Tuesday, May 26, 2009

ABC has story on underfunded pensions; GM to announce bankruptcy June 1; how will pensions be handled?

The “Money” column on ABC News has a comprehensive discussion of the pressure on corporate defined benefit pension plans, dated March 30, 2009. The story is by Scott Mayerowitz, it is titled “Next Recession Victim: Your Pension and Retirement Plan: Companies Cut Back or Eliminate Pensions and Retirement Savings Contributions as They Struggle With the Economy”, with this link.

The most common action for companies is to freeze pensions. That hurts long term workers because the pension calculation usually is based on the most recent five years of service, when earnings are the highest.

Freezing of pensions is different from terminating a pension plan, which usually requires coverage by the Pension Benefit Guaranty Corporation.

Companies with poor pension funding may have been affected by the Pension Protection Act of 2006. Sometimes employees may not be able to take their pensions as lump sums if they choose.

In a late development, NBC reports that GM will file for bankruptcy Monday June 1. (Forbes story by Joann Muller is here.) We’ll have to watch how the pension matter for GM is handled, and whether the PBGC is involved. The Treasury will pump $50 billion into the restructuring, giving the public 70% ownership as the company comes out of bankruptcy. A typical story (Michigan Messenger) says that GM’s unfunded pension liability is $13.5 billion and the Treasury may have to pour some more money into PBGC. The CNN story by Chris Isidore is "GM bondholders reject offer: Source says few GM bondholders were interested in a proposal to swap debt for stock - virtually guaranteeing a bankruptcy filing in the next few days," link here.

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