Back at you on the GM argument
Back in 2008 cactus wrote Back at you on the GM argument.
Reader Jack sends this note on 2014:
Proof positive that the UAW is/was(?) the cause of car maker’s demise!!
That’s how I’d put it to all those out there that still harbor the idea that the poor performance of much of the American car industry was a direct result of the inflated demands of its workers through their union, the UAW. Not one, but two articles in today’s NY Times provides the evidence.
First up: “U.S. Agency Knew About G.M. Flaw but Did Not Act”
The story begins, “Federal regulators decided not to open an inquiry on the ignitions of Chevrolet Cobalts and other cars even after their own investigators reported in 2007 that they knew of four fatal crashes, 29 complaints and 14 other reports that showed the problem disabled air bags, according to a memo released by a House subcommittee on Sunday.”
Second up: “Car makers’ Close Ties to Regulator Scrutinized”
It’s the same sad story again and again. No, too much regulation isn’t the problem. Too little adherence to regulatory requirements in a “good old boy” milieu is what seems to ail industry. Why the surprise when the public turns away in search of a better, safer product? ” She is among many former top N.H.T.S.A. officials who now represent companies they were once responsible for regulating, part of a well-established migration from regulator to the regulated in Washington.”
The link to Cactus’ post does not work.
Fixed Daniel and thanks Arne
I was being an ass yesterday. Sorry.
There is a small but important flaw in the argument laid out by cactus. GM along with all private companies that offer(ed) defined benefit retirement plans were prohibited by tax law from over-accumulating in their pension account. Pension contributions are tax deductible expenses and since Treasury wants to make sure it gets its fair share prevents companies from having a excess pension reserves.
So then you get a recession, interest rates fall as a result of easy money (raising the value of the bonds in the pension account), but stock markets fall as a result of the recession and so the pension account, which could be no more than slightly over-funded by law, is now under-funded during a recession when companies are looking to save costs because of slack demand and to protect profits. And on top of that, the expected return on the bond allocation is lower because of lower interest rates, requiring even higher contributions to get back to whole.
Maybe GM and other pension-offering companies would run their pensions this way even if they could fill a rainy-day jar for their pension accounts. After all, municipalities, without such tax considerations, have pensions in much worse shape than private companies.
Listening to NPR on this yesterday. I work in manufacturing and consulted to it for throughput, etc. I also drive a 2007 Saturn ION with 114,000 miles on it. Some interesting things were said.
– The ignition did not pass PPAP. The switch looks like this: http://www.partsgeek.com/gbproducts/MC/18065-07043421.html?utm_content=MC&utm_term=2004-2007+Saturn+Ion+Ignition+Switch+Standard+Motor+Products+US-778+04-07+Saturn+Ignition+Switch+2005+2006&fp=pp&gbm=a&utm_source=google&utm_medium=ff&utm_campaign=PartsGeek+Google+Base&gclid=CKXu7cKFzL0CFaN9OgodBTQA2Q
and fits into this:
Not passing PPAP means you usually send it back to the supplier (Delphi) for correction. For some reason, GM did not do it. They probably decided it did not affect form, fit, or function. Something as insignificant as feathering on a plastic edge could cause a reject. We would need to read the PPAP in order to understand the significance of rejection and why GM accepted it.
– GM did make a change to the ignition in 2006(?); but, they did not change part numbers (could be as small as a suffix change). The magnitude of not doing so means GM can no longer track the change by lot number, date, etc. If you use the part for 10 years and an issue arises, you now have an issue with 10 years of parts instead of fewer years based on a change. Not changing part numbers (as I have experienced) requires changing prints which usually falls on Engineering and Documentation. They do not like changing Prints.
– My wife has a problem with her Vue (Evap leakage) and Chuck my mechanic was telling me about the ignition switch. He says he has changed out quite a few of the ignition switches on various makes of cars. He laughed at the suggestion they pop out of the set mode for driving. Instead, he said they just fail to work while a person is driving and the engine shuts off. This is vastly different than too much weight on the key fob causing the key to move to the accessory position. It would be a 100% switch failure. By the way, he fixed the Evap Leakage problem for free or my donation of a 12 pack of Sam Adams.
– One auto company commentator kept bringing up a driver driving drunk at 100mph when the ignition shut off (who was too drunk to control the vehicle and do something) and various young women deaths (the idea is they did not know what to do when the ignition shut off). This is a cop out and a non sequitur to the main problem; a cheap-ass switch poorly made and allowed to remain in production. Who was driving, how they were driving, and what condition they were has no bearing on the issue of ignition switch failure.
Cars built with power steering are hard to steer when the power goes off and far worst than manual steering, the automatic transmission is a drag, and the power brakes do not work as well as non-power brakes when that hydraulic assist dies. Just steering to the side of the road in 70+mph Detroit highway traffic with a dead engine is not as easy as the commentator claims it was.
Anyhoo, my $.02.
What’s great about unions from labor’s perspective is the lack of incentives. You can do a lousy job and not get fired, and you can do that lousy job while being grossly overpaid. Add favoritism, e.g. for relatives and friends, and it’s even better, although not necessarily good for consumers.
