 40 percent and secure more business from Asian
and European transplant automakers. However, by early 2010, there were
signs that the economic conditions for suppliers may have begun to
stabilize. The Association's January 2010 and March 2010 surveys of
its membership reported increased optimism across the sector,
especially among larger companies.
Many U.S.-based auto suppliers sponsor defined benefit plans that are
insured by PBGC. Each company failure could potentially result in PBGC
having to assume responsibility for its pension plans, and PBGC
officials told us that they are monitoring about 35 large auto
suppliers. Even before last year's restructuring of GM and Chrysler,
suppliers (like many other employers) were experiencing significant
underfunding of their defined benefit plans. Table 3 shows 18 auto
suppliers we identified that reported a combined $14.9 billion in
unfunded pension liabilities in 2008.
Table 3: Funded Status of Selected Suppliers' Defined Benefit Pension
Plans (2008) (Dollars in millions):
Supplier name: Delphi Corporation;
In bankruptcy proceedings in 2009: [Check][A];
Unfunded pension liabilities: $5,264.0.
Supplier name: Honeywell International;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $3,526.0.
Supplier name: Goodyear Tire & Rubber;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $2,129.0.
Supplier name: Eaton Corporation;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $1,614.0.
Supplier name: Johnson Controls, Inc.;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $402.0.
Supplier name: TRW Automotive Holdings;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $361.0.
Supplier name: Visteon;
In bankruptcy proceedings in 2009: [Check];
Unfunded pension liabilities: $326.0.
Supplier name: Lear Corporation;
In bankruptcy proceedings in 2009: [Check];
Unfunded pension liabilities: $254.7.
Supplier name: American Axle and Manufacturing Holdings, Inc.;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $254.5.
Supplier name: Tenneco, Inc.;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $169.0.
Supplier name: Dana Holding Corporation;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $149.0.
Supplier name: Cooper-Standard Holdings;
In bankruptcy proceedings in 2009: [Check];
Unfunded pension liabilities: $89.1.
Supplier name: BorgWarner, Inc.;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $87.1.
Supplier name: Hayes Lemmerz International;
In bankruptcy proceedings in 2009: X[A];
Unfunded pension liabilities: $70.8.
Supplier name: Dura Automotive Systems, Inc.;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $65.3.
Supplier name: ArvinMeritor, Inc.;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $42.0.
Supplier name: Modine Manufacturing Company;
In bankruptcy proceedings in 2009: [Empty];
Unfunded pension liabilities: $35.3.
Supplier name: Accuride;
In bankruptcy proceedings in 2009: [Check];
Unfunded pension liabilities: $26.8.
Supplier name: Total;
Unfunded pension liabilities: $14,865.6.
Source: GAO analysis of recent corporate annual reports and filings.
Data are for fiscal years ending in 2008 or 2009.
[A] Suppliers with pension plans that have been terminated and
trusteed by PBGC.
[End of table]
In 2009, several of GM and Chrysler's suppliers filed for bankruptcy,
and in some cases, PBGC intervened and assumed trusteeship of the
companies' defined benefit plans. For example, in July 2009, PBGC
terminated and assumed responsibility for the pension plans of 70,000
workers and retirees of the former Delphi Corporation, citing Delphi's
inability to afford to maintain the plans. More specifically,
according to PBGC officials, the key factors that led to this action
were Delphi's failure to fund its pensions during bankruptcy, and the
company's imminent sale and liquidation of its assets as it left
bankruptcy protection. Other suppliers avoided bankruptcy, but still
felt the effects of the slumping auto industry. For example, American
Axle and Manufacturing Holdings, Inc., an auto part supplier that
narrowly averted bankruptcy in 2009, estimated that the GM and
Chrysler factory shutdowns had cost the company $100.6 million in
sales and $29.3 million in operating income.
While some recent reports have indicated that the outlook for the
automakers and suppliers may be improving, the ability of suppliers to
fund their defined benefit plans in the future will rest, in part, on
the continued viability of the automakers. Moreover, any revival in
the auto supply sector may come too late for workers who have already
had their pension plans terminated and their benefits reduced to the
PBGC benefit guarantee levels.[Footnote 59]
Both PBGC and Plan Participants Incur Losses when Underfunded Plans
Are Terminated:
When an underfunded defined benefit plan is terminated, the PBGC bears
the costs of any unfunded liabilities up to the guaranteed benefit
amounts defined by ERISA, while plan participants bear the loss of
benefits beyond these guaranteed amounts that would go unpaid.
[Footnote 60] According to Treasury officials, there is no indication
that any of GM's or Chrysler's defined benefit plans will be
terminated. Nevertheless, to hypothetically examine the potential
impact if their plans were to be terminated, we explored how PBGC and
plan participants would have been affected had the plans been
terminated when these companies filed for bankruptcy in 2009, and the
factors at play that could change that picture if the plans were to be
terminated 5 years later.
PBGC's Exposure Signals Potential Impacts on Both its Deficit and its
Resources:
Following the termination of an underfunded defined benefit plan, PBGC
generally incurs losses that affect its deficit, as well as its
resources. With respect to its deficit, the amount of loss to the
single-employer fund is equal to the value of the unfunded guaranteed
benefits required to be paid under ERISA.[Footnote 61] Although this
is generally considerably less than the total value of unfunded
liabilities in a large auto sector pension plan, the loss can still be
substantial. With respect to its resources, PBGC must assume
responsibility for administering the terminated plan, including
continuing benefit payments to retirees, determining the assets and
liabilities of the plan as of the date of termination, calculating the
guaranteed and nonguaranteed benefit amounts owed each participant in
the plan, and keeping participants informed. When plans are large and
complex, this can be an enormous task, requiring years to complete.
PBGC's Deficit-Related Exposure:
Each year, PBGC assesses its exposure to losses from underfunded
pension plans sponsored by financially weak companies. Its estimates
of exposure are based on companies with credit ratings below
investment grade or that meet one or more of the criteria for
financial distress. PBGC classifies the plans sponsored by these
companies as "reasonably possible" terminations.[Footnote 62] At the
end of fiscal year 2009, PBGC estimated that its exposure from
reasonably possible terminations was approximately $168 billion, up
from $47 billion a year earlier.[Footnote 63] A significant part of
this increase was due to the dramatic increase in exposure related to
manufacturing, which PBGC attributed primarily to changes in the auto
industry, as well as primary and fabricated metals (see figure 6).
Figure 6: PBGC's Estimate of Possible Exposure to Loss by Industry:
[Refer to PDF for image: multiple horizontal bar graph]
Manufacturing:
FY 2008: $21 billion;
FY 2009: $10.3 billion.
Transportation, communication, and utilities[B]:
FY 2008: $16.2 billion;
FY 2009: $30.6 billion.
Services:
FY 2008: $2.4 billion;
FY 2009: $13.3 billion.
Wholesale and retail trade:
FY 2008: $4.5 billion;
FY 2009: $13 billion.
Health care:
FY 2008: $1.5 billion;
FY 2009: $5 billion.
Agriculture, mining, and construction:
FY 2008: $0.7 billion;
FY 2009: $2.5 billion.
Finance, insurance and real estate:
FY 2008: $0.4 billion;
FY 2009: $2.1 billion.
Source: PBGC 2009 Annual Report.
[A] For fiscal years 2008 and 2009, manufacturing exposure was
primarily from automobiles, auto parts, and primary and fabricated
metals.
[B] For fiscal years 2008 and 2009, transportation exposure was
primarily from airlines.
[End of figure]
In May 2009, PBGC reported that unfunded pension liabilities across
the auto industry as a whole totaled about $77 billion as of January
31, 2009, and accounted for about $42 billion of PBGC's total exposure
of $168 billion.[Footnote 64] This means that, should all the auto
industry's underfunded plans insured by PBGC be terminated and
trusteed, PBGC would be required to cover about $42 billion of the
benefit amounts promised, adding to its deficit. Between the end of
fiscal years 2008 and 2009, the deficit in PBGC's single-employer
insurance program doubled in size from $10.7 billion to $21.1 billion.
[Footnote 65] Should all the underfunded auto industry plans fail,
PBGC's January 2009 estimate indicated that its end of fiscal year
2009 deficit could triple in size. An increase of this magnitude would
have implications not just for PBGC's accumulated deficit, but for its
overall funding going forward, as the auto industry is responsible for
contributing a significant portion of PBGC's premiums each year.
According to PBGC's most recent data book, the motor vehicle equipment
industry accounted for about 1.2 percent of all insured plans under
the single-employer insurance program in 2007, but 6.1 percent of all
insured participants and 7.3 percent of all premiums.
With respect to PBGC's exposure for GM's and Chrysler's pension plans
in particular, PBGC calculated its potential exposure prior to when
the new companies assumed sponsorship of the plans. Before the change
in sponsorship, PBGC estimated that its exposure for GM's unfunded
guaranteed benefits would be about $9.0 billion, and that its exposure
for Chrysler's unfunded guaranteed benefits would be about $5.5
billion (see table 4).
Table 4: PBGC's Estimates of Potential Exposure for GM's and
Chrysler's Pension Plans in Early 2009:
GM:
Estimated unfunded benefit liabilities: $27.3 billion;
Estimated unfunded guaranteed benefit liabilities: $9.0 billion;
Estimated unfunded nonguaranteed benefit liabilities: $18.3 billion;
Estimated number of participants: 673,286.
Chrysler:
Estimated unfunded benefit liabilities: $10.4 billion;
Estimated unfunded guaranteed benefit liabilities: $5.5 billion;
Estimated unfunded nonguaranteed benefit liabilities: $4.9 billion;
Estimated number of participants: 249,251.
Total:
Estimated unfunded benefit liabilities: $37.7 billion;
Estimated unfunded guaranteed benefit liabilities: $14.5 billion;
Estimated unfunded nonguaranteed benefit liabilities: $23.2 billion;
Estimated number of participants: 922,537.
Source: PBGC estimates, calculated on a termination liability basis.
Notes: GM estimates are as of January 31, 2009; Chrysler estimates are
as of April 30, 2009--the most recent PBGC estimates available. Totals
exclude pension plans that are fully funded. PBGC officials note that
volatility in plan asset returns and valuation discount rates may
cause significant changes in these estimates over time.
[End of table]
Even without the change in sponsorship, actual losses to PBGC could be
substantially different, as estimates of exposure are inherently
difficult to calculate. For example, the significant volatility in
plan underfunding and sponsor creditworthiness over time makes long-
term estimates of PBGC's expected claims difficult. Moreover, there is
a time lag in making these estimates. Estimates of exposure are
generally based on company reports filed as of December 31 of the
previous year. Thus, the dramatic increase in PBGC's aggregate
reasonably possible exposure between fiscal years 2008 and 2009
depicted in figure 6 was primarily due to the deterioration of credit
quality and poor asset returns that occurred during calendar year
2008. Subsequent changes in economic conditions (such as the steady
rise in equity returns since March 2009) were not yet reflected in
these estimates. In addition, actual losses due to terminated plans
depend on PBGC's liability only for unfunded guaranteed benefits, but
this is not factored into the estimates because it is difficult to
determine the extent and effect of the limits on guaranteed benefits
prior to actual termination.[Footnote 66]
However, PBGC's exposure for unfunded guaranteed benefits in the auto
supply sector has already begun to materialize. Over the past year,
the plans of several large suppliers were terminated and trusteed by
PBGC, and PBGC estimates that the unfunded guaranteed benefits that it
will be required to pay to participants in the plans of these large
suppliers will exceed $6.6 billion (see table 5). The estimate for the
pension plans of the former Delphi Corporation alone is over $6.2
billion.
Table 5: Auto Supplier Pension Plans Terminated and Trusteed by PBGC,
May 2009-January 2010 (Dollars in millions):
Supplier: Delphi Corporation: Hourly Plan;
Estimated unfunded benefit liabilities: $4,500.0;
Estimated unfunded guaranteed benefit liabilities: $3,800.0;
Estimated unfunded nonguaranteed benefit liabilities: $700.0;
Estimated number of participants: 47,176.
Supplier: Delphi Corporation: Salaried Plan;
Estimated unfunded benefit liabilities: $2,700.0;
Estimated unfunded guaranteed benefit liabilities: $2,200.0;
Estimated unfunded nonguaranteed benefit liabilities: $500.0;
Estimated number of participants: 20,203.
