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TORONTO — The General Motors of Canada Ltd. pension funds had a shortfall of $4.5-billion as of last November – before the stock market collapse – creating a massive financial headache for the Ontario government and pension cuts for retired employees if the company falls into bankruptcy protection.
Senior GM officials revealed the shortfall between the assets in the company's unionized and salaried plans and their liabilities in a meeting yesterday with the editorial board of The Globe and Mail. The shortfalls are measured on a solvency deficiency basis, which would apply if the plans have to be wound up in the event of bankruptcy.
“That's another good reason why we want to continue to operate,” David Paterson, GM Canada's vice-president of corporate and environmental affairs, said as he joined chief financial officer John Stapleton in outlining the reasons for the request for financial help from Ontario and Ottawa to help it survive a cash crunch.
Backstopping GM's pension fund would further complicate any Canadian moves to support the struggling sector in tandem with a broader U.S.-led bailout of the Detroit Three auto makers. As Ontario and the federal government grapple with their options, GM CEO Rick Wagoner led a parade of industry executives and politicians in making impassioned pleas for aid to Congress in Washington.
GM Canada is struggling with a pension crisis
General Motors
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Mr. Wagoner focused on the dire economic impact of a failure of the industry, warning a Senate panel that personal income in the U.S. would fall by $150-billion (U.S.) and governments would face tax losses of $156-billion over three years.
“Such a level of economic devastation would far exceed the government support that our industry needs. This is about much more than just Detroit. It's about saving the U.S. economy from a catastrophic collapse.”
In Canada, the auto maker is in compliance with all legal requirements and has a smaller shortfall when the pension funds are measured on a going-concern basis, which essentially amounts to pay-as-you-go.
GM is the only company in Ontario that is permitted to make annual payments into the province's Pension Benefits Guarantee Fund instead of being required to finance its pensions on a solvency basis.
GM became eligible to do that in the early 1990s when the Canadian units of the Detroit Three and steel makers Algoma Steel Inc. and Stelco Inc. were granted relief from onerous pension payments in part because the government agreed they were too big to fail.
A senior Ontario government official said the province is aware of GM's pension shortfall and it will be taken into account in negotiations over providing assistance to the auto industry. The government has not yet seen the auto maker's books.
“The ramifications are enormous,” the official said.
The government would have to determine not just the impact on individuals of the collapse of GM's pension, but also the cost to the treasury of providing assistance. He noted that the government added money to the pension fund at Stelco as part of a 2006 rescue package and “that's what you'd be looking at, some way of solidifying it.”
The official emphasized that Ontario is in the early stages of examining GM's financial situation, although he promised the company's books would be scoured as part of the talks with the auto industry.
“We're going to engage some pretty smart people to help us with these kind of negotiations,” the official said.
The GM plans have a target of 69-per-cent equities and 31-per-cent fixed-income instruments, Mr. Stapleton said.
That kind of ratio almost certainly means the assets in the plans have plunged, pension industry sources and others said yesterday, based on the crash of North American equity markets and studies showing that the value of assets held by pension plans in publicly traded companies has fallen by between 15 and 20 per cent.
“One would suspect” the value of assets has fallen, said Sym Gill, director of pensions and benefits for the Canadian Auto Workers union, which represents tens of thousands of GM retirees and active workers.
The unionized plan for Ford Motor Co. of Canada Ltd. employees had a solvency deficiency of about $900-million as of this January, Mr. Gill said. The Chrysler Canada Inc. plan was fully funded as of May, 2007, which was the most recent data for that company, he said.
Retirees would take a hit in a GM bankruptcy because the provincial fund covers only a portion of the monthly payments up to the first $1,000.
If, for example, a pension plan held assets equal to 80 per cent of liabilities when it was wound up, a retiree receiving $3,000 a month before the wind-up would get $800 of the first $1,000 a month, financed by the assets in the plan. The Ontario fund would make up another $200.
But the remaining $2,000 a month would be reduced to $1,600 a month – based again on that 80-per-cent figure – leaving a shortfall of $400 a month because of the $1,000 cap on the fund.