Back to my original point. GM, and probably Chrysler for that matter, hard to judge in regards to Ford, had choices all the way down the road over the past forty years. Either invest in good quality and reliability or simply dress up next years model to seem like a change. That’s been American car company culture for a long while. It cost them, in the long run, to take the low road and leave quality and reliability at the side of the road. That leads to customer disappointment, more devastating than dissatisfaction. The Japanese, at first, the Koreans more recently, and the Germans always, saw the opportunities in better engineering of a daily use mechanical complexity. The unions didn’t kill the American car companies. Their executive staff did that while walking away with the biggest compensation packages of any car companies across the globe. That’s our pay for performance creed in action, but some how driving off the cliff.
Lower prices and higher quality is a rising tide that lifts all boats.
You are the supreme ass. Every union contract lays out clearly the steps to take to discipline poor work performance and those contracts are agreed to by the management. All any supervisor ever has to do is to demonstrate and document the infractions. And nepotism and favoritism are far more likely to occur in any work situation that is not covered by a union contract or civil service law.
Get real and try some facts rather than your asinine ideological talking points. Yes, unions protect worker interests, but that’s done through contractual agreements with management. Pensions are too high you say. Well managements offered better retirement later in lieu of holding off on wage increases in the present. Later came up on them and low and behold its discovered that successive managements failed to live up to their contractual obligations. And suddenly its the “greedy” union employee that’s to blame. NJ is a perfect example of that bull shit. And GM was too, but the government bailed out banks and the managers and left the previous stock holders to suck up the losses.
Jack, your “supreme ass” comment makes no sense. For example, are you saying it’s easier to get fired from a union job than a non-union job?
” GM along with all private companies that offer(ed) defined benefit retirement plans were prohibited by tax law from over-accumulating in their pension account” –mj-
Yeah, that’s what the problem with GMs pension account was.
That ranks right up there with the non-existent voter fraud thing.
“defined benefit retirement plans were prohibited by tax law from over-accumulating in their pension account. Pension contributions are tax deductible expenses and since Treasury wants to make sure it gets its fair share prevents companies from having a excess pension reserves.”-mj_
Would you by chance have a link to the IRS that shows this is not just absolute bs?
What MJed said is true on over funding pensions by companies. What MJed did not say is that companies would sometimes use the pension funds for upper management benefits. Another conspicuous abuse of pension funds by companies and states is to over forecast the return on investments allowing the company/state to remove funds from the pesnions. Most recently, Michigan took part of the funds from Teacher’s Pensions to fund other state needs.
I actually worked in a union – the CWA. There was no performance pay, except if you took a higher level position.
If I was twice as productive as someone who started the same day I did, we would be paid the same just based on seniority (and they paid very well, with amazingly great medical & dental benefits).
And, although I was twice as productive compared to another worker, that worker would not even come close to getting fired.
And, yes, relatives and friends worked there. There were even large extended families.
“And, although I was twice as productive compared to another worker”
I’d have thought more…………….
This is from McMegan and all I could find on short notice. She makes a point about the IRS about which I was unaware. Since union pensions were collectively bargained, employers were forced into continuing to contribute, but in order to maintain the tax deductibilty of the contributions had to ratchet benefits as well, because the IRS wouldn’t budge on the overfunding issue.
In order to make a point, you and McCardle need to come up with actual instances of this happening. In particular to this discussion, you need to show how GMs pension plane was over funded. (good luck to that)
Geez, let me think how a pension manager could “solve” the “overfunding” problem………….
If I am underfunded, I just raise my anticipated interest gain. So maybe I could just lower my anticipated interest gain and solve that problem?
Keep moving those goalposts emichael.
No reason to move the goalposts when you are already moving the field.
Read this post again
April 6, 2014 10:08 am
And then get back on the field.
Peak, “For example, are you saying it’s easier to get fired from a union job than a non-union job?”
I’m pointing out that to get fired from a job the management should have to provide some rationale for the firing. The union contract requires that the employee be fired for cause, not for the whim of a manager. Terminated for cause means you screwed up in some way that was demonstrable and knowable before the fact. Fired on a whim can have many causes, none of which is good reason for an employee to lose the job. That’s what unions are about, in addition to fair compensation, including retirement savings.
If you’ve done better work than your fellow employees, but all have worked up to the criteria set by management then that is the basis for the equal pay. All workers should assume that the enhanced reward for better work, quality or quantity, comes in the form of promotional opportunity. Garment workers were often paid piece meal rates so that the quickest earned the most. Guess what? Piece rates were almost always low wage levels. But even that approach can be negotiated with a union. And we only have your good word for the quality of your work. Maybe your supervisors didn’t see it as you do. Your opinions are not often supported by those here who read them. Maybe you need to take a better look at what you have to offer.
If your mechanic is correct then there may be multiple GM switch problems. Or different problems depending on the models.
Do a cut and paste search on this “When an engineer working for the Meltons”
There is a very good image of the problem part which is the detent pin or plunger. (Cobalt ignition switch parts.)
———————————————————————- Start extract ———————————————————————-
From the article: “The combined difference in size was only about 1.6 millimeters, or less than the width of a quarter, but the engineer, Mark Hood of McSwain Engineering, told NBC News that the change meant the plunger and spring would exert more force and make the key harder to move accidentally. “The longer plunger and the longer spring is more likely to stay in the run position,” said Hood.”
———————————————————————- End extract ———————————————————————–
IMHO, GM must not have thought that this was a major problem, and didn’t fully appreciate what the likely consequences would be if it was a major problem. (Murphy’s Law seems to have applied here.)
