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Vinita Patel

Acct - 404
Professor Lohrey
March 13, 2017

General Motors Pension Plan

General Motors is the worlds one of the largest automobile manufacturer. In

2004 they had $194 billion in sales. The company was facing high debt and the

recall problem for many of its models. GMs profit is declining because of high oil

and steel prices, also increase in competition from foreign automakers. General

Motors provide many benefit pension plans to their employee, including hourly

based workers or executive employees. They also provide the Other Postretirement

Employee Benefits (OPEB), which provide medical, life insurance and dental benefits

to employees and their dependents.

The OPEB plans are underfunded, because of tax rules, they are operated on

a pay-as-you-go basis. The benefit obligation for the US and Non US pension plans

totaled $184,914 million for 2004, out of that 44 % are the companys total

liabilities and 39% asset value of the company. The funded status of the US Pension

and Non US pension plans totaled ($68,989) for the year 2004. The funded states

are worse in 2004 because of the NON US Pension plan and OPEB plans. These

provision is permitted under GAAP; the net liability situation is not going to be

reflected on the balance sheet. General Motors reported their Assets on Balance

sheet $6706, which included both US Pension and Non US pension plans in 2004.

And as we see above these plans are underfunded by ($68,989) million. They need

to consider the off balance sheet amount as the company was in financial problems

and the retirement time is short. The off balance sheet amount is ($75,695) in 2004,
which we can get by subtracting the total funded status from total Balance sheet

amounts. In comparison of 2004 off balance sheet the 2003 amount is ($66,474),

from this we can concluded that the 2004 liability increases the total liabilities of the

company and impact negatively.

Last year the company plan to contribute $2billion to its hourly plans, which

you can see on the companys 2016 10-k. they also planned to contribute $947

million to its NON US benefit plans this year. At the end of 2016 the assets managed

in the companys US benefit plans dropped 7.1%, and the NON Us benefit plans

estimated $13 billion as of Dec 2016, which was down 11.6% than the previous

year. The debt increase and equity declined from 16% to 14%.

The return on plant assets affects companys operating income. GM assumes

9% rate of expected return on plant assets for US pension plans. The actuarial loss

for the US pension plans is $30 million. The company declares that the current Rate

of return is reasonable, the company has shifted the investment focus from equity

markets, and that was not related to market and the management has received

more returns on that in past. The 9% of rate of return is high as per the data

provided in Exhibit 3. The current long term rate for corporate debt for 2004 was

6%. The study by Mercer Human Resource Consulting released in 2005 indicated

that the mean ROA for S&P 500 plans in 2004 was 8.5%, again indicating that the

9% is high.

There are some most significant challenges for GM which Hamilton need to

consider in reviewing his investment in GM shares. First of all, in 2005 the company

was facing high debt, global overcapacity and recall of many of their models.

Increasing the competition from foreign automakers. Some argued that GM gave
large discount to their customers, which will affect the image of the company. Gm

was also facing several risk related to the pension plans, which was include the cash

flow risk, financial risk, and equity risk. Companys two out of three funds were

underfunded, which will create more risk if the company required more financing.

The actual return on GMs pension is poor, if the equity market continues to be

weak, and affect the funded status of the plan. If the investment status of the

companys bond is lowered, the value of companys equity will decrease. Will make

more expensive and hard for company to borrow funds and have to pay more