Supplier: Delphi Corporation: Other plans;
Estimated unfunded benefit liabilities: $65.0;
Estimated unfunded guaranteed benefit liabilities: $60.0;
Estimated unfunded nonguaranteed benefit liabilities: $5.0;
Estimated number of participants: 2,229.
Supplier: Metaldyne Corporation;
Estimated unfunded benefit liabilities: $157.0;
Estimated unfunded guaranteed benefit liabilities: $153.0;
Estimated unfunded nonguaranteed benefit liabilities: $4.0;
Estimated number of participants: 10,771.
Supplier: Hayes-Lemmerz International;
Estimated unfunded benefit liabilities: $94.4;
Estimated unfunded guaranteed benefit liabilities: $93.7;
Estimated unfunded nonguaranteed benefit liabilities: $0.7;
Estimated number of participants: 4,786.
Supplier: Foamex LP;
Estimated unfunded benefit liabilities: $79.0;
Estimated unfunded guaranteed benefit liabilities: $76.0;
Estimated unfunded nonguaranteed benefit liabilities: $3.0;
Estimated number of participants: 5,504.
Supplier: Fluid Routing Solutions Inc.;
Estimated unfunded benefit liabilities: $29.7;
Estimated unfunded guaranteed benefit liabilities: $24.9;
Estimated unfunded nonguaranteed benefit liabilities: $4.8;
Estimated number of participants: 2,400.
Supplier: Proliance International, Inc.;
Estimated unfunded benefit liabilities: $17.0;
Estimated unfunded guaranteed benefit liabilities: $17.0;
Estimated unfunded nonguaranteed benefit liabilities: $0.0;
Estimated number of participants: 1,620.
Supplier: Contech U.S., LLC;
Estimated unfunded benefit liabilities: $13.6;
Estimated unfunded guaranteed benefit liabilities: $12.0;
Estimated unfunded nonguaranteed benefit liabilities: $1.6;
Estimated number of participants: 532.
Supplier: Stant Manufacturing, Inc.;
Estimated unfunded benefit liabilities: $9.0;
Estimated unfunded guaranteed benefit liabilities: $8.9;
Estimated unfunded nonguaranteed benefit liabilities: $0.1;
Estimated number of participants: 900.
Supplier: Total;
Estimated unfunded benefit liabilities: $7,664.7;
Estimated unfunded guaranteed benefit liabilities: $6,445.5;
Estimated unfunded nonguaranteed benefit liabilities: $1,219.2;
Estimated number of participants: 96,121.
Source: GAO analysis of PBGC estimated data for each plan as of
February 2010.
[End of table]
To help protect against further exposure, according to PBGC's 2009
annual report, the agency was continuing to monitor the auto industry
and negotiate settlements for additional pension protections in
several auto-related corporate downsizing cases. For example, in the
case of Visteon Corporation, a large automotive supplier, PBGC
negotiated an agreement in January 2009 that required Visteon to
provide over $55 million in additional protections to workers at
closed facilities by making cash contributions to the plan, a letter
of credit to PBGC, and a guaranty by certain affiliates of certain
contingent pension obligations. Similarly, in the case of Cooper Tire
& Rubber Company, PBGC negotiated a deal in August 2009 that required
the plan sponsor to strengthen the plan by $62 million, in connection
with a plant closing in Albany, Georgia. According to PBGC, such
protections can help prevent plan termination or, in the event that
the plan does terminate, reduce the losses to the insurance program
and participants.[Footnote 67]
PBGC's Resource-Related Exposure:
If PBGC were to become trustee of GM's and Chrysler's auto plans, the
impact on its resources would be unprecedented. As illustrated in
figure 7, the number of participants and trust fund assets that PBGC
is responsible for managing would increase dramatically. Moreover, in
addition to their sheer size, these plans have many of the
characteristics that contribute to complexity and delays in
processing, such as a history of mergers, complicated benefit
formulas, movement of participants and assets across plans, and large
numbers of participants subject to one or more of the legal limits on
guaranteed benefits.[Footnote 68]
Figure 7: Size of GM's and Chrysler's Plans Compared with Total PBGC-
Trusteed Plans:
[Refer to PDF for image: 2 multiple vertical bar graphs]
Participants[A]:
2008, Total PBGC participants[B]: 1.27 million;
2009, Total PBGC participants[B]: 1.48 million;
Total GM participants[C]: 0.70 million;
Total Chrysler participants[C]: 0.25 million;
Total GM and Chrysler participants[C]: 0.96 million.
Plan assets:
Total PBGC plan assets[D]: $64.6 billion;
Total PBGC plan assets[D]: $68.7 billion;
Total GM assets[C]: $84.5 billion;
Total Chrysler assets[C]: $19.9 billion;
Total GM and Chrysler assets[C]: $104.4 billion.
Source: GAO analysis of PBGC and automakers‘ documents.
[A] Participant data for PBGC and the automakers is summed by plan;
therefore, employees who participate in more than one plan are counted
multiple times.
[B] PBGC data includes participants in all plans terminated and
trusteed under the single-employer insurance program. (A very small
number of payees--fewer than 200--are from multiemployer plans that
were terminated and trusteed prior to October 1980. Since October
1980, PBGC no longer assumes trusteeship or pays benefits to
participants of terminated multiemployer plans.)
[C] Automaker data include all U.S.-based defined benefit plans under
each company's sponsorship. GM's participant data are as of September
30, 2008, and Chrysler's participant data are as of January 1, 2008
(most recent data available). Data on plan assets reflect measurements
in accordance with Financial Accounting Standards. GM data are as of
December 31, 2008; Chrysler data are as of January 1, 2009.
[D] PBGC data includes assets for all plans terminated and trusteed
under the single-employer insurance program.
[End of figure]
Among plans terminated and trusteed by PBGC, the average number of
participants per plan is just under 1,000[Footnote 69], but most of
GM's and Chrysler's plans far exceed this average. For example, as of
the end of September 2008, GM's hourly plan had over 500,000
participants, and its salaried plan had nearly 200,000. Based on
counts as of the beginning of 2008 (the most recent available),
Chrysler's UAW Plan had about 135,000 participants, and the Chrysler
Pension Plan had about 44,000 participants. Only two of Chrysler's ten
plans had less than 1,000 participants. Taken together, the number of
participants in these two companies' pension plans is equal to about
40 percent of all the participants in all the plans terminated and
trusteed by PBGC since the agency was established in 1974. Even more
striking, taken together, the amount of assets in these two companies'
pension plans exceeds--by a considerable margin--the total amount of
assets that PBGC is currently managing for all the plans it has
trusteed combined (see figure 6).
In addition to their large size, GM's and Chrysler's plans have many
of the characteristics that, as delineated in a previous report,
[Footnote 70] contribute to complexity and delay in processing. For
example, both GM and Chrysler have long histories of acquisitions,
mergers, and divestitures, stretching over the past century (see
appendix V). To determine the potential impact on any current or
future retirees or beneficiaries of the plan, documentation concerning
each change must be obtained, along with data about any affected
employees. An employee's movement from one plan to another also can
cause complexity in benefit calculations. Even within a plan, tiers
can be created that treat some employees differently and make benefit
calculations more complicated. For example, at both GM and Chrysler,
different formulas were created for employees based on such things as
the date employees began participating in their plans or whether or
not they contributed to their plans.
Delays also result when PBGC must adjust participants' benefits to
comply with legal requirements. PBGC guarantees participants' benefits
only up to certain limits, specified under ERISA and related
regulations.[Footnote 71] Among GM's and Chrysler's plans, certain
provisions and characteristics of participants suggest that many would
likely be subject to one or more of these limits should the plans be
terminated, as discussed further in the next section. Recent changes
in the law added new provisions concerning the treatment of certain
events, such as plant shutdowns and attrition programs (referred to as
"unpredictable contingent events").[Footnote 72] PBGC has begun to
grapple with some of these complexities following the termination of
the Delphi plans, as many of the benefits provided by the Delphi plans
reflect negotiations with UAW and are similar to benefits provided by
UAW plans across the auto sector.
In its 2009 annual report, PBGC noted that it has been taking steps to
prepare for the possible trusteeship of large auto industry plans by
defining the changes to its infrastructure that would be needed to
handle the increase in workload. The types of changes examined as part
of this effort included expanded contracts, additional staff, and
increased capacity in its information technology system.
High Earners and Early Retirees Are Most At Risk for Reduced Benefits:
When ERISA's guarantees do not cover all pension benefits promised by
an underfunded plan that is terminated, those participants whose
benefits are reduced share in the losses from the plan's termination.
In many cases involving terminated and trusteed plans, participants'
full benefit amounts are guaranteed and their benefits are not reduced
as a result of the termination. But in cases involving complex plans
with generous benefit structures such as GM's and Chrysler's, large
numbers of participants are likely to have benefits subject to the
guarantee limits and, depending on the extent of plan underfunding at
termination, these participants would be at risk of having their
benefits reduced as a result. When PBGC calculated its exposure across
the auto sector as a whole in January 2009--prior to the shift in
sponsorship of GM's and Chrysler's plans to the new companies--PBGC
estimated that about $35 billion in unfunded liabilities would be
nonguaranteed benefits; that is, plan participants would bear losses
for about $35 billion in benefits not funded by the company and not
guaranteed by PBGC if all the at-risk underfunded plans across the
sector were terminated. Of this $35 billion, about half ($18 billion)
was attributable to GM's plans, and another $5 billion was
attributable to Chrysler's plans.
Participants most often affected by the application of guaranteed
benefit limits are high earners whose benefits exceed the maximum
limit,[Footnote 73] those who take early retirement, and those whose
benefits increased due to recent plan amendments. We were unable to
obtain precise data on the number of GM and Chrysler plan participants
whose benefits might be reduced due to these limits; however, GM and
Chrysler pension plans provide several options for early retirement,
with supplemental benefits to those who retire before age 62 as a
bridge to Social Security benefits. Under one type of guarantee limit
(the accrued-at-normal limit),[Footnote 74] any supplements being
provided to retirees as of the date of plan termination, and any
supplements to be provided to future retirees, would not be
guaranteed. According to PBGC officials, a significant number of GM
and Chrysler participants could be vulnerable to having their benefits
reduced due to this limit should the pension plans be terminated. In
addition, retirees whose benefits reflect increases in the 5 years
prior to the date of plan termination could be subject to another type
of guarantee limit (the phase-in limit).[Footnote 75] For example, if
GM's and Chrysler's plans had been terminated in 2009, this limit
would have affected the increases in benefits provided in the 2007 UAW
contracts negotiated with both GM and Chrysler, causing only a part of
those increases to be guaranteed.[Footnote 76] The increases included
as benefit enhancements offered as part of recent attrition programs
would be subject to the phase-in limit, as well.[Footnote 77]
Although many participants would likely lose some portion of their
nonguaranteed benefits if the automakers' plans were terminated, not
all would be at equal risk. This is because when a pension plan is
terminated and trusteed by PBGC, ERISA specifies that the remaining
assets of the plan and any funds recovered for the plan from company
assets be allocated to participant benefits according to a certain
priority order (see appendix VI).[Footnote 78] Due to this allocation
process, if GM and Chrysler plans were terminated, participants who
were retired (or eligible to retire) for at least 3 years would be
most likely to have some or all of their nonguaranteed benefits paid,
while those participants who retired early--especially those who
retired under one of the special attrition programs--would be most at
risk for having their benefits reduced.[Footnote 79]
Passage of Time Would Shift Termination Losses for PBGC and Plan
Participants:
The exposure to loss from plan termination would shift over time, but
it is unclear whether PBGC or plan participants would be better off as
a result. Hypothetically, if plans were to terminate 5 years into the
future--in 2014 instead of 2009--overall losses could either increase
or decrease, and how those losses would be shared between PBGC and
plan participants would likely shift as well. For example, plan assets
could grow or diminish over time, depending on investment returns and
employer contributions. Plan liabilities could also grow or diminish
over time, depending on interest rates, ages of participants, and
whether benefits are revised in future years. In addition, more
participants could acquire vested benefits over time, increasing
liabilities; while more benefits would have been paid over time,
decreasing liabilities.
