GE's Pension Time Bomb: $31 Billion Shortfall... And Rising

Tyler Durden's picture

Authored by Mike Shedlock via MishTalk.com,

GE has the largest pension shortfall in the S&P 500. It’s a $31 Billion Balance Sheet Hole That Keeps Growing.

At $31 billion, GE’s pension shortfall is the biggest among S&P 500 companies and 50 percent greater than any other corporation in the U.S. It’s a deficit that has swelled in recent years as Immelt spent more than $45 billion on share buybacks to win over Wall Street and pacify activists like Nelson Peltz.

 

In the last two years, GE spent little more than $2 billion on total pension contributions, which hasn’t been nearly enough to keep the overall shortfall from widening. (The company also curtailed capital investments.) At the end of last year, its pension had $94 billion in obligations but only $63 billion in assets — a funding ratio of 67 percent.

 

In addition to the “anemic” free cash flow from its industrial businesses, GE’s pension hole and its indebtedness helped subtract roughly $8 a share from its equity value, based on a sum-of-the-parts analysis by Cowen & Co. That’s equal to $70 billion in market capitalization. To put it another way, the discount amounts to eight years of per-share earnings based on 2016 results.

 

The company has the largest projected benefit obligation of any S&P 500 member and among the top 10, no one has a lower funding ratio.

 

Because interest rates are still relatively low, it’s possible for GE to borrow money it needs to cover its shortfall. Verizon Communications Inc. and FedEx Corp. sold bonds this year to do just that.

Default Danger

Nobody is suggesting that GE is in imminent danger of defaulting on its pension obligations and many analysts say the company still has years to address the bulk of its shortfall. What’s more, a rising rate environment helps GE winnow its pension deficit by boosting its expected return.

 

And the longer its pension remains underfunded, the costlier it becomes. The Pension Benefit Guaranty Corp., a government agency that acts as a backstop when plans fail, has more than tripled its rates for companies with funding deficits, and they’re set to rise even more in the next two years.

Dividend Yield, Market Cap

I fail to see how GE can afford to keep paying a 3+% dividend. But the moment GE lowers the dividend, its share price will likely crater.

Pension Bomb

Time Bomb Talking Points

  • Current Liabilities: $94 Billion.
  • Current Assets: $63 billion.
  • Shortfall: $31 Billion.
  • Obligations: $47 billion in pension benefits to its retired employees and their beneficiaries over the next 10 years.
  • Pension Trust owns 32.9 million GE shares at the end of 2016.
  • Assumptions: 7.5 percent return.
  • GE’s non-pension debt: $130 billion.

GE needs to come up with nearly $5 billion a year for 10 years just to meet pension obligations. That assumes an annualized rate of return of 7.5% a year.

Warning bells are flashing. Returns are far more likely to be zero or negative than anything approaching 7.5%.

The danger of default is real. I suggest likely, even though default isn’t “imminent”.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Gordon_Gekko's picture

Good. I hope there is nothing left to pay out. Perhaps then people *might* wake up.

Chuck Norris's picture

Purely coincidence that Immelt is stepping down??

Erek's picture

Maybe Bezos is going to buy GE soon?

Arnold's picture

Good thing we were a Westinghouse family.

Joe Davola's picture

Doesn't the same thing apply to all defined benefit pensions?

Well, except gov employees who've managed to get it written into law that they can always say:  Fuck you, pay me!

BullyBearish's picture

...balance $hit hole...there, fixed it for you

froze25's picture

GE never intended on making good on it anyway, why else would they completely neglect it while make huge profits over the years?

Yukon Cornholius's picture

Edison still owes N.Tesla $50k(plus interest). Good luck to GEs riffraff.

NidStyles's picture

Almost like the board planned to destroy the company on purpose....

Not surprised considering (((who))) it is running the company.

targayren hous's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.jobproplan.com

runnymede's picture

....."Fuck you, pay me!"

