How Do GM’s Pension Obligations Look ahead of 2018?



Pension obligations

Previously, we looked at the recent performance of GM Financial Company, General Motors’ (GM) financial services arm. GM Financial’s rising revenues and stable profits along with higher sales penetration levels have contributed positively to GM’s overall business in the first three quarters of fiscal 2017.

Among all its auto industry peers, GM is also known to have the largest pension liabilities. In this part, we’ll look at these pension obligations and see what could have an impact on them.

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Pension obligations reduced

At the end of fiscal 2016, General Motors’ global pension obligations were $92.9 billion. They were underfunded by $18.3 billion. At that time, GM’s pension funded ratio was 80.3%.

At the same time, Ford (F), GM’s direct peer (IYK), reported a pension burden of $76.4 billion. However, its funding status was 88.4% with $8.9 billion unfunded, far better than GM’s funding ratio.

Investors should pay attention to the funding status of these automakers’ pension liabilities. A significantly low pension obligation funding status could hamper a company’s future growth.

Fed’s rate hikes and possible impact

In December 2017, the Federal Reserve hiked interest rates by 25 basis points—the third interest rate hike in 2017. This rate hike could have a positive impact on GM’s pension liabilities because interest rates directly influence the discount rates.

According to GM’s own estimates at the end of fiscal 2016, an increase 25 basis points in discount rates would reduce its pension obligation by $1.6 billion. Therefore, we can expect a significant reduction in the company’s liabilities after three rate hikes in 2017.

The Fed’s indication of being open to more rate hikes in 2018 is also a positive factor for GM’s pension obligations.

As of December 31, 2016, GM’s funding ratio was worse than its peer Ford, but it was still better than US companies Intel (INTC) and Delta Air Lines (DAL). Intel’s funding ratio was 46.6%, while Delta Air Lines had a funding ratio of 49.4% at the end of 2016.

Next, we’ll discuss key developments related to GM that took place in 2017.


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