How the losses due to unfunded benefits would be shared between PBGC
(for guaranteed benefits) and plan participants (for nonguaranteed
benefits) could also shift over time. For example, participants'
monthly amount of guaranteed benefits would increase over time for
three main reasons: (1) more workers would be eligible to retire with
more generous benefits, based on years of service; (2) the maximum
limits are updated each year and thus would increase, and people would
grow older, so the cutbacks due to this limit would grow smaller; and
(3) the benefit reductions due to the phase-in limit would be phased
out. This increase in the monthly amount of guaranteed benefits would
tend to shift costs from participants to PBGC. Meanwhile, over time,
more participants will have been retired (or eligible to retire) for 3
years or more, and thus have benefits eligible for higher priority
status in the asset allocation process.[Footnote 80] In addition to
shifting the distribution of benefits to be paid among different
groups of participants, this could also cause more of the plan's
remaining assets to be allocated to guaranteed benefits within this
priority category, with less available to cover nonguaranteed
benefits, resulting in a shift in costs from PBGC to plan participants.
Taking all these factors into account, it is unclear whether the
passage of time would increase or decrease the overall cost of
unfunded guaranteed benefits to be paid by PBGC compared with the loss
of unfunded nonguaranteed benefits to be borne by plan participants.
Clearly, improvements in the financial well-being of the companies and
their pension plans would serve the best interests of both PBGC and
plan participants.
Balancing Multiple Federal Roles May Create Tensions and Challenges:
As a result of GM's and Chrysler's restructuring, the federal
government has assumed new roles vis-à-vis the automakers as part-
owner and lender, in addition to its traditional role as pension
regulator.[Footnote 81] On behalf of the U.S. taxpayer, Treasury has
an interest, as a shareholder, in the financial well-being of the
companies, as well as the viability of their pension plans.[Footnote
82] These interests may diverge at times. Although Treasury has
established policies designed to separate these interests, the
perception of a conflict could arise, for example, should choices need
to be made regarding the allocation of funds from the companies to
their pension plans.
Treasury Has Established Various Structures to Mitigate Any Risk
Related to Conflicts:
Under normal circumstances, transparency and disclosures to the public
related to agency actions can often mitigate risks related to
conflicts of interest. But, in this case, because this involves
private companies and business sensitive information, Treasury is less
able to rely on transparency and disclosure in its dealings with the
automakers to mitigate any potential conflicts of interest.
Nevertheless, as we have previously reported, what Treasury's goals
are for its investment in Chrysler and GM, among other things, is
important information for Congress and the public to have.[Footnote
83] Although Treasury provides public information on TARP activities,
including AIFP, through its legally mandated monthly reports to
Congress, transaction reports, and others, these reports do not
provide information on the indicators Treasury may use in assessing
the goals for its auto investments and the status of the automakers'
pensions. Identifying these indicators for Congress, and sharing as
much of this information as possible, while still respecting the
sensitivity of certain business information, could help Congress and
the public better understand whether the investment in the auto
companies has been successful and help mitigate potential or perceived
conflicts of interest.
Recognizing the potential for interested parties to perceive
conflicts, Treasury has taken several other steps to mitigate its
risk. First, to guide its oversight of the investments going forward
and limit its involvement in the day-to-day operations of the
companies, Treasury developed four core principles: (1) acting as a
reluctant shareholder, for example, by not owning equity stakes in
companies any longer than necessary; (2) not interfering in the day-to-
day management decisions; (3) ensuring a strong board of directors;
and (4) exercising limited voting rights. According to Treasury
officials, use of these core principles defines the operating
boundaries of the federal role within its ownership context by
limiting the reach and ability of the government to exert its powerful
influence on the business and operational matters of these companies.
Officials noted that the core principle of not interfering in day-to-
day decisions has been particularly helpful in dealing with political
pressures related to business operations. For example, officials said
that Treasury's auto team received about 300 congressional letters in
2009 regarding day-to-day management issues involving GM and Chrysler.
Several of these letters asked about company decisions and strategies,
or called on Treasury to exert influence on the companies' business
decisions. Some letters lobbied either in favor of or against a
certain practice or activity. Other letters have been passed along on
behalf of a particular constituent concern. Treasury officials said
that, because of their core principle, most of the time they can
simply reply to such letters by reiterating their policy of not
getting involved with the companies' business decisions, and as a
result, they have been able to avoid having to respond to these
pressures.
Second, to implement these core principles, Treasury established a
protective barrier between the Treasury officials (beneath the
Secretary level) who make policy-related decisions with respect to
investments in the automakers and the Treasury officials who are
responsible for regulating pensions or overseeing the operations of
PBGC. In theory, this barrier prevents Treasury in its role as owner
from interacting with Treasury in its role as pension regulator or
overseer of PBGC. Treasury officials stated that, in the management of
its investment in GM and Chrysler, the Treasury auto team does not
communicate with the IRS or PBGC.
Given the importance of balancing its competing interests as regulator
and part-owner, and mitigating the appearance of conflicts between
these interests, it is essential that Treasury ensure that it has an
adequate number of staff with the appropriate skills and expertise to
carry out its various tasks. Because of earlier reductions in the
number of Treasury staff working on the AIFP and Treasury's stated
plans to disband the team focused exclusively on managing Treasury's
stake in the auto industry, we recently recommended that Treasury
ensure it has the expertise needed to adequately monitor and divest
the government's investments in Chrysler and GM.[Footnote 84] We
believe that ensuring sufficient staffing continues to be essential,
particularly in light of the circumstances discussed here. Subsequent
to our making this recommendation, Treasury officials said they hired
two additional analysts dedicated solely to monitoring Treasury's
investments in Chrysler and GM, and planned to hire one more.
Despite These Efforts, Tensions May Remain:
The steps taken to mitigate any risks likely to result should
conflicts of interest arise--adoption of the core principles and
establishment of a protective barrier--may help, but the tensions
inherent in Treasury's multiple roles remain. This can be illustrated
by the conflicting pressures that would likely be brought to bear in
two critical and interrelated contexts: (1) how to respond to a
decline in pension funding; and (2) how to decide when to sell the
government's shares of stock.
Treasury officials told us they expect both GM and Chrysler to return
to profitability. If this is the case, and the companies are able to
make the required contributions to their pension plans as they become
due, then Treasury's multiple roles are less likely to result in any
perceived conflicts. However, if the funding of any of GM's or
Chrysler's defined benefit plans declines below certain funding levels
set out in statute,[Footnote 85] the company may request a waiver--
that is, request permission from IRS (within Treasury) to reduce its
required contributions to its plans over an extended period. Despite
Treasury's protective barrier and the autonomy of IRS to grant or
refuse such a waiver request apart from any influence from other units
within Treasury, some may still perceive a possible tension between
Treasury's interest in the value of its shareholder investment and
Treasury's interest, through its oversight of PBGC, in ensuring the
viability of the pension plans.
In addition, Treasury has been clear that it wants to divest its
shares as soon as practicable, but it must weigh a variety of factors
when making the decision about when and how this should happen.
Treasury officials said that on the basis of their analysis of the
companies' future profitability, they believe that both GM and
Chrysler will be able to attract sufficient investor interest for
Treasury to sell its equity. However, circumstances that may appear
advisable as to the best time to sell from a shareholder perspective--
that is, which would maximize the return on the taxpayer's investment--
could be at odds with the best interests of plan participants and
beneficiaries. For example, Treasury could decide to sell its equity
stake at a time when it would maximize its return on investment, but
when the companies' pension plans were still at risk.
Finally, in the event that the companies do not return to
profitability in a reasonable time frame, Treasury officials said that
they will consider all commercial options for disposing of Treasury's
equity, including forcing the companies into liquidation, which would
likely mean that the companies' pension plans would be terminated and
decisions would need to be made about the allocation of remaining
company assets. In such circumstances, although there is a protective
barrier preventing Treasury in its role as shareholder from
interacting with Treasury in its role overseeing the PBGC, it may be
difficult for the agency to make certain decisions without some
perceiving a tension between these two separate roles.
Concluding Observations:
Treasury's substantial investment and other assistance, as well as
loans from the Canadian government and concessions from nearly every
stakeholder, including the unions, have made it possible for Chrysler
and GM to stabilize and survive years of declining market share and
the deepest recession since the Great Depression. However, because of
the ongoing challenges facing the auto industry--including the still
recovering economy and weak demand for new vehicles--the ultimate
impact that the assistance will have on the companies' profitability
and long-term viability remains uncertain. This, too, is the case for
the companies' pensions. The companies' ability to make the large
contributions that would be required based on current projections is
mostly dependent on their profitability. Treasury officials who
oversee TARP expect both automakers to return to profitability.
Ultimately, much of the automaker recovery is not only dependent on
how well the automakers turn their companies around but also how well
the overall economy and employment levels improve.
The suppliers' future is even more complex. GM and Chrysler are
expected to continue to reduce the number of suppliers that they use
going forward. Suppliers have diversified their client base to include
many other domestic and international automakers to minimize the
impact of such cuts, but this has caused their viability to be more
dependent on a global economic recovery, which has been slow. As a
result, supplier bankruptcies and pension plan terminations may
continue for the near future.
In light of these conditions, the risks to PBGC and participants in
auto sector pension plans remain significant. PBGC estimated its
exposure for unfunded guaranteed benefits across the sector to be
about $42 billion as of January 31, 2009, and the exposure for plan
participants for unfunded nonguaranteed benefits to be about $35
billion. The federal government and its institutions, the automakers,
and the unions have all made a concerted effort to ensure that GM and
Chrysler do not fail. But, should the automakers not return to
profitability, interests may no longer be aligned. Treasury officials
said that they will consider all commercial options for disposing of
Treasury's equity, including liquidation; this would likely mean
terminating the companies' pension plans, and allocating remaining
company assets. In such circumstances, it would be difficult for
Treasury to make any decisions that would trade off the value of its
investment against the expense of the pension funds, potentially
exposing the government either to loss of its TARP investment or to
significant worsening of PBGC's financial condition. This is not a
choice the government wants to face, but this risk and its attendant
challenges remain real.
We recently recommended that Treasury should regularly communicate to
Congress about TARP activities, including the financial health of GM
and Chrysler.[Footnote 86] This would include information on the
companies' pensions as an integral part of the companies' financial
health. Treasury already provides some information on its investments
in the automakers through its monthly reports to Congress. In response
to our previous recommendations, Treasury said that it intended to
develop an approach for reporting on its investments in the auto
industry that strikes an appropriate balance between transparency and
the need to avoid compromising the competitive positions of the
companies, and that it was implementing a communication strategy to
provide key congressional stakeholders more current information about
its TARP activities. These reports could provide a vehicle to report
publicly available information on the financial status of the
automakers' pensions. Such disclosure could help mitigate the
potential or perceived tensions that could arise with the federal
government's multiple roles with respect to the automakers and, when
the time comes, could shed light on how Treasury's decision to divest
will impact the companies' pension plans.
Agency Comments and Our Evaluation:
We obtained written comments on a draft of this report from the
Department of the Treasury (see appendix VIII) and from PBGC (see
appendix IX). Treasury generally agreed with our findings, but
reiterated the importance of striking an appropriate balance in its
public reporting between its goal of transparency and the need to
avoid compromising the competitive positions of the companies or its
ability to recover funds for taxpayers. Treasury noted that it already
provides "a wealth of information" about AIFP on its Web site, and
also provides periodic updates to oversight bodies, including GAO. It
further noted that it will provide additional reports on its
investments in Chrysler and GM as circumstances warrant, but that it
will not communicate confidential business information due to the
potential to negatively affect the value of the investments. Treasury
concluded that, given its role as a shareholder, it would be
inappropriate for it to report separately on the assets and
liabilities in the automakers' pension plans to Congress and the
public.
We understand the importance of protecting the automakers' proprietary
interests. However, as we pointed out in our report, Treasury's role
is multifaceted, serving not only as a shareholder and creditor for
Chrysler and GM, but also as a regulator of pensions. As a creditor of
these companies, Treasury should know and disclose the pension
commitments, which represent liabilities for these companies. These
liabilities must be taken into account when evaluating the financial
status of these companies. GM and Chrysler are already required to
disclose certain information about the status of their pensions in
publicly available reports. By including this publicly available
information on the status of the automakers' pension plans in its
reports to Congress, Treasury could provide a more complete picture of
the companies' financial health and help mitigate any perceived
tensions between the various roles that the Treasury currently plays
as shareholder, creditor, and pension regulator without compromising
the companies' competitive positions.