I think you just summed up the human experience in four words.

vato poco's picture

this'll be instructive to watch. is there anyone here who isn't 100% sure GE has no intention whatsoever of paying off on those pensions? 

the question will be the exact method they use to fuck their pensioners; and what the USG does/don't do about it

runnymede's picture

Pensioners will get screwed--and the method is definitely TBD. Execs and bankers are planning on being safe in flyover country bunkers if it gets to that point. If and how they are held accountable is what I'm anxious to see. Screwing with people's retirement money will bring out the rage more than anything else. People will put up with a lot, but not that.

Deplorable's picture

If they end up in my flyover country, I will go after them with my Cat D10T2 Dozer.

booboo's picture

Hurry, get Jeff Imelt on the Pension Benefit and Guarantee Board stat!!!

all-priced-in's picture

I bet Immelt gets his full pension.

 

 

Offthebeach's picture

Too bad about HIS pension.   Right?  What?  ....

goober's picture

My thought as well. He and Corzine are laughing their asses off what they got away with. Both Obamaite worthless motherfuckers. But I imagine they will be looking over their shoulders for a long while. I look forward to reading of their demise.

shizzledizzle's picture

Is it? I have a hard time telling when 100 year Argentina bonds are a crowded trade.

jcaz's picture

LOL-  but Jack and Jeff have their parachutes, so who cares?

Maybe this will wake up the rank & file at GE and other companies who don't have a clue how bad this really is......

Arnold's picture

They go after the packer, not the flare to hard deck.

JohninMK's picture

This thread has hit the GE mail system, like a dose of diarrhoea.

Blankenstein's picture

But most important  "activist investor" Nelson Peltz was pacified and no doubt added to his $1.5 billion.  It's all good though, when you have $92 million in mortgage debt and spent $2 million on a bar mitzvah.  

 

"Billionaire Nelson Peltz, who owns one of the most expensive mansions in Palm Beach". The beach house totals 47,851 square feet

 

http://www.bizjournals.com/southflorida/news/2015/05/08/billionaire-nels...

 

"The hundreds of guests ... marveled at the stilt-walkers, two bands, five singers, hockey rink, basketball hoop and video games.  Guests estimated that the party cost $2 million. "

http://pagesix.com/2016/05/17/nelson-peltz-throws-2m-bar-mitzvah-for-his...

 

No different than the corporate raiders of the 1970s.  

"It’s a deficit that has swelled in recent years as Immelt spent more than $45 billion on share buybacks to win over Wall Street and pacify activists like Nelson Peltz."

 

 

marathonman's picture

It's a big club and you (all) are not in it.

GeezerGeek's picture

And when the rank and file wake up, then what? Riot? Go on strike? Quit and find another job? Most of those employees probably can't put the facts in order to see what is the best solution, so all I would expect is whining, followed by lots of political posturing.

Arnold's picture

Thank the Union reps on the way out.

itstippy's picture

You want some working class guy (or gal) who spent 40 years in a GE coil-winding factory to lose their pension so they'll "wake up"?!?

Your anger is misdirected.  Pensioners aren't the ones bleeding this country dry.  Pensioners toughed it out for many years in order to secure their pensions.  They aren't asking for free shit - they upheld their part of the contract and they expect that contract to be honored.

small axe's picture

ideally GE would cancel the dividend, leaving the Wall Streeters empty handed, and put the dividend proceeds completely toward pension obligations. But that won't happen because the collapse in share price would gut executive compensation, so the execs would never agree to satisfying pension obligations first. So that means the workers are screwed...an endless cycle of negative reinforcement of a broken system.

Reset needed with GE and the whole system.

Secret Weapon's picture

"Reset needed with GE and the whole system."

Coming soon (90 days) to a country near you. 

Philo Beddoe's picture

Indeed. Maybe some are very deserving. True. 

However, I have several old asshole relatives that are in their 70s and have not worked since there early 50s. To them they are all deserving and those that arre not in a similar postion now or in the future are lazy or just not doing things right. I am sure it is these type of old fucks that the anger is directed at. 

 

WillyGroper's picture

of course! 

direct that anger at the slaves that worked in the corporate meat grinders, never at the looting parasites.

it has gotten so bad, the time keepers have got slaves justifying down to the minute...next it will be millisec's.

so, did the 70's assholes express as much, or is that your assumption?

jcaz's picture

Really?   A traditional pension is, by definition, a Ponzi.