Also IMHO, the more serious issue is that GM did not take the reported ignition switch problems more seriously. Why didn’t the engineers fully appreciate that if the ignition switch was switched away from the ‘run’ position, then multiple systems could be impaired? (Power steering assist?, power break assist?, and the airbag?)
Did this possibility exist in all the earlier models too, just waiting for a defective ignition switch?
Maybe it is time to allow the computer to refuse to shut down those systems while the vehicle is moving? Which would introduce another complication.
Anyway IMHO, this looks like a GM engineering problem to me, not the installation.
My point is not that there is a restriction on over funding(my understanding is that the vast majority of such is in small private companies), my point is that we are talking about GMs pension funding.
My wife worked for GM in the 90s and early oughts. I never, ever saw any report that stated such was happening. I saw many years where no funds were added to the pension by the company.
When the whole GM bankruptcy thing was going on and the unions were blamed by management and every rwdw who could shake a stick, it was commonly asserted that union employees were being paid $70 or $80 an hour. To get to that number, you had to use all of the payments to those on pensions.
I would think if they were properly funded such would not have been necessary. And if they were overfunded, such would have been a benefit.
“Pension contributions are tax deductible expenses and since Treasury wants to make sure it gets its fair share prevents companies from having a excess pension reserves.”–mj-
How does this make sense considering:
“Pension contributions are tax deductible expenses and since Treasury wants to make sure it gets its fair share prevents companies from having a excess pension reserves. “
“The Washington Post Company is best known for its flagship newspaper title sold today to a company controlled by Amazon founder Jeff Bezos, but it makes its big money from less prominent sources: A for-profit education business, cable television, and local TV stations.
But while all these assets have their merits, here is one asset that gets much less attention: its hugely over-funded pension.
At a time when pension obligations are becoming giant financial drag on some of America’s best known companies – such a drag, in some cases, that the pension funds end up owning significant chunks of the business — having a hugely over-funded pension plan is a pretty sweet spot to be in.”
I didn’t say they couldn’t get to an over funded status. But The Post now cannot contribute a normal run rate to its plan as long as it remains in surplus, unless assuming McMegan’s facts were accurate, they increase run rate benefits.
And to your earlier request, in 1999, GM’s pension for US employee had fair value of assets of 80.5 bn and liabilities of 73.3 bn. For non-US employees, it was 7.1 bn and 9.7 bn, respectively.
JimH: The engine has to be running for those systems to work. They pull power from the crankshaft by way of the serpentine belt, except for the power brakes which use engine vacuum to operate the power brake booster. If the engine stops then no vacuum is created. Airbags could and should be on a separate electrical line but they aren’t.
GM has ALWAYS made crap and ALWAYS will no matter how much bailout money THE TAXPAYERS give them.
GM’s pension problem is because their management is incompetent and overpaid. EXACTY the same reason as their switch problem.
Problems show up in ANY machinery. Good engineers FIX them, good management MAKES SURE they do fix those problems.
Because of GMAC, GM thought of themselves as a BANK THAT HAPPENS TO MAKE CARS. Apparently this Administration agreed.
Not to get off track, but air bags, due to their explosives can not be on a separate line with out having an additional switch to turn them on. I can’t imagine people being willing to switch on the air bags after starting their car. Look what it took to get them to buckle up.
However, a time delay or some kind of relay to the impact sensors that would trigger the bags from a hot lead even if the switch is was turned off might be possible. These things are dangerous, and it is why all manuals require the disconnection of the battery for a period of time to discharge the electronic to assure there is not a misfire when one works on the electrics or near components of the air bag system.
Also, we now have electric steering and hydraulic boosted brakes showing up in vehicles along with fly by wire stuff such as the throttle.
It’s getting well beyond my 65 Chrysler Imperial which other than head rests and air bags does function has Mike notes.
In the end, the simplest fix was to correct the ignition switch.
Apparently, as the FACTS of life have shown, to fix the switch one would have had to “fix” GM first.
That does appear true Mike. : )
There’s a steering recall in the works as WE speak.
Its called “poor quality” and its invested in “planned obsolescence of product” and has been since 1958.
Cardiac Rot for the sake of GREED and increased market share that makes those “polished turds” STILL turds none the less. And as WE have seen they don’t seem to mind killing their LOYAL customers.
Yeah, you gotta love GMs accounting to come to that amount.
Strangely enough, if you have some bean counter tell you to assume a high interest rate on your liabilities you will “have a surplus”.
Strangely enough I saw GM do this(and Ford and Chrysler) with their captive auto leasing. Every single car GM leased through their own bank from the 80s on was a stone cold loser for the company, especially in the high priced SUV market. Ludicrous overestimates of residual values drove sales that actually lost money. But you can play a lot of games with bean counters and their numbers and put that loss off for years and years(while still pumping out dividends while the company was losing money except in the scribblings of your accountants).
Eventually you run of room. Then of course you blame the union.
from what I see, GM’s expected return on plan assets for their US pension changed from 11.0% in 1992 to 10.1% in 1993 and 10% (no decimal point provided) in 1994. Then it didn’t change from 1994 until 2003, when it was lowered from 10% to 9%.
Yep. and every single one of those numbers are drastically higher than that recommended by the Pension Benefit Guaranty Corporation, which in 2001 was 5.8%.