Both Treasury and PBGC provided technical comments, which are
incorporated into the report where appropriate. In addition, we
received technical comments on certain segments of the draft report
from GM, Chrysler, and Delphi, and have incorporated their comments
where appropriate, as well.
We are sending copies of this report to other interested congressional
committees and members, the Acting Director of PBGC, the Secretary of
Labor, the Secretary of the Treasury, and other interested parties. In
addition, the report is available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact Barbara Bovbjerg at (202) 512-7215 (bovbjergb@gao.gov) or A.
Nicole Clowers at (202) 512-2843 (clowersa@gao.gov). Contact points
for our offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff who made key
contributions to this report are listed in appendix X.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Sander M. Levin:
Acting Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: The Delphi Story:
Both as the former Delphi, prior to bankruptcy, and now as the "new
Delphi," postbankruptcy, the Delphi Corporation has been a leading
global supplier of mobile electronics and transportation systems,
including powertrain, safety, thermal, controls and security systems,
electrical/electronic architecture, and in-car entertainment
technologies. Delphi evolved as part of General Motors (GM) until it
was spun off as a separate entity in 1999. At the time it filed for
Chapter 11 bankruptcy in 2005, the company employed more than 185,000
workers in 38 countries, making it one of the largest suppliers in the
world.
The former Delphi Corporation sponsored six defined benefit plans for
its U.S.-based workers:
* the Delphi Hourly-Rate Employees Pension Plan;
* the Delphi Retirement Program For Salaried Employees;
* the Packard-Hughes Interconnect Bargaining Retirement Plan;
* the Packard-Hughes Interconnect Non-Bargaining Retirement Plan;
* the ASEC Manufacturing Retirement Program; and:
* the Delphi Mechatronic Systems Retirement Program.
Following Delphi's spin off from GM in 1999, GM agreed with its
unions, including the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America (UAW), to
offer pension protections for certain employees in the event that
Delphi's pension plans would be frozen or terminated. Specifically,
under the agreement, GM agreed with three unions to provide certain
former GM employees retired from Delphi certain pension benefits that
would otherwise not be paid by Delphi or by the Pension Benefit
Guaranty Corporation (PBGC) upon plan termination. Salaried and
certain other union-represented employees did not receive similar
contractual commitments from GM with respect to their pensions or
other postemployment benefits, and they are suffering the full impact
of their Delphi plans having been frozen and terminated.
In addition, GM agreed to provide transfer rights for certain Delphi
hourly UAW-represented employees in the United States. Specifically,
it provided these employees with "flowback" opportunities to transfer
to GM as appropriate job openings became available at GM. GM employees
in the U.S. had similar opportunities to transfer to Delphi. The
original flowback agreement provided that, when an employee
transferred, the employee would be eligible for pension benefits which
reflected the transferring employee's combined years of credited
service. The parties did not transfer pension assets or liabilities in
order to accomplish this. Rather, pension responsibility between
Delphi and GM was allocated on a pro-rata basis based upon the
employee's credited service at each company.
After Delphi and its U.S. subsidiaries filed for bankruptcy in 2005,
there were extensive efforts involving negotiations between Delphi,
GM, and other stakeholders to keep the pension plans ongoing. On
September 30, 2008, the company froze its salaried plan, the ASEC
Manufacturing Retirement Program, the Delphi Mechatronic Systems
Retirement Program and the Packard Hughes Interconnect Non-Bargaining
Retirement Plan. The company also reached agreement with its labor
unions allowing it to freeze the accrual of traditional benefits under
its hourly plan, effective as of November 30, 2008.
Delphi received the consent of its labor unions and approval from the
court to transfer certain assets and liabilities of Delphi's hourly
plan to GM's hourly plan. The first transfer involved liabilities of
approximately $2.6 billion and assets of approximately $486 million
(about 90 percent of the estimated $540 million of assets initially
scheduled to be transferred). It was anticipated that the remaining
assets would be transferred by March 29, 2009, upon finalizing the
related valuations. In exchange for the first transfer, Delphi's
reorganization plan released GM from all claims that could be brought
by its creditors with respect to, among other things, the spin off of
Delphi, any collective bargaining agreements to which the former
Delphi was a party, and any obligations to former Delphi employees.
Although the first transfer had the effect that no contributions were
due under the hourly plan for the plan year ended September 30, 2008,
Delphi still had a funding deficiency of $56 million for the salaried
plan and an approximate $13 million funding deficiency for its other
pension plans for the plan year ending September 30, 2008. Delphi
applied to the Internal Revenue Service (IRS) for a waiver of the
obligation to make the minimum funding contribution to the salaried
plan by June 15, 2009, and requested permission, instead, to pay the
amount due in installments over the following 5 years. However, Delphi
abandoned the waiver request when it became clear that it could not
afford to maintain the salaried plan and that GM was not going to
assume it.
In the second phase of the transfer, Delphi expected to transfer
substantially all of the remaining assets and liabilities of the
hourly plan to GM. In exchange for the second transfer, GM was to
receive a $2 billion administrative claim when Delphi emerged from
bankruptcy. In its 2008 annual report, Delphi was cognizant that the
second pension transfer to GM was contingent upon its emergence from
Chapter 11 under a modified plan of reorganization. If these
conditions were not satisfied and the second transfer did not take
place, it would likely be unable to fund its U.S. pension obligations.
Specifically, Delphi stated that:
"...due to the impact of the global economic recession, including
reduced global automotive production, capital markets volatility that
has adversely affected our pension asset return expectations, a
declining interest rate environment, or other reasons, our funding
requirements have substantially increased since September 30, 2008.
Should we be unable to obtain funding from some other source to
resolve these pension funding obligations, either Delphi or the
Pension Benefit Guaranty Corporation (the "PBGC") may initiate plan
terminations."
Delphi's financial difficulties continued, and when the second
transfer of pension assets and liabilities to GM was not implemented
on July 31, 2009, PBGC terminated all six of Delphi's U.S. qualified
defined benefit plans. PBGC assumed responsibility for the plans on
August 10, 2009. According to PBGC, this step was necessary because
Delphi had stated that it could not afford to maintain its pension
plans and GM, which itself had reorganized in bankruptcy earlier in
the year, had stated that it was unable to afford the additional
financial burden of the Delphi pensions. PBGC stated that the Delphi
pension plans were $7 billion underfunded when they terminated the
plans. PBGC estimates that it will make up about $6 billion of that
shortfall using PBGC funds. Following PBGC's takeover of the plans, on
October 6, 2009, in accordance with Delphi's plan of reorganization,
the former company sold its U.S. and foreign operations to a new
entity, Delphi Automotive LLP, with the exception of four UAW sites in
the United States and its steering business, which were sold to GM.
PBGC has acknowledged that the calculation of benefits for former
Delphi plan participants will be a difficult, lengthy process due to
the plans' complex benefit structures and the availability of
documentation for all the mergers and acquisitions that have taken
place throughout the life of the plans. On its Web site, PBGC stated
that it could take 6 to 9 months from Delphi's date of trusteeship
before it adjusted benefits to estimated PBGC benefit amounts.
Moreover, PBGC noted that it could take several years to fully review
the plan and finally determine all benefit amounts.
[End of section]
Appendix II: Legal Limits on PBGC Guaranteed Benefits:
To help protect the retirement income of U.S. workers with private
sector defined benefit plans, PBGC guarantees participant benefits up
to certain limits specified under the Employee Retirement Income
Security Act of 1974 (ERISA) and related regulations. These limits
include the phase-in limit, the accrued-at-normal limit, and the
maximum limit, as illustrated below in figure 8.
Figure 8: Determining If a Participant's Guaranteed Benefit Is Subject
to Legal Limits:
[Refer to PDF for image: illustration]
Is the full amount of my benefit guaranteed?
1) Was your benefit increased in the last 5 years?
If no, go to #2;
If yes:
* The ’phase-in“ limit will likely reduce your guaranteed benefit.[A]
* The portion of a benefit increase that is guaranteed is reduced for
each year it was not in effect during the last 5 years.
Summary of legal provisions:
Phase-in limit: The guaranteed benefit cannot include any benefit
increase implemented through a plan amendment that was made within 1
year of the date of the plan termination. For benefit improvements
that became effective more than1 year but less than 5 years prior to
the plan‘s termination, the guaranteed amount is the larger of 20
percent of the benefit increase or $20 per month of the increase for
each full year the increase was in effect. 29 U.S.C. § 1322(b)(1)and
(7); 29 C.F.R. § 4022.25 (2009).
2) Did you receive any supplemental benefits?
If no, go to #3;
If yes:
* The ’accrued-at-normal“ limit will likely reduce your guaranteed
benefit.
* Supplemental benefits that exceed the retirement benefit provided at
normal retirement age are not guaranteed.
Summary of legal provisions:
Accrued-at-normal limit: The monthly guaranteed benefit cannot be
greater than the monthly benefit provided as a straight-life annuity
(that is, a periodic payment for the life of the retiree, with no
additional payments to survivors) available at the plan‘s normal
retirement age. The portion of any combined early retirement benefit
and supplemental benefit that exceeds the normal retirement age
straight-life annuity is eliminated by this provision. 29 C.F.R. §
4022.21 (2009).
3) Is your benefit amount greater than the maximum set by law for your
age at retirement and type of benefit?
If no, go to #4;
If yes:
* The ’maximum“ limit will likely reduce your guaranteed benefit.
* The level of guaranteed benefits is limited by an amount set by law.
It is also lower for those retiring before age 65 or those with a
survivor benefit.
Summary of legal provisions:
Maximum limit: The guaranteed benefit cannot exceed the statutory
maximum, adjusted annually, at the time the plan terminates. In 2010,
the maximum is $54,000 per year for a person retiring at age 65 and
with no survivor benefit (that is, a single-life annuity). The maximum
is lower for those retiring under age 65 or with a survivor benefit.
29 U.S.C. § 1322(b)(3); and 29 C.F.R.§ 4022.23 (2009).
4) Your benefit is likely to be fully guaranteed.
Source: GAO analysis of ERISA, PBGC‘s implementing regulations and
related documents.
[A] Benefit increases subject to phase-in limits also include
"unpredictable contingent event benefits" (such as shutdown benefits).
In addition, in cases involving bankruptcy, the date the bankruptcy
petition was filed is treated as the termination date of the plan.
[End of figure]
[End of section]
Appendix III: Recent Attrition Programs at GM and Chrysler:
Table 6: Recent Attrition Programs at GM:
Hourly Plan:
Plan/program: 2006 Special Attrition Program;
Description: Hourly UAW employees and select Delphi UAW employees were
offered the following:
* Lump-sum payment of $35,000 for normal or early voluntary retirement
(paid from company assets);
* "Mutually satisfactory retirement" for age 50 and 10 years of
service and preretirement leave for select employees, depending on
plant location;
* Buyout of $140,000 for employees with 10 or more years of service
and $70,000 for employees with less than 10 years of service (paid
from company assets);
Estimated impact on pension obligations[A]: $1.2 billion decrease in
obligations (34,400 acceptances).
Plan/program: 2008 Special Attrition Program;
Description: About 74,000 UAW-represented employees and 2,300 other
union-represented employees were offered the following:
* Lump sum payment for retirement-eligible employees ($45,000 for
production and $62,500 for skilled trade) funded from plan assets.
Lump sum payable as an annuity, if elected;
* "Mutually satisfactory retirement" for age 50 and 10 or more years
of service;
* Preretirement leave for employees with 26-29 years of service.;
* Buyout of $140,000 for employees with 10 or more years of service,
and $70,000 for employees with less than 10 years of service (paid
from company assets);
Estimated impact on pension obligations[A]: $0.8 billion increase in
obligations (18,700 acceptances).
Plan/program: Special Attrition Program 3.0 (February 2009);
Description: About 57,000 hourly UAW employees were offered the
following:
* $45,000 incentive value offered to production and skilled employees
for normal/voluntary retirement and buyout. Incentive included $25,000
vehicle voucher plus $20,000 cash;
* "Mutually satisfactory retirement" for age 55 with 10 or more years
of service, and age 50 with 10 or more years of service for select
closed or closing plants;
All cash payments were funded from company assets;
Estimated impact on pension obligations[A]: $1.2 billion increase in
obligations (February and June programs combined);
(7,000 acceptances in February program).
