GM - General Motors

[sleepydragon]

What’s going on with GM today?

Pricing moving up very fast

[LowIQinvestor]

GM Cruise Spinoff?

[WayWardCloud]

Has GM gotten us so used to disappointment that you guys freak out when it goes up by 2%?  ;D

[Ahab]

My Jan 2021 "trade war" calls are feeling good right now.  ;D

 

 

[jeffmori7]

Just a reminder, last day to trade the warrants. Or you will have to exercise them after today.

[Gregmal]

So....Moody’s out with a note saying GM is on the verge of a downgrade to junk status...

 

I’m calling bullshit here. On whom? I don’t know yet. But on one end we’ve put up with some horrendous performance, because Mary Poppins has been preaching to us how well run GM is and how prepared it is for the next downturn and whatnot. So you tell me, how is it even conceivable we re even remotely close to junk here?

 

I’d wager Moody’s is wrong. But at the same time I think Mary deserves some blame here for it even being possible to throw out some kind of bullshit allegation like this.

[Spekulatius]

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

[Gregmal]

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

[NBL0303]

 

its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

Thank you for your thoughts on this, very interesting. I do not know all that much about it, I'd love to know is their balance sheet not a fortress in your view? Why not? I remember her saying that and hadn't really tracked their balance sheet health.

[Gregmal]

 

its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

Thank you for your thoughts on this, very interesting. I do not know all that much about it, I'd love to know is their balance sheet not a fortress in your view? Why not? I remember her saying that and hadn't really tracked their balance sheet health.

 

 

Look, I think GM's balance sheet is fine for an auto company. Definitely better than many peers. But it also got a reset with the bailout and has been raking in shit tons of cash and not really giving any of it to shareholders. The buybacks have basically stopped, and the dividend was last raised when? 2015? So I am not sure Barra deserves credit for this; rather, she and the board just use whatever they can point to as a rationale for doing things their way. Even if it was my opinion they had a fortress balance sheet... I would view it as a failure on her part if this was one of the few things she said was a focal point(while neglecting many others) yet there is still room for a company like Moody's to make this claim. You dont hear anyone saying Apple is on the verge of junk status...If the one thing she's preached is even disputable, and everything else poor(again, not to mention deliberately neglected)...what exactly has she accomplished?

[ander]

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

Gregmal - I can understand your frustration as I'm guessing you've held shares for several years. I've only been a shareholder since 2018. I feel that the intrinsic value of the stock has climbed over the past several years versus the current stock price to a point where I pulled the trigger last year. I think she has done a reasonable job. I too would like to see an increase in buybacks, but it seems like you're basically saying that she has failed because the stock price has not delivered. I agree with you that the stock price performance has been poor but I believe that a re-rating is on the horizon (which is why I own the stock) - and probably more likely after a recession which will prove out and show the changes that Barra has made. I'm pleased with the strategic moves (ditching unprofitable international operations for example) and operationally what she has done. I'm hoping that she holds strong against the Unions since I believe in free-markets.

 

So, what did Barrs do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moodys rationale either, but I dont get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

[Gregmal]

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

Gregmal - I can understand your frustration as I'm guessing you've held shares for several years. I've only been a shareholder since 2018. I feel that the intrinsic value of the stock has climbed over the past several years versus the current stock price to a point where I pulled the trigger last year. I think she has done a reasonable job. I too would like to see an increase in buybacks, but it seems like you're basically saying that she has failed because the stock price has not delivered. I agree with you that the stock price performance has been poor but I believe that a re-rating is on the horizon (which is why I own the stock) - and probably more likely after a recession which will prove out and show the changes that Barra has made. I'm pleased with the strategic moves (ditching unprofitable international operations for example) and operationally what she has done. I'm hoping that she holds strong against the Unions since I believe in free-markets.

