GM's Experiment: Can You Defease a Pension?

Motley Fool's less favorable view

In 2003, General Motors issued about $10 billion in bonds, primarily to reduce a major underfunding problem in its pensions. Several good years in the stock market later, the gamble appears to have had at least some success; Motley Fool finds a slight shortfall while Allen Sloan (reference in title above) claims a multi-billion overage. GM has been very aggressive in its earning rate assumption; at one time 9% (now 8.5%) but at least for now they have succeeded.

In effect if their strategy is fully effective, GM will have become the first known company to defease pension debt with standard debt. Pension accounting is very complex, but doubtlessly many pension managers in companies with defined benefit pension plans are looking closely at the GM experiment. This is particularly true with FASB making noises about finding ways to require inclusion of underfunded pensions in the balance sheet and not just the notes of publcly-traded companies.