Plan/program: Special Attrition Program 3.1 (June 2009);
Description: About 50,000 hourly UAW employees were offered the
following:
* Normal/voluntary retirement incentive value of $45,000 (production)
and $70,000 (skilled). Incentive included $25,000 vehicle voucher;
* Buyout incentive value of $70,000 for those with less than 10 years
of service; $105,000 for those with 10 to 20 years of service;
and $140,000 for those with 20 or more years of service. Incentive
included $25,000 vehicle voucher;
* Preretirement leave offered to employees with 28 and 29 years
seniority;
* "Mutually satisfactory retirement" for age 50 and 10 or more years
of service;
All cash payments were funded from company assets;
Estimated impact on pension obligations[A]: (6,000 acceptances in June
program).
Salaried Plan:
Plan/program: 2008 Salaried Window Retirement Program;
Description: Voluntary retirement offers were extended to certain U.S.
salaried employees, as follows:
* 6-month cash lump sum payment from the pension plan for all
retirement-eligible employees (age 62 and older) who elect to retire
or for employees under age 55 who will receive reduced benefits. Lump
sum payable as an annuity, if elected;
* Enhanced window retirement factors for employees ages 55 to 61 who
are eligible but do not elect the lump sum payment;
Estimated impact on pension obligations[A]: $0.3 billion increase in
obligations (3,700 acceptances).
Plan/program: 2009 Salaried Window Retirement and Involuntary
Severance Program (June 2009);
Description: Offers were extended to about 5,700 salaried employees
for retirements targeted for October 1, 2009, as follows:
* Unreduced pension benefits for participants age 58 and older as of
October 1, 2009; participants ages 53-57 would receive enhanced window
retirement benefits;
* Severance program provides monthly base salary payments up to 6
months (if classified) or 12 months (if executive). Severance payments
to be paid from company assets;
Estimated impact on pension obligations[A]: $0.5 billion increase in
obligations; (3,000 acceptances).
Source: GM documents.
[A] Estimated impact is based on measurements of pension obligations
in accordance with Financial Accounting Standards. The measurements
reflect remeasurements performed around the time of the respective
attrition programs and changes in a number of variables that are
incorporated into the remeasurement calculations, such as changes in
present-value discount rates. All data included in this column are
approximations.
[End of table]
Table 7: Recent Attrition Programs at Chrysler:
Plan/program: Incentive Program for Retirement (2006-2009);
Description:
* Normal retirement eligibility (that is, 30 or more years of service,
or combination of age and years of service = 85), or age 60 with 10 or
more years of service, or age 65 with one or more year of service;
* $50,000 lump sum payment plus $25,000 vehicle purchase voucher.[B];
Estimated impact[ A]: $1,067 million increase in obligations (10,956
acceptances)[C].
Plan/program: Special Early Retirement (2006-2009);
Description:
* Age 55-62 with 10 or more years of service and not otherwise
eligible for IPR[D];
* Normal retirement benefit with no age reduction factor applied (in
certain labor markets, nonviable age reduced to 50);
* No lump sum;
Estimated impact[ A]: $401 million increase in obligations (3,141
acceptances).
Plan/program: Enhanced Voluntary Termination of Employment (2007-
2009);
Description:
* $75,000 lump sum payment plus $25,000 vehicle purchase voucher (per
"Plant Closure Agreements" - $100,000 plus $25,000 vehicle purchase
voucher)[B];
Estimated impact[ A]: $57 million decrease in obligations (7,636
acceptances).
Plan/program: Other miscellaneous programs (2006-2008);
Estimated impact[ A]: $184 million increase in obligations (438
acceptances).
Source: Chrysler documents.
[A] Estimated impact is based on measurements of pension obligations
in accordance with Financial Accounting Standards. The measurements
reflect remeasurements performed around the time of the respective
attrition programs and changes in a number of variables that are
incorporated into the remeasurement calculations, such as changes in
present-value discount rates. Data for 2006-2008 are based on actual
numbers; data for 2009 are based on projected numbers, across all ten
U.S. qualified defined benefit plans, as appropriate.
[B] Lump sum payments during 2008 paid with pension plan assets;
payments before 2008 and after 2008 paid with company assets.
[C] Also includes data for the Separation Incentive Program.
[D] In 2008, the retirement age was 53 instead of 55 for certain
salaried nonunion employees.
[End of table]
[End of section]
Appendix IV: Product Lines and Facilities Being Eliminated:
Table 8: GM Product Lines and Facilities Being Eliminated:
Product line: Pontiac Vibe;
Current status: Production ceased at the end of August 2009;
Location of plant shutdowns: The New United Motor Manufacturing
Incorporated facility (known as "Nummi") jointly operated by GM and
Toyota in Fremont, CA, to close.
Product line: Pontiac;
Current status: Production of the last Pontiac model will cease by the
end of December 2010;
Location of plant shutdowns: None identified to date.
Product line: Hummer;
Current status: In February 2010, GM announced that the sale of Hummer
to Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd. could not be
completed and there would be an orderly wind-down of Hummer
operations. Currently approximately 850 units of the H3 model are
being produced for a fleet customer. H3 production will cease at the
end of June 2010. All other Hummer production ceased at the end of
September 2009;
Location of plant shutdowns: None identified to date.
Product line: Chevy Kodiak and GMC Topkick;
Current status: Production ceased at the end of July 2009;
Location of plant shutdowns: None identified to date.
Product line: Saturn;
Current status: Following Penske Automotive Group's decision to
terminate discussions to acquire Saturn in September 2009, GM
announced that it would be winding down the Saturn brand and
dealership network. Production ceased at the end of December 2009;
Location of plant shutdowns: None identified to date.
Product line: Saab;
Current status: Purchased by Spyker Cars, NV, on February 23, 2010;
Location of plant shutdowns: The previously announced wind down of
Saab operations has ended. Saab and Spyker will operate under the
Spyker (AMS:SPYKR) umbrella, and Spyker will assume responsibility for
Saab operations.
Product line: Manufacturing plants;
Current status: Total number of assembly, powertrain, and stamping
facilities in the United States to be reduced from 47 in 2008 to 34 by
the end of 2010 and 33 by 2012;
Location of plant shutdowns:
* Powertrain castings plant in Massena, NY, closed in May 2009;
* Stamping plant in Grand Rapids, MI, closed in May 2009;
* Assembly plant in Wilmington, DE, closed in July 2009;
* Assembly plant in Pontiac, MI, closed in September 2009;
* Stamping plant in Mansfield, OH, closed in January 2010;
* Powertrain engine plant in Livonia, MI, to close by July 2010;
* Powertrain components plant in Fredericksburg, VA, to close by
August 2010;
* Powertrain plants: Flint North components plant and Willow Run Site,
MI; and Parma, OH, components plant to close by August 2010;
* Stamping plant in Indianapolis, IN, to close by December 2011;
* Stamping plant and assembly plant in Shreveport, LA, to close by
June 2012.
Product line: Parts;
Current status: Three parts distribution centers closed;
Location of plant shutdowns: Parts distribution centers in Boston, MA;
Columbus, OH; and Jacksonville, FL, closed on December 31, 2009.
Source: GM documents.
[End of table]
Table 9: Chrysler Product Lines and Facilities Being Eliminated:
Product line: Dodge Magnum and the Chrysler Pacifica, Crossfire, and
PT Cruiser convertible;
Current status: Announced in November 2007 that these four models were
to be eliminated from the product portfolio through 2008. Subsequently
announced that the PT Cruiser would remain in production;
Location of plant shutdowns: Production at several North American
assembly and powertrain plants to be cut, which combined with other
actions, was expected to reduce the number of hourly jobs by 8,500 to
10,000 people through 2008. See May 2009 updated list of plant
closings provided below in last row of this table.
Product line: Dodge Ram pick-up truck;
Current status: Announced in June 2009 that production would end
effective July 10, 2009;
Location of plant shutdowns: St. Louis Assembly Plant North in Fenton,
MO. See also below.
Product line: Service and parts operations;
Current status: List of plants scheduled for closing, as of May 2009;
Location of plant shutdowns:
* St. Louis Assembly Plant South in Fenton, MO, closed October 2008;
* Assembly plant in Newark, DE, closed in December 2008;
* St. Louis Assembly Plant North in Fenton, MO, was to close by the
end of September 2009. Production to be moved to Warren Truck Assembly
plant;
* Conner Avenue Assembly Plant in Detroit, MI, was to close in
December 2009;
* Stamping plant in Twinsburg, OH, was to close in March 2010.
Existing volume to be transferred to Warren Stamping and Sterling
Stamping plants;
* Assembly plant in Sterling Heights, MI; engine plant in Kenosha, WI;
and axle plant in Detroit, MI, to close at the end of December 2010.
Source: Chrysler documents.
[End of table]
[End of section]
Appendix V: History of Major Acquisitions and Divestitures:
1900s:
GM:
Founded September 16, 1908;
1908: Acquired Oldsmobile and Reliance Motor Truck Company;
1909: Acquired Cadillac; Oakland Motor Car Company; Rapid Motor
Vehicle Company (later renamed GMC Truck); and Champion (later renamed
AC Spark Plug Company);
Chrysler: [Empty].
1910s:
GM:
1918: Acquired McLaughlin Motor Company (later renamed General Motors
of Canada) and United Motor Corporation;
1919: Acquired Fisher Body; Dayton Wright Company; Guardian Frigerator
(later renamed Frigidaire); and Saginaw Malleable Iron Company
(renamed Saginaw Products Company);
Chrysler: [Empty].
1920s:
GM:
1925: Acquired Vauxhall Motors, Ltd., based in Luton, England;
1929: Acquired Adam Opel Corporation, located in Rüsselsheim, Germany;
and Allison Engineering Company;
Chrysler:
Founded June 6, 1925;
1928: Acquired Dodge.
1930s:
GM:
1930: Acquired Electro-Motive Engineering Corporation;
1931: Acquired Holden's Motor Body Builders Limited;
merged with GM's Australia Proprietary, Limited, to form Holden's
Limited, located in Melbourne, Australia;
1933: Acquired a controlling interest in North American Aviation;
merged with GM's General Aviation division;
Chrysler: [Empty].
1940s:
GM: [Empty];
Chrysler: [Empty].
1950s:
GM:
1953: Acquired Euclid, Inc.;
Chrysler:
1957: Acquired Ensamblaje Venezolana, soon renamed Chrysler de
Venezuela S.A.;
1959: Acquired Chrysler South Africa Ltd.
1960s:
GM:
1968: Sold most of Euclid; renamed remaining facilities the Terex
Division;
Chrysler:
1963: Acquired Chrysler Hellas S. A., Greece;
1965: Acquired the outboard engine business of West Bend Company of
Hartford, Wisconsin and the Lone Star Boat Company of Plano, Texas,
forming the Chrysler Boat Corporation;
1967: Acquired Redisco, Inc., from American Motors Corporation and
integrated it with Chrysler Credit to form Chrysler Financial
Corporation. Also acquired 77 percent of Barreiros Diesel S. A.
(Spain), and increased interest in Chrysler do Brasil (Brazil) to 92
percent.
1970s:
GM:
1973: Merged Allison Engineering with Detroit Diesel;
Chrysler:
1970: Control of Rootes Group equity reached 73 percent; the company
renamed Chrysler United Kingdom Ltd.;
1976: Sold the Airtemp Division to Fedders Corporation;
1978: Sold the Chrysler Europe Division.
1980s:
GM:
1981: Sold Terex Division;
1984: Acquired Electronic Data Systems Corporation;
1985: Acquired Hughes Aircraft Company; merged with Delco Electronics
to form a new subsidiary called Hughes Electronics;
1988: Spin off of Detroit Diesel;
1989: Purchased 50 percent equity in Saab Automobile AB of Sweden;
later purchased the remaining 50 percent to become sole owner in 2000;
Chrysler:
1980: Sold the Marine Division;
1981: Sold the Defense Division to General Dynamics;
1984: Reorganized into a holding company that included Chrysler
Motors, Chrysler Financial, Gulfstream Aerospace and Chrysler
Technologies;
1987: Acquired American Motors Corporation (and Jeep) for $800 million.