 

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

I agree I am overreacting a bit. I just have great disdain for management teams that get paid a great deal, and then don't deliver. My frustration isn't so much the share price. While its been poor, I can live with that if management is creating long term value. But assessing "long term value" is very tricky and hard to judge at times. My main gripe here, using the restaurant analogy, is if you have a guy in the kitchen, and he refuses to do anything other than bake cakes, but is known for making a heck of a cake, he better consistently deliver one hell of a fuckin cake. Barra has been all about solidifying the balance sheet and preparing for the next down turn. Just the other day I was laughing about Ford getting downgraded to junk. It would appear, at least to some, that we arent too far off from that either, and that's the issue. The one area where Mary has tried diverting our attention to, in order to thwart taking other obvious actions, is the balance sheet. So there shouldn't even be a debate about whether the company deserves a junk rating.

[WayWardCloud]

Thanks for your opinion. So then where do you think the "shit ton of cash" they made went? I'm puzzled by Moody's note as well but unfortunately not skilled enough to assess the balance sheet health myself so I was taking management word for it.

 

There has been the Lyft investment and the Cruise acquisition obviously but I'm not sure those alone can account for it, especially since they've opened up Cruise to outside capital. Maybe billions have been poured into R&D and subsidies on full electric? We haven't seen much of it yet but they have apparently dozens of EV models coming up simultaneously in the next few years.

[RadMan24]

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

Gregmal - I can understand your frustration as I'm guessing you've held shares for several years. I've only been a shareholder since 2018. I feel that the intrinsic value of the stock has climbed over the past several years versus the current stock price to a point where I pulled the trigger last year. I think she has done a reasonable job. I too would like to see an increase in buybacks, but it seems like you're basically saying that she has failed because the stock price has not delivered. I agree with you that the stock price performance has been poor but I believe that a re-rating is on the horizon (which is why I own the stock) - and probably more likely after a recession which will prove out and show the changes that Barra has made. I'm pleased with the strategic moves (ditching unprofitable international operations for example) and operationally what she has done. I'm hoping that she holds strong against the Unions since I believe in free-markets.

 

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

I agree I am overreacting a bit. I just have great disdain for management teams that get paid a great deal, and then don't deliver. My frustration isn't so much the share price. While its been poor, I can live with that if management is creating long term value. But assessing "long term value" is very tricky and hard to judge at times. My main gripe here, using the restaurant analogy, is if you have a guy in the kitchen, and he refuses to do anything other than bake cakes, but is known for making a heck of a cake, he better consistently deliver one hell of a fuckin cake. Barra has been all about solidifying the balance sheet and preparing for the next down turn. Just the other day I was laughing about Ford getting downgraded to junk. It would appear, at least to some, that we arent too far off from that either, and that's the issue. The one area where Mary has tried diverting our attention to, in order to thwart taking other obvious actions, is the balance sheet. So there shouldn't even be a debate about whether the company deserves a junk rating.

 

 

Your disdain for GM is very much the stock price. That's been clear since day 1. Now, if you provided management guidance and actual results compared to consensus expectations (i.e. quantitative data for long term performance instead of qualitative thoughts), I would have something to go on. Even qualitatively such as capital allocation has quantitative factors; even so, I find it confusing how one could complain about how GM de-risked Cruise, spread management out to focus on distinct, yet Key business drivers, and how it has maintained a balance sheet to withstand two years of  a harsh recession.

 

 

But hey, again, it's "not" the stock price.

 

edit: cleaned up last section of paragraph.

[UK]

https://www.wsj.com/articles/gms-big-fight-for-flexibility-11568806083

 

"Following its bankruptcy and government bailout in 2009, General Motors GM -0.29%▲ is under intense pressure to show it can cruise through the next downturn without too much damage. Only then can the largest U.S. auto maker expect a better stock-market valuation."

 

"Mary Barra is popular on Wall Street, in particular for well-timed decisions to quit Europe and raise $7.25 billion of frothy tech capital for GM’s driverless project. Even so, GM stock fetches just under six times earnings. To cement her reputation, Ms. Barra needs to drive the company successfully through tougher times. Investors can expect her to fight hard for GM’s flexibility."

