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Pensions Drive GM

By Jeff Hwang
December 3, 2003

Shares of General Motors (NYSE: GM) were up 6% to over $46 midday on strong vehicle sales and talk of improvement in its pension funding battle. For November, vehicle sales climbed 22% over last year, as truck sales jumped 30%. Unfortunately, those unit tallies benefited from the same strong incentives that have cut into profits.

In the bigger news, Goldman Sachs analyst Gary Lapidus suggests that GM has seen some improvements in its pension funds, which might provide some relief to 2004 earnings.

By the end of 2001, GM's pension plans were underfunded by $9.1 billion. According to GM, that figure had risen to $19.2 billion by the end of 2002. UBS (NYSE: UBS) pegged the figure closer to $25 billion. In June, the company raised over $13 billion in a debt offering to help close the gap.

The culprit had been aggressive expectations. Under GAAP, the company reported an expected return on pension assets of 10%, but rocky markets put such expectations to shame. As Bill Mann wrote in June, this allowed GM to report a $7.1 billion expected gain in 2002 vs. an actual loss of $4.9 billion. GM has since lowered its "asset earnings rate assumption" to 9%, which also lowered earnings by about $700 million.

But Lapidus suggests that GM's pension funds may have been bailed out to some extent by a stock market that has since reached 18-month highs. While GM's 9% "asset earnings rate assumption" might still be high, Lapidus' reasoning certainly makes sense.

We'd be cautious about making too much of the car and truck sales, as they look to be profitless. However, for long-term investors, any relief to GM's pension situation has got to be good news.

Jeff Hwang can be reached at
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