1990s:
GM:
1993: Sold Allison Gas Turbine;
1996: Sold Electronic Data Systems Corporation;
1997: Sold Hughes Aircraft to Raytheon;
1999: Spin off of Delphi; acquired exclusive rights to the Hummer
brand name from AM General Corporation;
Chrysler:
1998: Merged with Daimler-Benz AG; operated as "Chrysler Group," a
business unit of DaimlerChrysler AG.
2000s:
GM:
2002: Acquired the bulk of Korean automaker Daewoo Motor's automotive
assets and created a new company called GM Daewoo Auto & Technology;
2003: Sold Hughes Electronics;
2005: Sold Electro-Motive Diesel;
2006: Divested majority ownership in its financing unit, General
Motors Acceptance Corporation (now known as GMAC);
2007: Sold Allison Transmission;
2009: Acquired five U.S.-based components plants from Delphi;
Chrysler:
2007: Just over 80 percent of Chrysler and its related financial
services business sold to Cerberus Capital Management for $7.4 billion;
2008: Spin off of Chrysler Financial Corporation.
Source: GM's and Chrysler's Web sites.
[End of table]
[End of section]
Appendix VI: Allocation of Assets to Participant Benefits:
When a pension plan is terminated and trusteed by PBGC, ERISA
specifies that the remaining assets of the plan and any funds
recovered for the plan during the bankruptcy proceedings be allocated
to participant benefits according to six priority categories (see
table 10).[Footnote 87]
Table 10: Priority Categories for Allocating Participant Benefits:
Priority category 1:
Accrued benefits derived from voluntary employee contributions.
Priority category 2:
Accrued benefits derived from mandatory employee contributions.
Priority category 3:
Annuity benefits that have been in pay status for at least 3 years
before the plan's termination date, or could have been in pay status
for at least 3 years before the plan's termination date had the
participant chosen to retire at his or her earliest possible
retirement date; however, benefits subject to the phase-in limitation
(that is, benefit increases made within the last 5 years) are
excluded. These benefits can be either guaranteed or nonguaranteed.
Priority category 4:
Other guaranteed benefits, and certain nonguaranteed benefits.[A]
Priority category 5:
Other vested nonguaranteed benefits that a participant is entitled to
under the plan; however, benefits that result solely due to the
termination of the plan--which are deemed "forfeitable"--are excluded.
Priority category 6:
All other benefits under the plan. This category includes nonvested
benefits and "grow-in" benefits, which are benefits that are provided
in some situations where the company continues to operate after the
plan is terminated.
Source: GAO analysis of PBGC documents.
Note: The distribution of plan assets is based on type of benefit, not
retirement status, and many participants have benefits in more than
one category.
[A] Specifically, the nonguaranteed benefits included in priority
category 4 are those that are nonguaranteed because they are subject
to the aggregate benefits limitation for participants in more than one
plan that has been terminated with insufficient funds, or because they
are subject to special provisions applicable to substantial owners
(that is, those owning more than 10 percent of the company).
[End of table]
Funds recovered from bankruptcy proceedings are also allocated using
these priority categories, but unlike plan assets, recoveries are
required to be shared between participants' unfunded nonguaranteed
benefits and PBGC's costs for unfunded guaranteed benefits.[Footnote
88] As a result, recoveries are often more advantageous for
participants than residual plan assets. PBGC allocates the
participants' portion of the recoveries beginning with the highest
priority category in which there are unfunded nonguaranteed benefits,
and then to each lower priority category, in succession.[Footnote 89]
[End of section]
Appendix VII: PBGC Example Benefit Calculations:
PBGC prepared example benefit calculations to illustrate how
termination of the automaker pension plans might impact participant
benefits, depending on the participant's situation (see table 11). The
calculations assume that plan assets and recoveries are not sufficient
to fund nonguaranteed benefits beyond a portion of those benefits in
priority category 3 (that is, of those retired or eligible to retire
for at least 3 years), and they focus on those who would lose the most
under such situations. Although an early retiree eligible for priority
3 status would lose the least, all early retirees under age 62 as of
the date of plan termination would lose a sizeable portion of their
benefits until age 62 because their supplements are not guaranteed.
The person who retired early under a special attrition program or
plant shutdown benefit would lose even more, as the enhanced benefits
under the special program would also not be guaranteed, reducing the
person's lifetime benefit by more than half. Finally, the person not
yet eligible to retire would lose the most. Compared to the benefits
promised under the plan, he would not be able to retire for 5 more
years and his payment would be less than a quarter of the amount
promised. Over time, in general, more employees will be eligible to
retire and qualify for priority 3 status, and the amount of retirees'
monthly guaranteed benefits will increase.
Table 36: Examples of Participants' Benefit Reductions If an Automaker
Hourly Plan Were Terminated:
Example 1: Employee retires early in 2009; Age 53 with 33 years of
service (eligible for priority category 3);
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Employee retires early in 2014; Age 58 with 38 years of service
(eligible for priority category 3).
Benefit until age 62;
Plan benefit: $3,200;
PBGC benefit if plan terminates in 2009[A]: $1,750[B];
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Incremental increase in PBGC benefit.
Benefit after age 62;
Plan benefit: $1,750;
PBGC benefit if plan terminates in 2009[A]: $1,750;
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Incremental increase in PBGC benefit.
Example 2: Employee retires early in 2009;
Age 50 with 30 years of service (not eligible for priority category 3);
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Employee retires early in 2014; Age 55 with 35 years of service
(eligible for priority category 3).
Benefit until age 62;
Plan benefit: $3,200;
PBGC benefit if plan terminates in 2009[A]: $1,500;
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Incremental increase in PBGC benefit.
Benefit after age 62;
Plan benefit: $1,500;
PBGC benefit if plan terminates in 2009[A]: $1,500;
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Incremental increase in PBGC benefit.
Example 3: Employee retires early under special attrition program (or
plant shutdown) in 2009 (0 percent phase-in); Age 55 with 25 years of
service (not eligible for priority category 3);
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Employee retires early under special attrition program (or plant
shutdown) in 2009 (100 percent phase-in); Age 55 with 25 years of
service (eligible for priority category 3).
Benefit until age 62;
Plan benefit: $2,600;
PBGC benefit if plan terminates in 2009[A]: $600;
Changes to PBGC benefit if plan terminates 5 years later (in 2014): No
loss of benefit enhancements due to phase in, substantial increase in
PBGC benefit.
Benefit after age 62;
Plan benefit: $1,400;
PBGC benefit if plan terminates in 2009[A]: $600;
Changes to PBGC benefit if plan terminates 5 years later (in 2014): No
loss of benefit enhancements due to phase in, substantial increase in
PBGC benefit.
Example 4: Employee not yet retired when plan terminates in 2009;
Age 49 with 29 years of service (not eligible for priority category 3);
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Employee retires early in 2014; Age 54 with 34 years of service
(eligible for priority category 3).
Benefit until age 62;
Plan benefit: $3,200; (beginning at age 50 with 30 years of service);
PBGC benefit if plan terminates in 2009[A]: $700; (beginning at age
55);
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Eligible to retire, benefits not deferred, substantial increase in
PBGC benefit.
Benefit after age 62;
Plan benefit: $1,600;
PBGC benefit if plan terminates in 2009[A]: $700;
Changes to PBGC benefit if plan terminates 5 years later (in 2014):
Substantial increase in PBGC benefit.
Source: GAO analysis of PBGC documents.
[A] PBGC example calculations, assuming plan assets and recoveries are
not sufficient to pay nonguaranteed benefits beyond a portion of
priority category 3.
[B] PBGC benefit if priority category 3 is 70 percent funded. If more
than 70 percent funded, part of the temporary supplement is payable,
and could increase up to $2,750 if 100 percent funded.
[End of table]
[End of section]
Appendix VIII: Comments from the Department of the Treasury:
Department Of The Treasury:
Washington, D.C. 20220:
March 26, 2010:
Thomas J. McCool:
Director, Center for Economics Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
The Treasury Department (Treasury) appreciates the opportunity to
review the GAO's latest draft report on Treasury's Troubled-Asset
Relief Program (TARP), titled Troubled Asset Relief Program:
Automakers' Pension Funding and Multiple Federal Roles Pose Challenges
for the Future (Draft Report). Treasury welcomes the recognition by
the GAO that Treasury through TARP investments has helped make "it
possible for Chrysler and GM to stabilize and survive years of
declining market share and the deepest recession since the Great
Depression." There is important work ahead and the GAO's Draft Report
is constructive as Treasury continues to implement its Automotive
Industry Financing Program (AIFP).
Although the Draft Report contains no new recommendations, it suggests
that Treasury should not only report publicly on the auto investments
but also on the "status of the automakers' pensions." As we have
stated previously, in addition to providing a wealth of information on
the AIFP on FinancialStability.gov and periodic updates to the
oversight bodies, Treasury will provide additional reports regarding
the status of its investments in the automotive companies as
circumstances warrant. Treasury recognizes the importance, as noted by
the GAO in its various reports, of striking an appropriate balance in
its public reporting between our goal of transparency and the need to
avoid compromising either the competitive positions of these
automotive companies or Treasury's ability to recover funds for
taxpayers. It would be inappropriate for Treasury in our capacity as a
shareholder to separately report on the pension assets and liabilities
under the GM and Chrysler pension plans, and we suggest directing
these questions to GM and Chrysler.
Once again, Treasury appreciates the opportunity to review the Draft
Report. Treasury also appreciates the GAO's close oversight of TARP as
Treasury develops and implements its policies to stabilize the
financial system. We look forward to continuing this constructive
dialogue.
Sincerely,
Signed by:
Herbert M. Allison, Jr.
Assistant Secretary for Financial Stability:
[End of section]
Appendix IX: Comments from PBGC:
PBGC Pension Benefit Guaranty Corporation:
Protecting America's Pensions:
Office of the Director:
1200 K Street, N.W.
Washington, D.C. 20005-4026:
March 26, 2010:
Gene L. Dodaro:
Acting Comptroller General of the United States:
U.S. Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Dodaro:
Thank you for the opportunity to comment on the draft version of your
report entitled, "Troubled Asset Relief Program: Automaker Pension
Funding and Multiple Federal Roles Pose Challenges for the Future."
We appreciate GAO's calling attention to the automakers' defined
benefit pension plans, their funded status, and the risk of loss faced
by plan participants and PBGC's single-employer insurance program if
these plans are terminated in the future. As the report correctly
points out, improvements in the financial condition of the companies
and their pension plans will strengthen retirement security for plan
participants and reduce PBGC's exposure to loss. The report also
serves to highlight the complexity of the environment in which PBGC
operates as it strives to fulfill its mission. PBGC is actively
monitoring the financial health of plan sponsors in the auto industry,
as well as related corporate transactions that may affect defined
benefit pension plans.
Under a separate cover, we have provided suggested technical
corrections and other changes to further clarify aspects of the report.
GAO has consistently reported on matters affecting the retirement
security of the American people, and we especially appreciate GAO's
work in highlighting the challenges PBGC faces in "Protecting
America's Pensions."
Sincerely,
Signed by:
Vincent K. Snowbarger:
Acting Director:
[End of section]
Appendix X: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Barbara D. Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov A. Nicole
Clowers, (202) 512-2834 or clowersa@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Kimberley M. Granger and
Raymond Sendejas, Assistant Directors; Charles J. Ford, Jonathan
McMurray, Margie K. Shields, Sarah A. Farkas, Heather Halliwell, and
Joseph A. Applebaum made significant contributions to this report.
James Bennett, Jessica A. Botsford, Orice Williams Brown, Susannah L.
Compton, Shannon K. Groff, Cheryl M. Harris, Susan J. Irving, Charles
A. Jeszeck, Gene G. Kuehneman, Christopher D. Morehouse, Michael P.
Morris, Robert Owens, Roger J. Thomas, and Craig H. Winslow also made
important contributions.
[End of section]
Related GAO Products:
Troubled Asset Relief Program: The U.S. Government Role as Shareholder
in AIG, Citigroup, Chrysler, and General Motors and Preliminary Views
on its Investment Management Activities. [hyperlink,
http://www.gao.gov/products/GAO-10-325T]. Washington, D.C.: December
16, 2009.
Troubled Asset Relief Program: Continued Stewardship Needed as
Treasury Develops Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM. [hyperlink,
http://www.gao.gov/products/GAO-10-151]. Washington, D.C.: November 2,
2009.