 

 

[Gregmal]

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

Gregmal - I can understand your frustration as I'm guessing you've held shares for several years. I've only been a shareholder since 2018. I feel that the intrinsic value of the stock has climbed over the past several years versus the current stock price to a point where I pulled the trigger last year. I think she has done a reasonable job. I too would like to see an increase in buybacks, but it seems like you're basically saying that she has failed because the stock price has not delivered. I agree with you that the stock price performance has been poor but I believe that a re-rating is on the horizon (which is why I own the stock) - and probably more likely after a recession which will prove out and show the changes that Barra has made. I'm pleased with the strategic moves (ditching unprofitable international operations for example) and operationally what she has done. I'm hoping that she holds strong against the Unions since I believe in free-markets.

 

So, what did Barr’s do wrong in your opinion? If she had bought back more GM shares as many here had been suggesting, GM would probably be junk rated already?

 

I am not sure I get Moody’s rationale either, but I don’t get where Barra got it wrong.

 

Theres ultimately a responsibility for people in charge to deliver. GM has not performed on the only metric import to investors, basically since its IPO. We can debate whether Barra could have done things differently, but the bottom line is that GM has resisted investors and preached the "we're a rock fundamentally" stuff kind of as an excuse for not doing things the way many have suggested that perhaps they should. So to now, potentially not even have THAT! which doesn't matter if the stock performs(look at FCAU for a while for instance), its pretty damning.

 

When I go to a restaurant with a celebrated executive chef, I expect the food to be good. If it comes out terrible, I don't care what the process was, or how "we did everything the right way"...its about delivering a result and if you are going to fight your shareholders and do things your way, you damn well better deliver on what you're preaching. Which was a fortress balance sheet and long term value creation. Mary has done neither.

 

I agree I am overreacting a bit. I just have great disdain for management teams that get paid a great deal, and then don't deliver. My frustration isn't so much the share price. While its been poor, I can live with that if management is creating long term value. But assessing "long term value" is very tricky and hard to judge at times. My main gripe here, using the restaurant analogy, is if you have a guy in the kitchen, and he refuses to do anything other than bake cakes, but is known for making a heck of a cake, he better consistently deliver one hell of a fuckin cake. Barra has been all about solidifying the balance sheet and preparing for the next down turn. Just the other day I was laughing about Ford getting downgraded to junk. It would appear, at least to some, that we arent too far off from that either, and that's the issue. The one area where Mary has tried diverting our attention to, in order to thwart taking other obvious actions, is the balance sheet. So there shouldn't even be a debate about whether the company deserves a junk rating.

 

 

Your disdain for GM is very much the stock price. That's been clear since day 1. Now, if you provided management guidance and actual results compared to consensus expectations (i.e. quantitative data for long term performance instead of qualitative thoughts), I would have something to go on. Even qualitatively such as capital allocation has quantitative factors; even so, I find it confusing how one could complain about how GM de-risked Cruise, spread management out to focus on distinct, yet Key business drivers, and how it has maintained a balance sheet to withstand two years of  a harsh recession.

 

 

But hey, again, it's "not" the stock price.

 

edit: cleaned up last section of paragraph.

 

If that's how you want to interpret this, be my guest. I'll play that game, with a few questions for you. As a long time holder of BX, or AAL, I can attest to having patience with underperforming shares if management is firing on all cylinders; even if the CEO is a putz on conference calls(Dougie Parker) or the company refuses to buyback stock(BX).

 

The share price is in certain ways a function of capital allocation...Where have the buybacks been? Why even when the company was buying back stock, were they regularly paying high 30's and then all of a sudden refusing to repurchase meaningful amounts of stock when shares declined to the mid/very low 30's?

 

EPS has increased substantially over the past few years; why no dividend increase?

 

Tons of money has been spent on R&D. What IRR projections have they given on these investments? All Ive seen is "we're an auto company hardy har har and times are a changing so we need to have EV's"...

 

Why if Ms. Poppins has been so dedicated to the balance sheet do we now have the credit rating stand at the mercy of a corrupt Union?

 

What exactly is she waiting for to IPO Cruise?

 

I agree Barra has made some great moves. But she's also been helped quite a bit by the macro situation and GM as a whole is largely in good shape because all of its debt was wiped out. Quite different than a company like Ford. If we wanted to own a junk grade auto company its a no brainer to just go with FCAU.

 

By the way, remember this chicks response to the FCAU merger? We're merging with ourselves???? I was against the merger as well at the time, but in hind site both Mary and I clearly got that one wrong.