The move to equities in pensions was a license to steal, and GM and others took full advantage.
Good source is the book “Blind Faith”.
PeakTrader: “What’s great about unions from labor’s perspective is the lack of incentives. You can do a lousy job and not get fired, and you can do that lousy job while being grossly overpaid. Add favoritism, e.g. for relatives and friends, and it’s even better, although not necessarily good for consumers.”
Yeah, they have it as good as top management. Upper level corporate executives have no incentives either. They usually get a mega-lottery payout as their signing bonus, and if they cause enough damage on the job, they get another mega-lottery payout to go away. Nice work if you can get it, and you’ll notice that their pension rights are never questioned during bankruptcy proceedings.
VW fired the first shot at Detroit, and Detroit learning NOTHING. Americans wanted smaller, cheaper, better built cars, but Detroit responded with nothing. When Ralph Nader brought up the safety issue, Detroit kicked and screamed and lost even more market share. When the Japanese, heavily protected, subsidized, and hungry, came in, Detroit was dead meat.
The unions weren’t the ones who failed to revamp the industry in the 70s and 80s when it was on the ropes. They didn’t keep designing cars with bad fuel mileage and running lines with poor quality control. If they had a worker problem, it was poor morale, because no one likes cranking out a piece of garbage. Capitalist Detroit couldn’t meet the challenge of socialist Japan and Germany.a
assuming a 60/40 split between the S&P 500 and corporate bond index, arithmetic average returns would have been 9.4% from 1973 to 2013, which is as far back as bond indices go. If you take Treasuries and add a corporate bond premium of 150 bps and go back further, the average return would be the same. Lest you accuse me of cherry picking start dates, if you start the averaging 5 years later, in 1978, it goes to 9.8%, 1983 10.7%, 1988 9.3%, 1993 8.7%. And if you’re sitting there in 1992 and trying to forecast forward returns, you’re historical looks are 10.1%, 11.2%, 14.4%, 11.1%, from 1973, 1978, 1983, and 1988, respectively.
so let’s review:
* in pointing out a flaw in cactus’ argument you called BS on my assertion that IRS policy was a factor in restrictions on pension funding. Run affirmed that it was, and I provided a link where, while you may not agree with the author’s opinions, haven’t refuted her facts.
* you implied GM’s pension was never over funded, and I demonstrated that according to SEC filings it was over funded in at least 1999.
* you implied that GM assumed high expected return on plan assets to financially engineer a surplus, and if I was reading between the lines correctly, that they actively managed their assumptions to reach such a conclusion and I noted that GM’s expected return assumptions have been stable over long periods of time
* you state that GM’s expected return assumptions are higher than recommended by a third party, and I’ve pointed out that GM’s assumptions look pretty reasonable based on empirical returns.
All true, but there is a big piece missing.
The real problems with GMs(and Ford And Chrysler’s) lines were caused by the type of cars they sold.
Back in the 50s, 60s and 70s everybody ordered their cars for the most part, especially the high lines. Tons of options for each model, which people picked which options they wanted. On the high line cars, these options were huge moneymakers.
Problem was the process got too complicated. Cars came down the line with 50 or 60 different final products. The Japanese came in trim lines, usually three different cars coming down the lines(at the most). And they just ran those trim lines on separate days so basically the workers were doing the same car all day long.
They lost sight of any car you want as long as it was black. Multiples of options places hell with the Toyota Production System. And maybe I missed it in your analogy; but, the American auto makers solved their dilemma by building to a forecast going forward. This could work if it was accurate. It wasn’t, so you ended up with tons of piss-yellow Ford Escapes at the end of a model year.
So your entire process rests on the fact that GM used accounting fantasies for decades and decades?
Notice the relationship with the start of the fantasies and union contracts where pensions were the workers’ increases. Also notice the timing of the fantasies with the retirement of the workers who actually were going to receive the benefits.
This over funding thing is a waste of time. The only reason they “couldn’t” add to the pensions was because their ludicrous accounting said they were overfunded.
I assume you are referring to rate of return versus discount rate?
Discount rates and expected return on plan assets are two different concepts. The 5.8% recommended by PBGC that you referenced in your post at 11:47 am is a discount rate to arrive at present values – while somewhat related to expected return, you’ve misunderstood the implications of it. In fact, in your link, to the book you recommended, it suggests that GM’s assumption is too high, but in your 11:47 comment, you say, “Yep. and every single one of those numbers are drastically higher than that recommended by the Pension Benefit Guaranty Corporation, which in 2001 was 5.8%,” suggesting GM’s assumption is too low. Apparently reading and understanding are also two very different concepts for you, but that’s okay because pension accounting is hard.
And if we’re sitting in 1992 and GM announces they’re lowering expected return assumptions, despite having empirical evidence to support their historic assumptions and lowering their discount rate despite, per your link, using discount rate essentially inline with the median of all companies, they get a call from their friendly neighborhood IRS auditor and whatever OWS was at the time screaming bloody murder about corporate tax evasion and pension stuffing.
You are mixing assets and liabilities.
see page 59
I saw it. You’re wrong. “Interest Rate” in the way these authors are using it is identical to “Discount Rate” actuaries use to present value the liabilities. It’s related to expected return, but a completely different number.
A higher expected return return on assets requires less annual funding.
A higher assumed discount rate on liabilities requires more annual funding.