Pension Benefit Guaranty Corporation: Workers and Retirees Experience
Delays and Uncertainty when Underfunded Plans Are Terminated.
[hyperlink, http://www.gao.gov/products/GAO-10-181T]. Washington,
D.C.: October 29, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-1048T]. Washington, D.C.: September
24, 2009.
Pension Benefit Guaranty Corporation: More Strategic Approach Needed
for Processing Complex Plans Prone to Delays and Overpayments.
[hyperlink, http://www.gao.gov/products/GAO-09-716]. Washington, D.C.:
August 17, 2009.
Troubled Asset Relief Program: June 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-08-658]. Washington, D.C.: June 17,
2009.
Pension Benefit Guaranty Corporation: Financial Challenges Highlight
Need for Improved Governance and Management. [hyperlink,
http://www.gao.gov/products/GAO-09-702T]. Washington, D.C.: May 20,
2009.
Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date. [hyperlink,
http://www.gao.gov/products/GAO-09-553]. Washington, D.C.: April 23,
2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-504]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-296]. Washington, D.C.: January 30,
2009.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-242T].
Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-161]. Washington, D.C.: December 2,
2008.
Pension Benefit Guaranty Corporation: Improvements Needed to Address
Financial and Management Challenges. [hyperlink,
http://www.gao.gov/products/GAO-08-1162T]. Washington, D.C.: September
24, 2008.
Defined Benefit Pensions: Plan Freezes Affect Millions of Participants
and May Pose Retirement Income Challenges. [hyperlink,
http://www.gao.gov/products/GAO-08-817]. Washington, D.C.: July 21,
2008.
PBGC Assets: Implementation of New Investment Policy Will Need
Stronger Board Oversight. [hyperlink,
http://www.gao.gov/products/GAO-08-667]. Washington, D.C.: July 17,
2008.
Pension Benefit Guaranty Corporation Single-Employer Insurance
Program: Long-Term Vulnerabilities Warrant "High Risk" Designation.
[hyperlink, http://www.gao.gov/products/GAO-03-1050SP]. Washington,
D.C.: July 23, 2003.
[End of section]
Footnotes:
[1] 29 U.S.C. §1302.
[2] The Emergency Economic Stabilization Act of 2008 authorized TARP,
Pub. L. No. 110-343, Div. A, §§ 101-136, 122 Stat. 3765, 3767-3800
(codified at 12 U.S.C. §§ 5201-5241).
[3] GAO is required to report at least every 60 days on findings
resulting from, among other things, oversight of TARP's performance in
meeting the purposes of the act, the financial condition and internal
controls of TARP, the characteristics of both asset purchases and the
disposition of assets acquired, TARP's efficiency in using the funds
appropriated for the program's operation, and TARP's compliance with
applicable laws and regulations. 12 U.S.C. § 5226(a).
[4] For more information on the restructuring of GM and Chrysler
companies overall, see GAO, Troubled Asset Relief Program: Continued
Stewardship Needed as Treasury Develops Strategies for Monitoring and
Divesting Financial Interests in Chrysler and GM, [hyperlink,
http://www.gao.gov/products/GAO-10-151] (Washington, D.C.: Nov. 2,
2009); GAO, Auto Industry: Summary of Government Efforts and
Automakers' Restructuring to Date, [hyperlink,
http://www.gao.gov/products/GAO-09-553] (Washington, D.C.: Apr. 23,
2009); and GAO, Auto Industry: A Framework for Considering Federal
Financial Assistance, [hyperlink,
http://www.gao.gov/products/GAO-09-242T] (Washington, D.C.: Dec. 4,
2008).
[5] While a portion of TARP funds for the auto industry have been used
to assist GMAC LLC and Chrysler Financial, the former financing
divisions of GM and Chrysler respectively, we did not review the
effect of restructuring on the pension plans of these finance
companies as they are now separate legal entities.
[6] To qualify for preferential tax treatment, pension plans must
satisfy certain requirements related, for example, to minimal funding,
vesting, and accounting. 26 U.S.C. § 401. Employers may deduct their
contributions to qualified plans. Although such contributions are a
form of compensation to them, employees do not claim such
contributions as income for tax purposes, but the income from pensions
is considered taxable when pension benefits are received.
[7] Michaela D. Platzer and Glennon J. Harrison, The U.S. Automotive
Industry: National and State Trends in Manufacturing Employment.
(Washington, D.C.: Congressional Research Service, 2009).
[8] Treasury also received $2.1 billion in preferred stock in GM.
[9] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[10] GAO, Troubled Asset Relief Program: March 2009 Status of Efforts
to Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-504] (Washington, D.C.: Mar. 31,
2009); and GAO, Troubled Asset Relief Program: June 2009 Status of
Efforts to Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: June 17,
2009).
[11] The remaining funds have been used: (1) for the Warranty
Commitment Program, which provided funds to Chrysler and GM, but have
been repaid in full; and (2) to provide assistance to GM's and
Chrysler's financing divisions, now spun off as separate legal
entities.
[12] For a more detailed discussion of Chrysler and GM restructuring
efforts, see [hyperlink, http://www.gao.gov/products/GAO-09-553] and
[hyperlink, http://www.gao.gov/products/GAO-10-151].
[13] For further details on Delphi, see appendix I.
[14] Hybrid plans are legally defined benefit plans, but they contain
certain features that resemble defined contribution plans.
[15] Rob Kozlowski, "The List: Funded Status of the Largest Defined
Benefit Plans," Financial Week, June 16, 2008.
[16] See [hyperlink, http://www.gao.gov/products/GAO-08-817] and GAO,
Defined Benefit Pensions: Survey Results of the Nation's Largest
Private Defined Benefit Plan Sponsors, [hyperlink,
http://www.gao.gov/products/GAO-09-291] (Washington, D.C.: Mar. 30,
2009).
[17] A plan freeze is a plan amendment that closes the plan to new
entrants and may or may not reduce future benefit accruals for some or
all active plan participants. A "hard freeze," referenced here, occurs
when the plan is closed to new entrants and participants no longer
accrue additional benefits. For other freeze types and a discussion of
their effects, see: GAO, Defined Benefit Pensions: Plan Freezes Affect
Millions of Participants and May Pose Retirement Income Challenges,
[hyperlink, http://www.gao.gov/products/GAO-08-817] (Washington, D.C.:
July 21, 2008).
[18] PBGC is a wholly-owned government corporation--that is, the
federal government does not share ownership interests with nonfederal
entities. As such, PBGC must prepare annual budgets, produce audited
financial statements, and submit a management report to Congress each
year. 31 U.S.C. §§ 9101(3)(J), 9103, 9105 and 9107.
[19] 26 U.S.C. §§ 1-9834. The Internal Revenue Code is also referred
to sometimes as simply "the tax code."
[20] Pub. L. No. 93-406, 88 Stat. 829 (codified as amended at 29
U.S.C. §§ 1001-1461).
[21] Unlike defined benefit plans, defined contribution plans are not
covered by PBGC insurance. 29 U.S.C. § 1321(B)(1).
[22] A single-employer plan is a plan that is established and
maintained only by employers in a single controlled group. Single-
employer plans can be established unilaterally by the sponsor or
through a collective bargaining agreement with a labor union.
[23] 29 U.S.C. § 1341(c).
[24] 29 U.S.C. § 1342(a).
[25] If a plan has sufficient assets, a plan sponsor may voluntarily
terminate the plan without it being trusteed by PBGC (referred to as a
"standard termination"). In such cases, the sponsor generally
purchases a group annuity contract with an insurance company or makes
lump sum payments so that participants are paid all the benefits
accrued under the plan up to the date of termination. 29 U.S.C. §
1341(b). With respect to collectively bargained plans, there can be no
distress or standard termination until the collective bargaining
obligation has been rejected or modified--either through negotiated
resolution or court order authorizing rejection of the agreement
through the Bankruptcy Code. 11 U.S.C. § 1113 and 29 U.S.C. §
1341(a)(3).
[26] GAO, Pension Benefit Guaranty Corporation Single-Employer
Insurance Program: Long-Term Vulnerabilities Warrant "High Risk"
Designation, [hyperlink, http://www.gao.gov/products/GAO-03-1050SP]
(Washington, D.C.: July 23, 2003).
[27] See table 1 in the Background section for details.
[28] In 2007, both GM and Chrysler had reached agreements with UAW to
transfer responsibility for retiree health care of UAW members to new
independent voluntary employee beneficiary associations (VEBA) that
were created to manage retiree health plans starting on January 1,
2010. As part of the funding arrangement for these new VEBAs, members
would have to pay an additional monthly contribution toward their
medical benefits, but the automakers agreed to increase members'
pension benefits by a corresponding amount once these added payments
were to begin. This pension benefit increase became known as the VEBA
"pension pass-through." During the restructuring negotiations with GM
and Chrysler, however, this benefit increase was eliminated before it
was ever implemented.
[29] See table 1 in the Background section for details.
[30] The 2007 UAW plan benefit increases included a $2.65 or 5.1
percent increase (per month, per year of credited service) in the
active basic benefit, a $2.00 increase in the retiree basic benefit,
and a retiree lump sum payment paid from the pension plan, among other
changes.
[31] Liability valuations reflect the time value of money--that a
dollar in the future is worth less than a dollar today. Using a lower
interest rate would increase the present value of a stream of
payments, while using a higher interest rate would decrease the
present value of a stream of payments.
[32] Throughout this report, we have characterized the value of plan
assets and plan liabilities based on available information obtained
from financial statements and public filings. It is often the case
that the value of assets and liabilities from these sources are
substantially different than the value of assets and liabilities at
the point of plan termination. We have reported previously that there
are many factors that can increase plan liabilities immediately before
plan termination, such as economic factors, benefit increases, and
earlier-than-anticipated retirements. See GAO, Pension Plans: Hidden
Liabilities Increase Claims Against Government Insurance Program,
[hyperlink, http://www.gao.gov/products/GAO/HRD-93-7] (Washington,
D.C.: Dec. 30, 1992).
[33] For a listing of recent GM attrition programs and their estimated
impact on plan liabilities, see appendix III. For a detailed summary
of recent GM plant closings, see appendix IV.
[34] From the perspective of the company's consolidated financial
statement, it makes little difference whether payments are made from
plan or company assets; but from the participant's perspective, if the
level of plan assets has been diminished, it could have a significant
impact on future benefits should the plan be terminated.
[35] For a listing of recent Chrysler attrition programs and their
impact on plan liabilities, see appendix III. For a detailed summary
of recent Chrysler plant closings, see appendix IV.
[36] Most GM divestitures have resulted in no future pension benefit
accruals for the affected employees under the GM plan at the time of
divestiture, with only limited impact on the GM plan going forward.
See appendix V for a summary of key acquisitions and divestitures
since GM and Chrysler were founded.
[37] According to GM officials, Delphi salaried employees were never
eligible for any pension benefit guarantees.
[38] In exchange for GM's agreement to assume this liability from the
Delphi hourly plan, Delphi and its creditors released GM from all
potential litigation arising out of the original 1999 Delphi spin off.
For further details on the Delphi story, see appendix I.
[39] Chrysler merged with Daimler-Benz AG in 1998 and was operated as
a separate business unit called "Chrysler Group" until it was sold in
2007.
[40] Statutorily prescribed pension funding requirements for single-
employer plans specify how much a sponsor must contribute to its
defined benefit plans each year. 26 U.S.C. §§ 412 and 430. In general,
the minimum required contribution reflects the value of the plan's
assets compared with the plan's benefit obligations, as measured by
the present value of all benefits accrued or earned as of the
beginning of the plan year (the plan's funding target) and the present
value of all benefits that are expected to accrue or be earned under
the plan during the plan year (the target normal cost).
[41] 26 U.S.C. §§ 430 and 436.
[42] Pub. L. No. 109-280, §§ 101-107, 120 Stat. 780, 784-820.
[43] GAO, High Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-07-310] (Washington, D.C.: Jan. 31,
2007), 85.
[44] Pub. L. No. 110-458, 122 Stat. 5092.
