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GM Pension-Dump
Win-win mechanism to offload some of its $37 billion in liability. | |
As of GM's last 10-K filing, it holds over $9 billion in liability for pensions of its former employees and something like $28 billion for "other postretirement pensions."
Why not eliminate uncertainty from the sizeable portion of those liabilities which are supposed to cover health benefits for its
former and current employees?
GM would pay a consortium of HMOs a premium to assume liability for the health pensions. So for every dollar in liability, let's say GM would pay a consortium of HMOs $1.20 to take over.
The HMOs--since health care is their core competency--are able to provide healthcare services to GM's pensioners at a discount. For the sake of argument, let's say a conservative estimate of .90 on the dollar from what GM would have to pay.
So in this example, the HMO makes an infinite return--they're getting 30 cents essentially for free (well, for taking on the risk). Of course, these numbers are arbitrary, but it's the concept we're after.
In doing so, GM improves by:
1. Regularizing Cash Flow. Boomers are aging, and health problems will begin occuring more frequently. In addition to the added frequency, employee health problems will be unpredictable.
As a result, quarter-to-quarter drains on cash flow would be sporadic and unpredictable. Paying to offload this liability would regularize/annuitize payments and allow for management to budget for growth more predictably.
2. Sticking to its core competencies.
GM is not a health care provider. Leave this to the HMOs.
3. Positive PR. Wall Street would see this as an attractive move given that the firm can operate more predictably.
A win-win? Have companies ever done this?
define:HMO
http://www.google.c...=define%3AHMO&meta=
[calum, Apr 20 2005]
define:10-k
http://www.google.c...define%3A10-k&meta=
[calum, Apr 20 2005]
PBGC
http://www.gold-eag.../mauldin081404.html
Pension Benefits Guaranty Corporation. The US government regulated pension insurance company. [reensure, Apr 20 2005]
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I was thinking of the exact same solution today. However, I think one huge hurdle this would face is the agreement of the unions. |
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Yeah, that's a great point. |
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GM could make the argument that the HMO consortium would provide better healthcare--but the Union is a total wildcard. The assumption apparently being, if it's good for the company it must be bad for the Union... |
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Also, another factor is the cost of the debt; which may end up reducing what GM could pay the HMO consortium thereby making it unattractive. It would be interesting to see the numbers. |
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Seeking approval could easily be done, but what percent of those pension liabilities held for plan participants are dedicated for health care as directed by HMOs? Even if you break pension liabilities into annuities, insurances, and intangibles such as survivor payments and litigation reserves you see that HMOs directly benefit from only the insurance portion of those funds, and may not directly benefit from parts of the insurance excluding long-term care, disabilities, and beneficiaries who travel outside of the area of their networks. |
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This idea seems an appropriate and measured argument for national health insurance and a form of social medicine. Win-win in that the ends are equitable, and the means are justifiable. |
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So, GM currently provides healthcare directly? |
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Bristolz - GM does not directly provide health care as far as I know. The company is obligated to make payments to health care providers on behalf of the beneficiary. A function core to HMOs and insurance companies, not automakers. |
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Reensure - you're right. We'd need to know the percentage of those liabilities that are divestable to HMOs, and then divest only relevant portions. The peripheral liabilities that lie outside of healthcare could possibly be divested to someone else in a different transaction. |
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So GM pays a healthcare management company management fees and funds the actual care or does it pay an insurance premium to a healthcare insurer? |
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In simpler terms, is GM self-insured or not? |
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I'll have to look into it when I get a few extra minutes. Hopefully the 10-K will have it. Getting more than I bargained for here ;). |
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New here, first post, but a subject dear to my heart. |
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GM, and other companies, would not have these unfunded liabilities if they had chosen a realistic rate of return, at the time they were making profits. |
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They decided that stockmarket returns would be astronomical for the foseeable future, so reduced their contribution to the funds. |
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Lo and behold, returns were lower, hence their unfunded liability rose. Now they cry that the pension and Medical obligations are killing them. |
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MOST large companies have vast unfunded liabilities facing them. |
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My own field, basic steel,has had dozens of companies bought up only after they dumped their pension liability taken over by the PBGC, who pay some 70% of what the worker spent 30 or more years trying to achieve. |
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HMOs are orgs who take over the normal operation of a corporate medical program, add their overhead, cut what they will pay to a provider, and pocket the difference. Called profits. |
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Hi George amd welcome. Good insights. |
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I agree that companies mishandled investments but "[n]ow they cry that the pension and Medical obligations are killing them," is valid as what else can they do now but cry? What's done is done. |
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\\As of GM's last 10-K filing, it holds over $9 billion in liability for pensions of its former employees and something like $28 billion for "other postretirement pensions."\\ |
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So you reckon there is a sum of 37 billion doing nothing on some bank account, waiting for people to get sick? Not so. If they would pay a monthly sum to HMO, the flow of money would be public and no longer under GM control. |
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Somewhere in the GM flow of capital there is some room to spare for healthcare, but because this is never fully called upon ( I mean like banks, right? If we All demanded our savings in cash right now, the economy would collaps) it does not, as such exist. Rather it is invested, due to be received etc. This money makes money. Monthly payments do not. |
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Everything can be sold. People sell polution rights and debt. So in a sense, GM's healthcare obligation is just another financial entity that can be sold. The question is at what price. |
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An issue *very* near and dear to my heart, since every time GM sneezes, the whole of the auto industry, (especially the suppliers), catches a cold, and I end up out on the street again. |
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The $#@! unions simply have to wake up from their dreamland and realize that it's a global marketplace, and job security for the rest of the industry is nonexistent, so why should they get it so cushy? |
