US - The massive underfunding level of General Motors' US pension plans is impacting badly on the company's balance sheet.
At the end of 2002 GM’s underfunding level reached US$19.3bn, up from US$9.1bn for the previous year. The 2002 figure was based on a negative return on its assets of 7%, and a discount rate of 6.75% (reduced from 7.25% in 2002), the rate used to calculate the current value of its future pension liabilities.
Prompted to take action by last year’s bear market GM has also decided to reduce the earnings rate assumption for its pension assets to 9% in 2003 from a rate of 10% which has been in force since 1993. Last year the SEC warned companies that expected rates of return on pension plans of more than 9% were difficult to justify.
This year GM is forecasting a rise of pension payments to US$3bn before tax for 2003, tripling the US$1bn expenses of 2002. Strong cash generation in 2002 allowed GM to contribute a total of US$4.8bn to its US pension plans during the year, including a US$2.6bn cash contribution in the fourth quarter.
As a result of pensions liabilities GM has warned shareholders that it may miss its target of full-year earnings per share of US$10 by the middle of the decade.
Healthcare costs are even more of a drag on GM’s balance sheet. GM vice chairman and chief financial officer John Devine revealed that healthcare underfunding had reached US$51bn.
Nevertheless the company targets for 2003 are US$5 earnings per share, generation of $10bn in cash and improving its market share.
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