Every line worker believes that they can retire at 62, and that they'll magically receive a "paycheck" for the next 30 years-  even better, they believe that their "paycheck" will get bigger every year- their Unions told them so;

What- do you think the magic money tree is paying these people?  They're receiving money out of thin air,  NOT money they've "earned".

It's called "Math"-  when a pension fund generates a 3% return and pays out an effective 8+%, it eventually runs dry.  Doesn't matter what Ponzi bullshit you use to prop it up- selling debt, artificlally funding it periodically- there are still ancillary costs... It's a FLAWED MODEL, and that's if you even believe the average ROI of current pension funds, which I do not- most pension funds are rehypothicated messes of wishful accounting;

If your line worker believes any different, then he/she is a schmuck.  Your plan is not to "scare" them?  Keep them in the dark?  Head in the sand?  Wow- you must be in HR.....

Wake the fuck up.  Yes, your bosses lied to you 30 years ago, who didn't?  Fund your OWN retirement.  Don't rely on the Jack Welches of the world to give a shit about you- you're just cattle to them.

Ironic that you use a Monopoly character for your icon; 

"Coil-winding factory"- really?  USA?  2017?

Gordon_Gekko's picture

It's not anger. Most people today will lose their pensions - if not directly, then indirectly via rapid currency depreciation. The difference is that the latter way allows the corrupt elites who control the financial system to get away with it. If people actually start to lose money DIRECTLY, there might be a chance for French Revolution type consequences for the elite banksters. And its not about just pensions - a whole host of other MAJOR problems will be solved once the banksters are guillotined.

TradingTroll's picture

So if Joe worked for Sears hauling pallets around the warehouse but doesn't have a pension, he is supposed to feel sorry for Jill, who hauled pallets around a GE warehouse, and who just found out her GE pension is bust?

Companies write bad contracts all the time. People and companies get screwed. Did GE become GE by being Nice??

People definitely need to wake up to all the broken contracts.

Go on eBay and buy some US Silver Notes, which are contracts to exchange the notes for silver, and see if you can get any silver.

If you are surprised then whose fault is that?

Vilfredo Pareto's picture

As long as I and other taxpayers aren't going to have to honor a promise made by GE to its employees then fine.

 

They can work it out among themselves.

optimator's picture

And that same poor GE guy that's beern retired for thirty years is still getting the same bucks cause he doesn't have a CLA like the Government retiree.  The FED may not agree, but we have had a bit of inflation the last three decades.

SubjectivObject's picture

It's GE. 

They never had any intention of paying.

FukushimaYooToo

HalEPeno's picture

Presumably executive pensions are fully funded.

Gordon_Gekko's picture

You can bet your ass fucking Welch an his boy Immelt will be getting money till the day thy die...fucking millions.

Bank_sters's picture

We have this thing called a printing press-  Alan Green spit.

Dr. Engali's picture

Pfffttt. No worries. Just print the shortfall. The yet to be born tax payers will be glad to pick up the tab. 

GeezerGeek's picture

Whites in the US have been forecasted as being in the minority in a few decades. So apparently most of those yet-to-be-born taxpayers will be minorities - Hispanics, muslims, etc. Sounds like the "good old days" of the Antebellum South where non-whites supported whites to a certain extent.

How long will that last, I wonder.

847328_3527's picture

" I fundamentally changed GE!"

 

~ Jeff Immelt, GE CEO and Obama's "Job Czar"

 

 

<< Obama’s jobs czar, General Electric Chief Executive Officer Jeffrey Immelt, reassured stockholders in a letter Friday the company is still a solid investment>>> (March, 2016)

 

http://dailycaller.com/2016/03/01/obamas-jobs-czar-jeffrey-immelt-govern...

SantaClaws's picture

My thought exactly.  Once he got close to Obama it was all over.

I wonder whether former CEO Jack Welch still owns GE stock.

JimJinNJ's picture

I'd bet not.  Jack is much smarter than Imelt.

Crypto-World-Order's picture

Garbage Electric, people still buy their shit?