The New York Times reports, “The pension plans at General Motors and Chrysler are underfunded by a total of $17 billion and could fail if the automakers do not return to profitability…”
As we noted in The Entrepreneurial Investor (Wiley, 2007), “Annual report sleuths should learn about the company’s pension plan. Any shortfalls (unfunded portions) of the pension plan or other benefits come right out of the company’s cash, affecting both its stability and flexibility.” We pointed out how GM handled a $25 billion pension shortfall: “In 2003, GM addressed its pension problem, borrowing money at low rates and investing very successfully; in 2007, they moved much of their impressive gains into bonds and it appears that their pension is now secure and fully funded, but cheap loans and great market gains are not always available.” Nor are customers for cars.
The Times cited a government report, which found that, “G.M.’s plan was overfunded by $18.8 billion in 2008, and was then underfunded by $13.6 billion last year.” Taxpayers should take note, because in the first place, the government now owns 61 percent of GM, and in the second place, “If either company’s plan must be terminated, the government would become liable for paying benefits to hundreds of thousands of retirees.” The government insures pensions through the Pension Benefit Guaranty Corporation, an agency with assets totaling “less than the $84.5 billion in G.M.’s plan alone.”
A challenge for investors is that pension liabilities do not generally appear on balance sheets and income statements, even though pension contributions and profits may appear. Pension liabilities tend to be a footnote item on financial reports, which is one reason we always advise prospective investors to read the footnotes first. This is where companies tend to bury information they are reluctant to share but required to disclose.
Underfunded pensions are not just a problem for private companies. National Public Radio recently reported on wobbly public pension funds in Rhode Island, Illinois, and Pennsylvania. Many states and municipalities face similar shortfalls, as money earmarked for pension funds is regularly diverted to other uses, legally if imprudently.
Many companies, states and municipalities have long treated their pensions as a “kick the can down the road” liability, a reckoning that can be indefinitely postponed. Demographics, however, have caught up and are overtaking America’s underfunded pension plans. The leading edge of the gigantic baby boom generation has reached retirement age during the biggest recession in their lifetimes.
Entrepreneurial investing requires a long-term perspective – entrepreneurial investors must require a long-term sense of responsibility in the leaders of organizations we support.