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Ford pension plan deep in red

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Company says it's manageable
November 15, 2002
BY JEFFREY MCCRACKEN
DETROIT FREE PRESS STAFF WRITER

Ford Motor Co.'s pension plan -- decimated by a falling U.S. stock market -- is on pace to be underfunded by $6.2 billion at year's end, the largest deficit in at least 15 years. The fund serves 162,000 hourly and salaried retirees.

Ford called the deficit "very manageable" Thursday in a conference call with investors and Wall Street analysts that sought to allay concerns about the mushrooming liability. Several analysts noted that General Motors Corp., while making more money than Ford currently, has a pension fund that could be in the red by $23 billion at the end of 2002.

Ford said that even if the stock market underperforms for several years, the pension fund wouldn't fall so far behind that Ford would be required by federal pension laws to contribute money for several years.

"It is neither necessary nor, frankly, advisable to overreact to recent volatility in equity markets. We have flexibility in deciding the amount and the timing of future contributions," said Ford Treasurer Malcolm Macdonald. He added that Ford has $25 billion in cash to handle the pension deficit, if necessary.

Nonetheless, at a time when Ford is cutting costs everywhere by closing plants or trimming white-collar staff, its cost for running the fund will likely increase by $249 million next year. Also, Ford said it plans to add $500 million to its pension plan in 2003 and again in 2004, just in case.

The underfunding of the pension does not mean that Ford workers or retirees are at risk of losing their pensions; federal laws ensure employees receive their money.

Ford's $35.8-billion pension plan began 2002 overfunded by $596 million. However, through the first 10 months of the year, the fund's investments have lost 11.5 percent, at the same time pension costs have increased.

Ford has had a pension since the early 1950s. It provides a pension to 106,000 hourly and 56,000 salaried retirees. It had obligations of $35.2 billion heading into 2002. About 70 percent of the fund is invested in stocks and the rest in fixed-income securities like bonds.

GM's pension fund is far larger. It had assets of $67.3 billion and an obligation of $76.4 billion coming into 2002, a deficit of $9.06 billion. It provides a pension to 459,000 GM retirees. It has lost about 10 percent so far this year, better than the 11.5-percent loss at Ford. That's because Ford is more heavily invested in the stock market than GM, which has only 40 percent of its fund invested in U.S. stocks.

"During the 1990s, these pension funds became overfunded and made the companies earnings look better than they really were. Now at Ford, and elsewhere, it's heading in the reverse," said Ed Eberle, president of Seizert Hershey & Co., a Bloomfield Hills money management firm that oversees $500 million for investors.

Eberle and other analysts noted that Ford's "worst-case scenarios" for the next three years predict the pension plan making 8 percent a year for the next few years. Under that scenario, Ford would have to pay out $4.9 billion by 2007 to avoid paying a penalty to the Pension Benefit Guaranty Corp., the federal agency that oversees pensions.

That 8 percent return might be overly optimistic, said Eberle and other analysts, because Ford's pension-plan returns the last few years have been well under that.

Furthermore, while Ford's fund has averaged an annual return of 9.3 percent the last 30 years, much of that impressive return came during the 1970s, 1980s and early 1990s, when inflation averaged around 5 percent. Accounting for inflation, Ford's return is about 4.3 percent.

With inflation today hovering closer to 2 percent, Eberle asked whether it might be better for Ford to predict a return closer to 6.3 percent, or slightly higher than that.

"I don't think Ford is being as conservative as they should be and a shareholder in them needs to know that," said Eberle. "I know what Ford is trying to do. They are in a liquidity position and trying to make the numbers look better. I just think their assumptions aren't what they should be."

Ford uses a 9.5-percent projection on annual pension-plan returns. GM projects a 10-percent return.

Both automakers, not to mention other corporate pension funds, have been criticized for overoptimistic pension-plan estimates. Rosier pension-plan forecasts help a company because they multiply that estimated return by the size of the plan -- in Ford's case $35.8 billion -- and come up with a number that helps cover pension expenses. The higher that number the more that can be carried over to improve or inflate a company's bottom line.
 
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