 

And oh yea, when's the last time Ms. Barra bought a share in the open market? How much of the company does the Board own?

 

Thanks

 

EDIT: oh yea, and since day 1? I wasn't even a member here the day I first purchased GM stock. Bit I guess that was clear....

[fareastwarriors]

GM’s Mary Barra Bets Big on an Electric, Self-Driving Future

 

The American automaker has challenges like dealing with strikes, developing tech that works, and finding a market.

 

 

https://www.bloomberg.com/news/features/2019-09-19/before-gm-goes-electric-mary-barra-has-a-strike-to-settle?srnd=premium

[JRM]

GM should have been buying back more stock and offering buy-outs of pensions.  Like most pensions, they have a large liability, and it is likely understated using an overly optimistic discount rate of 7-8%. 

 

Maven was a bust, Lyft was a questionable investment, and I'm losing faith on Cruise (and all autonomous driving) the more I learn about the actual work being done.

 

They have invested in factories and improved efficiencies.  Ironically this results in shutting down unproductive\unprofitable factories and angering the union.

[cmlber]

Like most pensions, they have a large liability, and it is likely understated using an overly optimistic discount rate of 7-8%. 

 

The net liability is calculatedly based on market value of assets minus actuarial value of liabilities (which uses something like long term AAA corporate bonds as the discount rate).  The 7-8% assumption has no relationship to the current funded status on the balance sheet, it only has implications for future changes in funded status.  But as long as they aren’t required to contribute cash because the plans are sufficiently funded, if they earn more than the discount rate (3%ish) on liabilities the funded status should improve over time.

[Cigarbutt]

Like most pensions, they have a large liability, and it is likely understated using an overly optimistic discount rate of 7-8%. 

The net liability is calculatedly based on market value of assets minus actuarial value of liabilities (which uses something like long term AAA corporate bonds as the discount rate).  The 7-8% assumption has no relationship to the current funded status on the balance sheet, it only has implications for future changes in funded status.  But as long as they aren’t required to contribute cash because the plans are sufficiently funded, if they earn more than the discount rate (3%ish) on liabilities the funded status should improve over time.

You may want to review some of your assumptions here. :)

Whether GM's choice of expected return on plan assets of 6.09% or 6.61% is felt appropriate or not given their asset allocation is a separate discussion.

Under US GAAP, the future periodic pension cost will be derived using the "expected" return assumption but if the realized return is less than predicted (even if higher than the discount rate used for obligation), this will result in a potentially significant shortfall in the funded status that may not escape the amortization of actuarial deviations as presently allowed. Numbers are large and even small changes in assumptions can have large effects.

 

Potentially irrelevant side notes:

-Isn't it interesting to note that GM has maintained a significant unfunded status after one of the longest expansions ever and after one of the greatest bull markets?

-In their note, they refer to 'improved' mortality tables and how this helped in decreasing their pension obligation. I guess they mean that pensioners dying sooner is a good thing. (?)

[cmlber]

Like most pensions, they have a large liability, and it is likely understated using an overly optimistic discount rate of 7-8%. 

The net liability is calculatedly based on market value of assets minus actuarial value of liabilities (which uses something like long term AAA corporate bonds as the discount rate).  The 7-8% assumption has no relationship to the current funded status on the balance sheet, it only has implications for future changes in funded status.  But as long as they aren’t required to contribute cash because the plans are sufficiently funded, if they earn more than the discount rate (3%ish) on liabilities the funded status should improve over time.

You may want to review some of your assumptions here. :)

Whether GM's choice of expected return on plan assets of 6.09% or 6.61% is felt appropriate or not given their asset allocation is a separate discussion.

Under US GAAP, the future periodic pension cost will be derived using the "expected" return assumption but if the realized return is less than predicted (even if higher than the discount rate used for obligation), this will result in a potentially significant shortfall in the funded status that may not escape the amortization of actuarial deviations as presently allowed. Numbers are large and even small changes in assumptions can have large effects.

 

Potentially irrelevant side notes:

-Isn't it interesting to note that GM has maintained a significant unfunded status after one of the longest expansions ever and after one of the greatest bull markets?