“The discount rate helps calculate the amount a company must set aside now to pay future pensions, allowing for the time value of money. The projected rate of return is just what it sounds like — the assumed investment returns on a pension plan’s assets.
Smoothing, in turn, is the exercise of leveling out a portfolio’s actual performance over two to five years. It evens out one-year aberrations such as the 2008 stock market crash that produced major losses in pension portfolios.
Private companies can exercise discretion in projecting their investment returns but have stricter limits than public funds in setting their discount rate.”
Discount Rate vs Rate of Return has an inverse relationship. It is risk management with Discounting. In any case and regardless of what the authors say, GM, other companies, and states have been playing games with the rate of return so they did not have to set funds aside.
“In its last annual report before filling for bankruptcy, General Motors used an assumed rate of return of 8.5 percent for its U.S. pension fund, even though the Standard & Poor’s 500 index fell 38.5 percent that year and GM sustained losses of $11.4 billion on its U.S. pension assets alone.”
Ho much of an impact can you have in your position as to what your org forecasts as a rate of return? I know what mine is . . . zip, nada, zero, etc. Up till 2007/8, we believed the system. After all it was certified by the prestigious Arthur Anderson Accounting firm which basically said this was normal a practice and the funds were at some level of funding (80%) necessary going into the future. Who ever heard of an 8.5% rate of return? They were gaming the system. GM was also in the CDS/derivative market pretty heavily.
I am sure GM did not run around and talk about this.
sorry – serves me right for doing 4 things at once.
A higher assumed discount rate on liabilities also requires less annual funding.
It happens. 🙂
“A higher expected return return on assets requires less annual funding.
A higher assumed discount rate on liabilities requires more annual funding.”
Now we agree.
But you believe GM was not often in a position where more annual funding was needed. Right up until the point where they were totally buried.
So figure out your rate of return(S&P + bonds) for those thirty something years and then try to figure out how they could possibly become buried.
Ru, I am talking the 50s, 60s and 70s where the Big Three could do whatever they wanted and people still bought their cars.
Starting in the 70s that changed, so the blame was placed on greedy and inefficient American workers as opposed to management without a clue.
Not that I dispute their screwing up their forecasts. But the trim lines concepts were adopted decades after the imports.
Jed I did mix up the liability and asset rates.
Mike Meyer, “JimH: The engine has to be running for those systems to work.”
Yes I know, that is why I said “would introduce another complication.” I did some work on my own car when I was younger.
As a first cut, make the ignition switch only an input to the computer. Allow the computer to test for MPH and refuse to shut down engine if the car is going faster than some speed. This might get really complicated because of unintended consequences.
And remember I said maybe.
It would be easier to declare the ignition switch a critical part which could never be compromised.
run – “Who ever heard of an 8.5% rate of return? ”
go back to my post at 12:40, a typical pension allocation would’ve returned north of 8.5% over reasonable pension investment horizons.
emichael @ 6:13 – thanks for acknowledging. does that mean we don’t agree per your 5:30 comment? I corrected my second sentence that you paste. As for retirement funding, if I’m going to save x% of my income to meet my retirement needs, I’m not going to save x% – y% simply because my retirement account appreciated more than I anticipated in a given year. But this is what IRS policy forces.
Let’s say you’re targeting 100. If you go over 100, you can’t contribute any more. So in fact, you’re going to target something less than 100. Now the market is up 30%, and say your starting point was 90, so now you’re at 120. You don’t contribute for a few years, so the liabilities grow but not the assets. Now the assets and liabilities are at 120 and 130, respectively, back to roughly your “whisper” target. And then the market goes down 20%. You’re screwed. This is basically my understanding of what happened and happens continually.
I really do not care what your post said. The fact of the matter is no one gets 8.5% return and no one would have gotten it during the market crash. These are pensions no cds.
pensions don’t care about 1 year returns. Their aggregated liabilities don’t have a cash call in any given year. It’s perfectly reasonable to use a very long time horizon to project returns. And over reasonably sufficient time horizons, pension indices generated north of 8.5%.
You are missing the point, they do care not about forecasted returns whether one year or smoothed over multiple years as it allows them to draw down the funding, which by the way, they did.
JimH: I don’t build ’em, I just fix ’em: (I do build custom motorcycles though, but that’s a whole different story)
Sharp idea with YOUR computer hook up though.
STILL the true problem is GM culture and that’s a corporate management problem.
So how did GMs pension get buried if their ” pension indices generated north of 8.5%.” ?
Assume at the beginning of 1973, your assets and liabilities are matched at 100. Each year, your liability grows by a net 2.5% (growth in liability less payments for past vested benefits). Assume that each year your assets grow exactly at 8.5% per year and the company contributes 1.5% of beginning assets and makes payments for past vested benefits. Under these assumptions, you are always in actuarial balance.
Now instead of growing at exactly 8.5% per year, assume your assets compound at the empirical returns I referenced earlier. Under these assumptions, at the end of 2013, your assets would fall short of your liabilities by 271, at 4 versus 275, respectively; you essentially have zero assets after by this point in 2014.
Now assume that in years where you were at a negative funding status, you contributed just 5% of the shortfall, plus the 1.5% “normal” contribution. Under these assumptions with that one simple tweak, at the end of 2013, your assets would exceed of your liabilities by 143, at 419 versus 275, respectively (and if you used 25% of the shortfall the assets would reach 983).
