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Minyan Mailbag: Pension Benefit Guarantee



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Prof. Succo,

If the UAW stays its course, it is conceivable that General Motors (GM) takes a bigger dive. My question is about the pension liabilities. Does the U.S. Pension Board guarantee that liability dollar for dollar, and if so what are the implications for stocks and bonds?

Thanks for sharing your knowledge.

Minyan Rick


The Pension Benefit Guarantee Corp. is a government entity. Companies with pension plans of a certain size are required to contribute "dues" to the public fund which is used to guarantee companies' pension plans. We all know that the PBGC is itself under-funded.

When a company goes bankrupt, or otherwise indicates that its pension is under-funded, the PBGC steps in and guarantees dollar for dollar the unfunded pension liabilities. In most cases (which is where companies don't actually go bankrupt), this is a psychological underwriting which is an attempt to just keep things going and hopefully the pension fund grows out of its problems. In this way all these underfunded pensions just get pushed along where the problem can actually (and has) become worse.

In reality the PBGC would not underwrite all of the unfunded liabilities. Most likely the plan would be re-structured where the plan owners (Mom and Pop) would settle for some cents on the dollar.

Prof. Succo

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