-In their note, they refer to 'improved' mortality tables and how this helped in decreasing their pension obligation. I guess they mean that pensioners dying sooner is a good thing. (?)

 

Correct, to quote you, "future periodic pension cost" is derived from the expected return on plan assets, not todays balance sheet liability.  Isn't the periodic pension cost equal to service cost (a pretty small number relative to the liability) + interest cost (the discount rate x liability) - expected return on plan assets? 

[Cigarbutt]

Like most pensions, they have a large liability, and it is likely understated using an overly optimistic discount rate of 7-8%. 

The net liability is calculatedly based on market value of assets minus actuarial value of liabilities (which uses something like long term AAA corporate bonds as the discount rate).  The 7-8% assumption has no relationship to the current funded status on the balance sheet, it only has implications for future changes in funded status.  But as long as they aren’t required to contribute cash because the plans are sufficiently funded, if they earn more than the discount rate (3%ish) on liabilities the funded status should improve over time.

You may want to review some of your assumptions here. :)

Whether GM's choice of expected return on plan assets of 6.09% or 6.61% is felt appropriate or not given their asset allocation is a separate discussion.

Under US GAAP, the future periodic pension cost will be derived using the "expected" return assumption but if the realized return is less than predicted (even if higher than the discount rate used for obligation), this will result in a potentially significant shortfall in the funded status that may not escape the amortization of actuarial deviations as presently allowed. Numbers are large and even small changes in assumptions can have large effects.

...

Correct, to quote you, "future periodic pension cost" is derived from the expected return on plan assets, not todays balance sheet liability.  Isn't the periodic pension cost equal to service cost (a pretty small number relative to the liability) + interest cost (the discount rate x liability) - expected return on plan assets?

To your question: yes but, to be comprehensive, you have to adjust for employer contributions and deal with remeasurements. And the interest cost is based on the net liability (or asset if applicable).

 

Let's use a real-life example.

You want to fund an education account for your kids. For the obligation part, you have to take into account the equivalent of the service cost, interest effect, expected tuition inflation etc. In order to establish your yearly contribution, you have to assess your expected return. Let's say you want to get 100K$ in 20 years and you "choose" 7%. Your contribution is 2439$ per year. If your realized return though is 5%, you should have contributed 3024$ per year (+24%, per year). If your realized return is 3%, you should have contributed 3722$ per year (+53%, per year). The remeasurement exercise on the pension asset side ultimately allows to recognize or reconcile the difference between expected and realized returns. GM recognizes the actuarial changes in OCI (numbers are large and potentially very large and it's unclear where they are in the corridor at this point). Back to our real-life example, if you realize along the way that your funding level is too low, a conservative way would be to increase your contributions above minimum levels. Another strategy would be to put 24% of your invested assets into hedge funds. :)

 

I am familiar with GM to some extent and looked rapidly for this post (so this is not audited). Average pre-tax profit in the last five years is about 8,5B. Average periodic pension cost (recognized in P&L) in the last 3 years is about 1,3B. On the surface not life-threatening but significant nonetheless and we are talking about a negative impact that would last a very long time.

[cmlber]

Like most pensions, they have a large liability, and it is likely understated using an overly optimistic discount rate of 7-8%. 

The net liability is calculatedly based on market value of assets minus actuarial value of liabilities (which uses something like long term AAA corporate bonds as the discount rate).  The 7-8% assumption has no relationship to the current funded status on the balance sheet, it only has implications for future changes in funded status.  But as long as they aren’t required to contribute cash because the plans are sufficiently funded, if they earn more than the discount rate (3%ish) on liabilities the funded status should improve over time.

You may want to review some of your assumptions here. :)

Whether GM's choice of expected return on plan assets of 6.09% or 6.61% is felt appropriate or not given their asset allocation is a separate discussion.

Under US GAAP, the future periodic pension cost will be derived using the "expected" return assumption but if the realized return is less than predicted (even if higher than the discount rate used for obligation), this will result in a potentially significant shortfall in the funded status that may not escape the amortization of actuarial deviations as presently allowed. Numbers are large and even small changes in assumptions can have large effects.

...

