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DETROIT Pension fund deficit eats into GM earnings

Tuesday, January 14, 2003

GM pumped nearly $5 billion in cash into its pension fund last year and has plans to put in $15.5 billion more.
DETROIT -- Three years of abysmal stock market returns have dropped General Motors Corp.'s pension fund into an estimated $19.3 billion deficit and will cost the automaker about $1.9 billion in earnings this year, GM told Wall Street analysts.
"We have a hole in the pension side no doubt due to the poor performance in the equity markets three years in a row," said GM Chief Executive Officer Rick Wagoner.
GM had to put $4.8 billion into the pension fund last year and said it will likely have to contribute up to $15.5 billion more over the next five years to keep the fund within government pension-funding requirements.
Despite the pension costs, GM said it expects to earn $5 per share in 2003, or roughly $2.8 billion. Auto analysts had been projecting earnings at $4.82 per share. GM stock finished up $1.29, or 3.3 percent, Thursday, in part based on the company's expectation that it will beat Wall Street targets.
Without the increased pension expense, GM would have projected earnings closer to $7.55 per share, or $4.25 billion after taxes.
By comparison, GM's 2002 earnings are projected at $6.75 per share, or about $3.78 billion.
One factor
One thing that raised GM's pension expense was the automaker's decision to lower its projected pension investment returns from 10 percent to 9 percent.
This move -- which will cost GM about $700 million in 2003 earnings -- matters to a company like GM because pension profits or expenses are booked each year based on expected returns, not actual returns.
The $19.3 billion deficit on GM's $67 billion pension fund -- the largest private pension fund in the United States -- is the largest hole GM has faced since at least 1990. It's worse than GM's darkest days of the early 1990s, when the company was losing billions a year.
The problem
While pension experts say there is no concern GM will default on the fund -- and a government agency exists to guarantee pensions -- the problem is the billions of dollars GM has to put into the fund each year in order to stay within government requirements. Those billions of dollars are money GM and analysts would like to see invested in product development or new technology.
GM told analysts it contributed $2.6 billion in cash to the pension fund this past quarter, the first time that detail had been made public. For all of 2002, GM put $4.8 billion into the fund. It expects to contribute $3.5 billion to $4 billion this year and again next year, followed by $2 billion to $2.5 billion in contributions from 2005-2007.
"We don't like it, but we know what we've got to do," said GM Chief Financial Officer John Devine. "We've been here before. We have to feed it cash over time, and we will."