Now assume that in years where you were at positive funding status, you ratcheted your liabilities by 2% (increased permanent benefit level) but continued to fund as above, 5% of shortfall, plus 1.5% of beginning liabilities. Under these assumptions, at the end of 2013, your assets would fall short of your liabilities by 52, at 323 versus 375, respectively.
Like I said, pension calculations are complicated.
You don’t get it do you? WE are not going to “assume” or suppose anything here when the reality of it is COMPANYS failed to adequately fund pensions. Not only did they fail to adequately fund pensions, they failed to go back to their workers and tell them they would have to put more into it to keep it viable. Like I said, pension funding has been a game for companies to harvest additional funds as GM did to make their bottom line look better as GM did and then when they go bankrupt go to court and have the liability tossed back on Labor which GM also did except the Federal Government bailed Labor out at the expense o bond holders (if I remember correctly). GM bankruptcy was never about Labor, it was about poor management decisions. Gettelfinger got it right in front of Congress when he told them Direct Labor was 10% of the cost of manufacturing. Hell, Direct Labor has not been a high cost of manufacturing since the early seventies.
Sorry Jed that is not going to fly.
Complicated for certain. And the math is certainly beyond me.
I would think if I consistently underestimate my liability and consistently overestimate the growth of my assets for decades and decades(intentionally) I end up with a clusterf!ck.
Is that correct?
And if so, is that what GM did? Or were they simply one of the worst pension administrators in the world?
When they went bankrupt they were forecasting 8.5% return on pension funds which was ludicrous. It was not just them, it was other companies as well and a common event regardless of what the market place did the same return always popped up. Every company and state in the US did the same forecast. And now its Labor’s fault? That is nonsense.
Later, I have to go lift some weights.
Chill out run. emichael asked, how with an empirical return stream that essentially matched ex ante assumptions for annualized returns, a pension could end up in such an underfunded situation, and I answered him. And as I’ve mentioned above, companies were strongly discouraged, if not explicitly prohibited, by IRS policy from adequately funding pensions through continuing “normal” contributions or per McArdle, ratcheting benefits, when they were in a surplus status – the other side of that coin is to draw down surplus as you referenced, and for the same reason – to avoid having trapped capital and or being forced to further ratchet benefits. As for my assumptions – if you’d like to go pull 10-Ks and figure out actual returns on GMs pension assets, feel free. I took a simplistic allocation of 60% to equities and 40% to bonds. These are real-world, backward looking returns which had an arithmetic average of 9.4% over the 40 years and a geometric average of 8.7%. You’re free to say no one should expect that, but if you invested $100 in 1973, that’s what you would’ve received on the $100 investment.
” when they were in a surplus status”
And that status was determined by the pension admins.
Thus our differences.
Yes. And given your demonstrated numeracy, I completely understand why you think you know better than auditors and pension actuaries.
Didn’t say I know better.
But there are those results hanging around.
Well criticizing investment managers is quite easy with the benefit of hindsight – why didn’t that idiot buy Google after the IPO, why didn’t he sell AIG in 2007, why were they assuming such a high rate of return when *everyone* knew that it was aggressive.
But as Yogi Berra said, “It’s tough to make predictions, especially about the future.” Don’t think many people (except perhaps the shareholders) would object or claim they’re still being too aggressive, if GM announced today that they decided to lower their current expected return to 6.0%.
6.0% is a 2.5% premium to the current 30 year Treasury yield.
Put in that context, in 1992, when 30 year Treasuries are yielding around 7.5%, assuming a 10% long-term return – that same 2.5% premium to Treasuries – on a diversified investment portfolio, when your empirical index returns have generated 10% over a 20-year history, seems neither outlandish nor aggressive to me.
Using only what you could have known in 1992, without knowing what actually happened next, what expected rate of return would you have recommended and why?
And then when the S&P returns 10% in 1993, 1% in 1994, 38% in 1995, 23% in 1996, 33% in 1997, 29% in 1998, and 21% in 1999 are you going to tell me that sitting there at the end of 1999 with your (presumably) less aggressive expected rate of return assumption, you don’t have reason to assume you’re at a funding surplus?
Not the point.
First, pensions should not be aggressive. There is a reason most of them are restricted in large amounts to AAA investments.
Second, when everything on the asset end goes pretty much how you predicted and you still ended up buried, there has to be a big problem with the other end of the equation.
If both sides worked as you foresaw(or close) and you ended up buried there is incompetence or fraud.
Yeah, bubbles last forever. Everyone knows that.
But you only look at one side, Jed.
Here I take your S&P numbers and take them right through the bottom of 2008
So there is the asset side, pretty close to where it should be.
And in 2008 GM’s pension was where?
And if you go back farther, like 1973 the numbers(W/o inflation) are even better.
What could have happened?
I’d guess the best place to look for those pension funds would be the CEO&CFO’s pockets. Might want to strip search the board of directors too.
“Second, when everything on the asset end goes pretty much how you predicted and you still ended up buried, there has to be a big problem with the other end of the equation.. . .What could have happened?”
Gee, if only someone had linked to something that could have possibly explained such a counter-intuitive outcome. Oh wait:
“A whole lot of the big union pension plans are in trouble. This is usually cited as an example of The Trouble With Unions, or alternatively, The Scandalous Underregulation of the Private Sector. . . .