Correct, to quote you, "future periodic pension cost" is derived from the expected return on plan assets, not todays balance sheet liability.  Isn't the periodic pension cost equal to service cost (a pretty small number relative to the liability) + interest cost (the discount rate x liability) - expected return on plan assets?

To your question: yes but, to be comprehensive, you have to adjust for employer contributions and deal with remeasurements. And the interest cost is based on the net liability (or asset if applicable).

 

Let's use a real-life example.

You want to fund an education account for your kids. For the obligation part, you have to take into account the equivalent of the service cost, interest effect, expected tuition inflation etc. In order to establish your yearly contribution, you have to assess your expected return. Let's say you want to get 100K$ in 20 years and you "choose" 7%. Your contribution is 2439$ per year. If your realized return though is 5%, you should have contributed 3024$ per year (+24%, per year). If your realized return is 3%, you should have contributed 3722$ per year (+53%, per year). The remeasurement exercise on the pension asset side ultimately allows to recognize or reconcile the difference between expected and realized returns. GM recognizes the actuarial changes in OCI (numbers are large and potentially very large and it's unclear where they are in the corridor at this point). Back to our real-life example, if you realize along the way that your funding level is too low, a conservative way would be to increase your contributions above minimum levels. Another strategy would be to put 24% of your invested assets into hedge funds. :)

 

I am familiar with GM to some extent and looked rapidly for this post (so this is not audited). Average pre-tax profit in the last five years is about 8,5B. Average periodic pension cost (recognized in P&L) in the last 3 years is about 1,3B. On the surface not life-threatening but significant nonetheless and we are talking about a negative impact that would last a very long time.

 

Interest cost is not based on the net liability, it's pension benefit obligations times the discount rate.  So, to the extent your returns on plan assets equal the discount rate, why would the funded status change?  Required contributions may change, but the balance sheet funded status would not.

 

Also, GM has recorded pension income, not cost, in recent years; exactly because of the point above, returns on plan assets have been higher than the discount rate.  This is one of the larger reasons why "earnings" have been so much higher than auto FCF.

[JRM]

I stand corrected.  Their discount rate is closer to 4%.  I still think pension funds, in general, are a ticking time bomb if interest rates stay low for an extended period.

[Cigarbutt]

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Interest cost is not based on the net liability, it's pension benefit obligations times the discount rate.  So, to the extent your returns on plan assets equal the discount rate, why would the funded status change?  Required contributions may change, but the balance sheet funded status would not.

 

Also, GM has recorded pension income, not cost, in recent years; exactly because of the point above, returns on plan assets have been higher than the discount rate.  This is one of the larger reasons why "earnings" have been so much higher than auto FCF.

I'm trying to see your perspective so let's see if we can turn this into a two-step argument: 1-what happens when realized return is less than expected return (with the return being above or below the discount rate) and 2-what this means for GM. 2- will be discussed if we can agree on 1 :)

 

The discount rate for obligations and the expected return on invested assets are remotely related conceptually but they are two different things and I submit that you are overlooking what is bypassing the income statement.

 

Using the real-life example described above, If I were to buy your education fund obligations, I would use a discount rate in correlation with your overall counterparty risk as a sponsor, not in correlation to your asset allocation related to your investments managed in separate accounts. This is why discount rates for the liability side usually correspond to highly rated bonds. It would be possible to try to match the liability and the asset side with a similar risk profile but it would be difficult and that's not the way pensions are typically funded.

 

As mentioned above, whatever discount rates used for the pension obligation, the difference between realized returns and expected returns, up to a 10% value of assets or liabilities corridor, bypasses the income statement and the net liability (or net asset) number but ends up in equity through OCI. This makes sense because a certain degree of smoothing is reasonable and if, over time, the expected vs realized mismatch balance then the end result is neutral. However, if the company, on a net basis, keeps on building actuarial losses because of realized returns that are lower than expected returns (discount rate for liabilities does not matter here), eventually very true negative cashflows will need to occur to balance the books. This is very insidious because companies can 'manage' this aspect for a very long time and 10% of the greater of the defined benefit obligation or the fair value of the plan assets is a very large number.

 

If interested, I suggest to look at GE's pension management, accounting and reporting.

 

Where am I wrong?