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This premise doesn't jive with me. Big companies are nearly all self-insured. Insurance exists to spread out the risks among a wider population. Companies with lots of employees already have that risk diluted across many people. |
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Getting a middleman involved (another insurer) is inherently inefficient & unnecessary, and would only serve the purpose of playing shell games to hide theft. |
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Right. Participation in typical pension plans is by consent, some options exist for participants at certain levels within structured plans. See link for discussion of the Pension Benefits Guaranty Corporation, _the_ insurance company to which all pension providers subscribe. Also inside the article are some good/bad news items of interest. |
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\\As of GM's last 10-K filing, it holds over $9 billion in liability for pensions of its former employees and something like $28 billion for "other postretirement pensions."\\ |
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But, when any contract is negotiated, it is a "package" of 1 dollar per hour increase, not 1 dollar in your paycheck. |
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Upping the pension by 2 dollars per year's service might be 30 cents per hour of that "wage" increase. That is money that "should" be sequestered in the retirement portfolio, not money that the company is now trying to scrape up to pay the benefit. Similar to the SS Lockbox. |
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The money wasn't needed in the Trust Fund, so they didn't put it into the Trust Fund. |
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The present admin, and excuse me if this seems political, is trying to scare the younger generation with "You are going to have to pay higher taxes in the future to redeem those SS T-notes." |
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Well, excuse me, but China, Japan, Merril-Lynch, everybody else presents a note for redemption, the tax rate does not climb, at least in this admin. They just redeem it and sell more. |
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As to GM, the present issue of Forbes seems to think that GM might not survive as a viable corporation. They seem to be pinning their hopes on fuel cells, which none of the rest of the world's experts, and I have to qualify expert, as I think some are NOT all that expert. 'Nother thread, sorry.
The corporation can't compete, pure and simple. |
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They're having their lunch eaten on an ongoing basis. |
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The Germans, for 1, and maybe the Japanese, have more stringent pension obligations thrust upon them. They retire younger, they receive a larger benefit, AND, they pay their workers more than the US automakers do. |
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The $#@! unions simply have to wake up from their dreamland and realize that it's a global marketplace, and job security for the rest of the industry is nonexistent, so why should they get it so cushy?
RayfordSteele, |
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Forgive me, but your name sounds Southern. Southerners are brought up to be anti-union, good grief, the Union whooped them 140 years ago, although they won't admit it. (Smiley here) |
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I don't think you pay less for any commodity than I do, but you are willing to settle for less pay, less security, less of everything, just to keep them damn Unions out/ |
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Mebbe you should ask a Northener what the pay rate is for the same job you do. |
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If them damn Unions didn't get their members 10 bucks an hour, you sure as hell wouldn't be getting 9.9 bucks an hour, the difference being Union dues, for the job you are doing. |
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More like choppin' cotton wages. 3, mebbe 4 bucks an hour? |
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GM tried this, a 2 tier system, in the Delphi plant, in, I think, Tennessee. Old hands got 14 bucks, new hires got 7 bucks, to do the same job. Soon had to build a new plant, to do the same work, for the new second tier workers. They were happy when all their co-workers got the same wage they got, even though they got half what the Union plant got. |
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BTW, HMOs also determine whether you can even SEE a specialist for your ailment. "Nah, we won't pay for that life saving device, costs too much." |
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You mean Daewoo, the Korean car mfg? The one whom GM bought then turned into Renaults or Fiats or something, and the Chevy Cobalt, no, it was the Isuzu Reno and a couple other versions, who have the same parts that I could not buy to fix my daughter's 2001 Daewoo Nubira. |
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Finally found the parts, thank goodness, as she was driving my grandson and my g'son to be down the pike at 70 mph. |
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All companies outsource. Look at all the suppliers who spring up aboput any factory built in the last 50 years, 100 years, whatever timeframe you like. |
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But, they have never outsourced the main component of their true being as they are today. |
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Forbes, again, with computer inter-connectivity, they can build a factory, link the CNC machine to the computer, and have an operator in India or Pakistan, or Mexico, run it, with a twitch of a joystick or a mouse . |
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All that is needed here, is a strong back to put the next part in place, and that is only if it is a large part. A continously fed machine does not even need that. |
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And you bebefit from that? |
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That 11.95 toaster only costs you 12.95, next year, instead of 13.95. |
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Can you imagine 120 million people without a job, unless they are service people? |
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Dilbert comes to mind, here, as a nation of janitors and maids, "Just imagine how clean the US will be." |
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//if you continue to push more contribution premium payments into the pool// |
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[unabubba] I agree with everything you said. That's a pretty big "if," considering GM's current situation. |
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[sophocles] //Getting a middleman involved (another insurer) is inherently inefficient & unnecessary, and would only serve the purpose of playing shell games to hide theft.// |
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Then why do companies purchase goods/services at all from other companies, instead of just doing it themselves? I don't think of it as a middle-man as it is a sale. GM pays entity B $X to take on the liability. Entity B being another company/govt org/whatever whose core it is to administer these types of things. Yes, GM pays a bit of a premium, but uncertainty is offloaded from its balance sheets in favor of regular payments. |
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This premium, in addition to the premium on the debt that GM issues to pay whatever organization taking over could be considered the fair value of the risk. |
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GM is getting rid of risk that it is bad at managing, while entity B is taking on risk in which it is good at managing. I see it as more of a two-party deal than a middle-man. |
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[George] Outstanding insights. I'm new here too. Welcome! |
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Thank you all for your input. Frankly, I'm a bit taken aback. Sorry if I didn't respond to you--I honestly didn't expect this much but keep it up! |
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