Is It Safe? GM Pension Plan Faces Freeze

General Motors' pension plan, underfunded by $13.6 billion, is the latest component of the company to go through the ringer.
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Everything seems to be falling to pieces at

General Motors

(GM) - Get Report

. In the fourth quarter, the defined benefit pension plan for the carmaker's employees became the latest component of the balance sheet to break down.

With the increasing threat of a June 1 bankruptcy filing being pushed by the Obama administration, many pension-plan participants are questioning the safety of their retirement benefits. There are about 700,000 GM pensioners plus spouses and dependents.

Ford

(F) - Get Report

and

Chrysler

aren't as close to the chasm as GM.

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According to General Motors' 2007 10-K, before the market meltdown in 2008, its pension-funding status was on solid footing compared with other

large companies

such as

Macy's

(M) - Get Report

,

ConocoPhillips

(COP) - Get Report

and

Viacom

(VIA.B)

. General Motors had a funding surplus of $18.7 billion, which resulted in a so-called funding status of 122%. However, after 2008 losses were assessed, the surplus vanished. The pension plan is now underfunded by $13.6 billion.

While the pension status won't be reported again until the end of the year, additional losses are almost a certainty at this point, as the S&P 500 has extended its decline so far in 2009. As for GM's stock itself, it has tumbled more than 90% in the past year.

The one positive for the GM plan is the allocation of plan assets. According to the 2008 10-K, GM has only 24% of its assets in equities and 61% in fixed income, helping the carmaker avoid greater losses, though also raising questions about the underlying investment assumptions.

A portfolio with only 24% of its assets in equity investments is conservative, yet GM expected a return of a whopping 8.5% on its entire portfolio. This number is irrationally high for a plan with a conservative allocation. Expectations of bigger returns have required GM to contribute less to the plan under the assumption that the difference would be covered by gains on assets.

While this scheme has most likely boosted profits, or minimized losses, in the past, it has also led, in part, to the underfunding that may now fall on the Pension Benefit Guaranty Corp. if GM were to fail. The PBGC protects the pensions of 44 million American workers and retirees, financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans and other sources.

This looming obligation comes at a terrible time for the PBGC. The PBGC has recently moved from its traditionally conservative investment strategy to one that is far more aggressive, placing large bets on equities.

As of Sept. 30, the PBGC had an underfunding of $11 billion. This number is before the meltdown in the final quarter of 2008, so the underfunding would certainly be much higher now.

The PBGC originally switched to the more aggressive investment strategy to close the gap in its funding status, but the bear market has now created a gulf. Should the GM pension expense be piled on to this already overloaded facility, the government may be required to intervene regardless of the fact that the PBGC isn't backed by the full faith and credit of the U.S. government.

Employees depending on their GM pensions in retirement shouldn't worry about the safety of their benefits, however. If the PBGC failed, it would be catastrophic to the economy. The government would never allow such a devastating event to occur.

GM is currently rated "sell" by TheStreet.com Ratings, with a grade of E+.

TheStreet.com Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research,

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Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.