“So the IRS got very strict about pension overfunding: they didn’t allow it. Or rather, they allowed it, but they wouldn’t let you deduct any payments into an already overfunded plan. . . .
“However, by the late 1990s, a whole lot of pension plans were overfunded. . . The pension consultants and money managers who were responsible for calculating the required contributions were well aware that the rocket-fuelled 1990s price increases were not likely to continue forever. They even understood that prices were likely to fall, leaving the funds not-so-funded. They wanted to keep pouring contributions into the funds in order to protect against the inevitable decline. But the IRS wouldn’t let them. . . .
“But the big multi-employer plans (MEPs) run by the unions had an even worse problem. Pension contributions were set by multi-year collective bargaining agreements with each local. Those companies didn’t have the option of stopping their contributions; to do so they’d have had to go back and negotiate a whole new contract with the unions (at the height of a labor market boom, to boot). So the money kept pouring into the pension funds even though they were already overfunded. . . .
“The rules were very clear: if the fund was overfunded, you had to either stop making contributions, or increase the benefits. And the IRS refused to budge. So the pension plans increased the benefits. . . .
“The MEPs emerged from the dotcom crash not only with less funding than they should have had, but also burdened with a much richer set of benefits they had to pay out. Moreover, the 2001 recession had pushed a number of their member employers into bankruptcy. They left behind big unfunded liabilities–“orphan liabilities”–that by the rules of the plans, ended up spread around the remaining members. . . .
“The government eventually fixed this problem, but only after the market had thoroughly finished crashing and destroying the funding status of these plans. Obviously, this was far too late to help anything.”
Yeah, let me know when you can show me that this is what happened at GM.
“Nov. 16, 1992 12:01 PM ET
DETROIT (AP) _ General Motors Corp.’s pension funds are $11 billion short because the automaker overestimated how much money the funds would earn and underestimated how long its retirees would live.
The liability is up $2.4 billion from $8.6 billion last year. The shortfall is a problem only on paper at this point. It would only have a material effect on GM retirees only in the unlikely event that all those who qualified for pensions would tried to collect at one time.
GM executives have hinted the automaker might add some cash to the pension funds before the end of the year, perhaps part of the proceeds of a fourth- quarter charge against earnings. GM has not said how big the charge would be.
However, GM spokesman Mark Tanner said today he doesn’t believe another pension contribution is required this year. GM added $500 million worth of common stock to the funds in May, but the value of that stock has fallen about 30 percent since, contributing to the gap.
GM periodically adds stock to its pension funds, Tanner said.
Pension fund earnings have been depressed this year by low interest rates. Higher rates next year could restore some of the gains GM thought it would make.
GM also underestimated the longevity of some of its retired workers, which has placed an additional demand on the funds.
Yep. It’s pretty easy to construct a backwards fitting model that has a pension shortfall in 1992, surplus in 1999, and shortfalls ever since (hey look at me, I’m just like a climate scientist!) In fact, tweaking just one of the metrics I provided above, so that GM contributes an extra 2% (instead of my prior assumed 5%) of the shortfall in years following a shortfall (per your article they added 4.5% in 1992, which compares to my modeled 3.5% assumption for years when not in shortfall and 1.5% for years when in surplus), shows that their modeled shortfall increases 30% in 1993 versus 1992. Per the article, their actual shortfall increased 28%.
Can you state that GMs pension problems were not caused by underestimation of their liabilities on a continuing basis?
that depends. Is GM supposed to estimate that their liabilities will increase because one of their competitors for labor goes bankrupt? Is GM supposed to estimate that their liabilities will increase because the IRS will essentially force them to increase their benefits?
Could they have underestimated or fooled themselves regarding longevity? Absolutely. But the volatility around longevity in a large population is pretty small and expected life spans for people who make it to 65-year olds haven’t increased all that much.
You are accusing the IRS of forcing them to increase benefits without any proof of such, nor do you want to admit there is a possibilty(and a track record) of GM underestimating liabilities which caused the over funding which made the IRS force GM to increase benefits.
I spent over two decades personally watching GM take profits that did not exist and push the losses down the road on the captive leased vehicles.
Sorry if the demise of a company which had everything going for them(including government restriction of imports) and could not stay in business makes me more than a little leery of any accounting they control.
“Any assets in excess of the amount needed to pay benefits are the property of the employer, although these assets are subject to a federal excise tax of up to 50% if they are used for any other purpose than to provide pensions or retiree health benefits.”
” We may also hear today about current rules which limit
contributions by employers when a plan is overfunded. Designed
to prevent companies from taking excessive deductions, these
rules could have the perverse effect of discouraging companies
from setting aside money for a DB plan when times are good,
expecting them instead to be able to free up the necessary cash
when times are bad. I am interested in considering whether the
well-intended deduction limits in current law are really
serving the best interests of employees and retirees.”
“(d) Increase in tax for failure to establish replacement plan or increase benefits
(1) In general Subsection (a) shall be applied by substituting “50 percent” for “20 percent” with respect to any employer reversion from a qualified plan unless—
(A) the employer establishes or maintains a qualified replacement plan, or
(B) the plan provides benefit increases meeting the requirements of paragraph ”
Subtitle A—Treatment of Reversions of Qualified Plan Assets to Employers
. . . .