[45] In March 2009, the IRS issued guidance clarifying that under
Notice 2008-21, for a calendar year plan with a January 1, 2009,
valuation date, the IRS would not challenge the use of the monthly
yield curve for January 2009, or any one of the four months
immediately preceding January 2009. Since interest rates were much
higher on October 1, 2008, than on January 1, 2009, using the October
1, 2008, yield curve for the discount rate would significantly reduce
required contributions for the 2009 plan year. Also, in September
2009, the IRS issued guidance providing automatic approval for a new
choice of interest rates for 2010, regardless of what choices were
made for earlier plan years (as codified in new regulations effective
October 15, 2009).
[46] 401(k) Fair Disclosure and Pension Security Act of 2009, H.R.
2989, 111th Cong. tit. III (as reported by H.R. Comm. on Ways and
Means, July 31, 2009) and American Workers, State, and Business Relief
Act of 2010, H. R. 4213, 111th Cong. tit. III (as passed by Senate,
March 10, 2010). Yet another factor that could affect funding
projections is future labor negotiations. Both GM and Chrysler have
plans that are collectively bargained with UAW, and the result of
future negotiations could increase or decrease projected liabilities.
[47] 26 U.S.C. § 430(f). Credit balances can be earned when a sponsor
contributes more to its pension plans than required. Under certain
conditions, sponsors can use these balances to offset required
contributions until the balances are exhausted. Prior to PPA, credit
balances could be augmented because they accrued interest at a rate
determined by the plan to reflect the time value of money. PPA
delineated two types of credit balances: so-called "carryover
balances," generated under prior law, and "prefunding balances,"
generated after passage of the act. PPA also established certain
standards on the use of credit balances, such as a requirement that
balances be adjusted based on market conditions. Further, if a plan's
funded ratio (determined with a reduction of assets in the amount of
any carryover balance) is at least 80%, the plan sponsor may generally
use its credit balance to offset any required contribution. The credit
balances we refer to with respect to GM and Chrysler are specifically
"carryover balances."
[48] The 2008 data on projected cash contributions are the latest
publicly available data. GM was to file quarterly and annual financial
reports for the period ending December 31, 2009, with the Securities
and Exchange Commission by March 31, 2010. However, GM submitted a
"notification of late filing" with the Commission and officials told
us they plan to file the reports sometime in April 2010.
[49] As noted earlier, Daimler agreed to make installment payments of
$200 million in 2009, 2010, and 2011 (for a total of $600 million).
[50] Chrysler expected to provide its 2009 audited annual financial
statement to Treasury and its other shareholders by April 2010.
Chrysler plans to file quarterly and annual financial reports with the
Securities and Exchange Commission beginning with its 2010 audited
annual financial statements, which will be publicly available.
[51] 26 U.S.C. § 430(i). Once it is fully phased in, the test for
determining if a plan is at risk will be whether its funding target
attainment percentage for the preceding year, not applying at-risk
requirements, is less than 80 percent and its funding target
attainment percentage for the preceding year, applying at-risk
requirements, was less than 70 percent. 26 U.S.C. § 430(i)(4).
[52] Plans determined to be "at risk" are required to use actuarial
assumptions that result in a higher value of plan liabilities and,
thus, require additional funding by the plan sponsor. 26 U.S.C. §
430(i)(1)(A)(i) and (i)(1)(B). For example, plans in "at-risk" status
are required to assume that all workers eligible to retire in the next
10 years will do so as soon as they can, and that they will take their
distribution in whatever form would create the highest cost to the
plan, without regard to whether those workers actually do so.
[53] The notice for the GM's hourly plan covers the plan year
beginning October 1, 2008, and ending September 30, 2009. GM's
estimated plan funding requirements of $12.3 billion for the years
2013 and 2014 reflect funding needs for both its hourly and its
salaried pension plans combined, including consideration of its hourly
pension plan being in "at-risk" status. GM's salaried pension plan is
not "at risk."
[54] 26 U.S.C. §§ 436(b) and (d).
[55] For further details on Delphi, see appendix I.
[56] A "going concern" qualification is a reflection of the auditor's
substantial doubt of the audited company's ability to remain in
operation. Organizational weaknesses including overcapacity and high
wage agreements, when combined with questions about their ability to
continue as a going concern may have the effect of triggering loan and
bond defaults and making it difficult for suppliers to raise new
capital.
[57] In a hearing before the Senate Committee on Banking, Housing, and
Urban Affairs in October 2009, a representative of nearly 700 parts
suppliers testified that administrative obstacles, bank restrictions,
and limitations on the types of receivables eligible for assistance
had created a significant gap between those suppliers eligible to
participate and those suppliers able to participate in the program.
Restoring Credit to Manufacturers: Hearing Before the S. Comm. on
Banking, Housing and Urban Affairs, 110th Cong. (2009) (statement of
David Andrea, Vice President, Industry Analysis and Economics, Motor
and Equipment Manufacturers Association).
[58] According to GM, the 31 top suppliers that participated in the
Treasury program accounted for less than 2 percent of GM's North
American 2009 adjusted present value.
[59] For further details on PBGC's guaranteed benefit limits, see
appendix II.
[60] This describes the situation when an underfunded defined benefit
plan covered by PBGC's single-employer insurance program is terminated
and benefits are paid subject to certain limits. 29 U.S.C. § 1322. If
a plan is covered by PBGC's multiemployer insurance program, PBGC will
provide financial assistance, but it will not trustee the plan or pay
unfunded guaranteed benefits. 29 U.S.C. § 1341a. Also, while PBGC
insures most defined benefit plans, it does not insure some
categories, such as defined benefit plans sponsored by governments or
churches. In addition, PBGC does not insure defined contribution
plans. 29 U.S.C. § 1321(b)(1)-(3).
[61] 29 U.S.C. § 1361.
[62] For PBGC to classify a plan as a "reasonably possible"
termination, it must have $5 million or more of underfunding, as well
as meet additional criteria, such as that it has filed for bankruptcy,
has requested a funding waiver, has missed a minimum funding
contribution, or has a bond rating that is below-investment grade for
Standard & Poor's or Moody's. At even higher risk are those companies
PBGC classifies as "probables," which are those that PBGC deems likely
to terminate in the future. For more information on this topic, see
GAO, Private Pensions: Questions Concerning the Pension Benefit
Guaranty Corporation's Practices Regarding Single-Employer Probable
Claims, [hyperlink, http://www.gao.gov/products/GAO-05-991R]
(Washington, D.C.: Sept. 9, 2005).
[63] PBGC's exposure to loss ultimately may be less than these amounts
because of the limits on guaranteed benefits, as specified under ERISA
and related regulations (see appendix II). However, calculations
taking into account these limits are not specifically factored into
PBGC's estimates of exposure, per se, because it is difficult to
prospectively determine the precise extent and effect of the limits
prior to a plan's actual termination.
[64] PBGC calculates estimates of exposure by using information such
as the reports submitted to IRS and corporate annual reports. Although
guaranteed benefit limit calculations are not part of PBGC's estimate
of its exposure, per se, its estimate nevertheless attempts to
approximate the losses it would incur under ERISA upon a plan's
termination. 29 U.S.C. § 1361. Also, PBGC officials noted that these
estimates can change substantially over time due to volatility in
discount rates and plan asset values.
[65] PBGC holds assets in two categories of funds: the trust funds and
the revolving funds. The trust funds hold assets acquired from
terminated plans; the revolving funds consist of premium receipts.
Separate funds are maintained for the single-employer and the
multiemployer programs. 29 U.S.C. § 1305.
[66] Following termination of a plan insured under the single-employer
program, the net liability assumed by PBGC is equal to the present
value of the future guaranteed benefits payable by PBGC less amounts
provided by the plan's assets and amounts recoverable by PBGC from the
plan sponsor and members of the plan sponsor's controlled group, as
defined by ERISA. 29 U.S.C. § 1301(a)(14).
[67] 29 U.S.C. § 1362(e), which authorizes PBGC to assess plan
liability when there is a substantial cessation of operations by an
employer.
[68] See GAO, Pension Benefit Guaranty Corporation: More Strategic
Approach Needed for Processing Complex Plans Prone to Delays and
Overpayments, [hyperlink, http://www.gao.gov/products/GAO-09-716]
(Washington, D.C.: Aug. 17, 2009).
[69] [hyperlink, http://www.gao.gov/products/GAO-09-716].
[70] [hyperlink, http://www.gao.gov/products/GAO-09-716].
[71] 29 U.S.C. § 1322(b)(1), (3) and (7), and 29 C.F.R. §§ 4022.21,
4022.24 and 4022.25 (2009). These guarantee limits are commonly
referred to as the maximum limit, the "accrued-at-normal" limit, and
the phase-in limit. For further details, see appendix II.
[72] PPA amended ERISA to provide a special phase-in rule for shutdown
benefits and other unpredictable contingent event benefits. 29 U.S.C.
§ 1322(b)(8). PBGC intends to issue a separate rule to implement this
section of the law, but the proposed rule has not yet been published.
[73] In 2009, the maximum monthly guarantee limit for those age 65
with no survivor benefit was $4,500, or $54,000 annually. Retirees who
are under age 65 as of the date of plan termination could be subject
to a maximum limit on their monthly benefit that is considerably
lower. For example, in 2009, the monthly maximum limit for a retiree
age 60 was $2,925, and for a retiree age 50, just $1,575.
[74] For more details about the accrued-at-normal limit, see appendix
II.
[75] For more details about the phase-in limit, see appendix II.
[76] In addition, this limit would have eliminated the additional $300
monthly benefit provided to certain post-65 retirees and surviving
spouses in GM's salaried plan in exchange for elimination of their
company-sponsored retiree health care.
[77] For a list of recent GM and Chrysler attrition programs, see
appendix III.
[78] 29 U.S.C. §§ 1322(c) and 1344.
[79] After benefits derived from employee contributions are paid,
benefits of those retired (or eligible to retire) for at least 3 years
are given priority status in this allocation process (priority
category 3). In terminations of large complex plans, plan assets
typically are depleted with the payment of benefits in this priority
category. (See [hyperlink, http://www.gao.gov/products/GAO-09-716],
table 4.) For PBGC's example benefit calculations that illustrate how
termination of the automaker pension plans might impact participant
benefits, see appendix VII.
[80] For examples of this impact on participant benefits, see appendix
VII.
[81] The IRS oversees the tax qualified status of pension plans and
the Secretary of the Treasury serves as one of the three members on
PBGC's board of directors. 26 U.S.C. § 401(a) and 29 U.S.C. § 1302(d).
In addition, PBGC provides insurance for most private defined benefit
plans. 29 U.S.C. § 1321.
[82] Previous reports have discussed the conflicts of interest that
could be created by having the government both regulate and hold an
ownership interest in an institution or company. See GAO, Troubled
Asset Relief Program: The U.S. Government Role as Shareholder in AIG,
Citigroup, Chrysler, and General Motors and Preliminary Views on its
Investment Management Activities, [hyperlink,
http://www.gao.gov/products/GAO-10-325T] (Washington, D.C.: Dec. 16,
2009); GAO, Troubled Asset Relief Program: Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30,
2009); and GAO, Troubled Asset Relief Program: Additional Actions
Needed to Better Ensure Accountability, Integrity, and Transparency,
[hyperlink, http://www.gao.gov/products/GAO-09-161] (Washington, D.C.:
Dec. 2, 2008).
[83] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[84] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[85] 26 U.S.C. §§ 412 and 430.
[86] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[87] 29 U.S.C. §§ 1322(c) and 1344.
[88] In cases when a plan's unfunded nonguaranteed benefits exceed $20
million, the total amount to be shared depends on the actual amount
recovered. In all other cases, the amount to be shared is determined
by an average of PBGC's recoveries over a 5-year period. ERISA section
4022(c).
[89] If the assets are not sufficient to pay for all benefits in a
category, the assets are distributed among the participants according
to the ratio that the value of each participant's benefit in that
priority category bears to the total value of all benefits in that
category. Within each priority category (except priority category 5),
assets are allocated first to the participant's "basic-type" benefits
(which include benefits that are guaranteed by PBGC, or that would be
guaranteed but for the maximum and phase-in limits), and then to the
participant's "nonbasic-type" benefits (which include all other
benefits). If the plan assets available for allocation to priority
category 5, which includes benefits subject to the phase-in limit, are
insufficient to pay for all benefits in that category, the assets are
allocated by date of plan amendment, oldest to newest, until all plan
assets available for allocation have been exhausted.
[End of section]
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