“(3) PRO RATA BENEFIT INCREASES.—
“(A) IN GENERAL.—The requirements of this paragraph
are met if a plan amendment to the terminated plan is
adopted in connection with the termination of the plan
which provides pro rata increases in the accrued benefits of
all qualified participants which—
“(i) have an aggregate present value not less than 20
percent of the msiximum amount which the employer
could receive as an employer reversion without regard
to this subsection, and
“(ii) take effect immediately on the termination date.
“(B) PRO RATA INCREASE.—For purposes of subpareigraph
(A), a pro rata increase is an increase in the present value
of the accrued benefit of each qualified participant in an
amount which bears the same ratio to the aggregate
amount determined under subparagraph (A)(i) as—
“(i) the present value of such participant’s accrued
benefit (determined without regard to this subsection),
“(ii) the aggregate present value of accrued benefits
of the terminated plan (as so determined).
Notwithstanding the preceding sentence, the aggregate increases
in the present value of the accrued benefits of
qualified participants who are not active participants shall
not exceed 40 percent of the aggregate amount determined
under subparagraph (A)(i) by substituting ‘equal to’ for ‘not
I get it.
What you refuse to get is that GM could easily manufacture the situation that would trigger those results.
As they have done many times.
First of all, if your clicked through any of the links I provided, or comprehended anything of what I’ve written or pasted – going all the way back to my first comment for which your first instinct was to call bs, you’d recognize that government policy sets up a significant asymmetry for pension plan sponsors to want to run perpetually short:
“Although declining interest rates and maturing plan populations were two of the factors that led to lower funded status, the most significant contributing factor was the slowdown in contributions to pension plans. DOL analysis indicates that in each of the years 1990 through 1995, payments to pension beneficiaries and plan expenses exceeded contributions to pension plans.
“Experts believe that public policy, directly as well as inadvertently, played a major role in the slowdown of pension contributions. Dr. Schieber, for example, asserted that a major reason for the decline in contributions was the new full funding limit legislated in 1987, which prohibits employer contributions if assets exceed 150% of the current liability. Dr. Schieber presented data that convincingly supported his thesis. . . .
“Contrary to what some believe, asset reversions did not lead to depletion of pension assets and lower funding ratios. Dr. Schieber noted that high excise taxes imposed on asset reversions by the Omnibus Budget Reconciliation Act of 1990 (OBRA 90) virtually put a stop to asset reversions. However, according to Dr. Schieber, OBRA 90 did adversely impact plan sponsor willingness to make large pension contributions. “The slowdown in pension funding is directly attributable to reluctance on the part of plan sponsors to tie up assets that can never again be accessed at reasonable cost even if there are wildly excess assets in the plan,” according to Dr. Schieber. . . .
“The DOL examined funding ratios over the period 1990 through 1996 for different industries. Funding ratios were studied for the following six industries: Construction, Retail, Manufacturing, Finance and Insurance, Communications and Utilities and Services. Manufacturing showed the lowest funding ratios while Finance and Insurance tied with Communications and Utilities for the highest funding ratios. The trend in funding ratios for each of the industries was remarkably similar. Funding ratios declined steadily from 1990 through 1996.
DOL data indicated that multi-employer plans had lower funding ratios than single employer plans and that the trend in funding ratios was downward between 1990 and 1996 for both single employer and multi-employer plans. . . .
“The DOL studied the funding ratios for collectively bargained plans versus non-collectively bargained plans. Funding ratios for collectively bargained plans were lower than for non-collectively bargained plans. “
Secondly, the ONLY way they could “manufacture the situation that would trigger [indication of overfunding]” is to change either their Discount Rate or Expected Return on Plan Assets. As I demonstrated, their EROPA was very sticky. And as Run noted, “Private companies can exercise discretion in projecting their investment returns but have stricter limits than public funds in setting their discount rate.”
As the 1999 DOL Working Group noted, “As of 1996, single and multiemployer pension plans were overfunded by some $251 billion in this country (Attachment 1). Given the extraordinary recent performance of the capital markets, the amount of overfunding has probably increased substantially since that estimate was made.”
Hell, even the PBGC estimated they were in surplus from 1996 – 2001, and yet your starting premise is that the only reason GM was projecting surpluses is because of nefarious accounting.
Third, aside from the potential of GM using nefarious accounting, I’ve demonstrated that every single one of your instincts with respect to my comments has been wrong.
* you called BS that IRS policy was a factor in limiting contributions – and you are wrong
* you implied GM’s pension was never over funded – and you are wrong
* you implied that GM adjusted expected return on plan assets to financially engineer a surplus – and you are wrong
* you stated that GM’s expected return assumptions are higher than recommended by a third party – and you are wrong
* you called BS that IRS policy caused an increase in benefits being provided by pension plans – and you are wrong
I’ve provided links and numerical analysis for all of the above. You’ve provided an anecdote that is tangentially related. I’m not overlooking the fact that their pension was/is underfunded presently, but I am pointing out that there was no reason to expect that it would be prior to the fact absent government restrictions that exacerbated their problems.
So maybe I just flipped 5 heads in a row and the forward odds are 50/50 that GM used nefarious accounting to project a surplus so they could report higher profits to the benefit of their shareholders and management. On that, I’d say lucky for you, you can’t be proven wrong. But then again, neither can my assertion that they didn’t, but you’re of course welcome to try with something a little more convincing than your observations.