Author Topic: Ronald J. Ryan Claims General Motors Pension Crisis was Avoidable  (Read 4247 times)

The Costa Report

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    • The Costa Report
January 11, 2015
RONALD J. RYAN CLAIMS GENERAL MOTORS PENSION CRISIS WAS AVOIDABLE

by American sociobiologist, Rebecca D. Costa

As the founder and CEO of Ryan ALM, Inc., Ronald J. Ryan has seen more than his fair share of corporations and government offices misreporting the value of their pension funds. He worries that accounting practices which inflate the value of pension assets now put the retirement of millions of Americans in jeopardy.

Speaking on The Costa Report, Ryan cited General Motors' 2002 pension obligation bond program. The auto giant faced a pension deficit of $14 billion with a net worth of only $8 billion.  Ryan explained that the deficit left the company with two options: bankruptcy, or a complete overhaul of their pension program. GM elected to do the latter, issuing pension obligation bonds totaling $14 billion. The company's plan was to contribute monies from the sale of the bonds back to the pension – a tax deductible move which they would benefit from. GM was permitted by law to forecast the long term return on pension assets. The company determined the long term return for the pension fund would be 9% (in spite of the 5% interest rate offered on pension bonds which were issued). The result?  According to Ryan, $560 million in "phantom pension earnings" were reported every year.

Ryan went on to discuss how the practice of overstating the value of pension assets has become a common practice. He claims pension programs would benefit from the application of a "custom liability index" – a system designed to help workers understand the liabilities and assets associated with pension portfolios. The first step is to "tell the truth": have a "scoreboard" that provides an accurate, up-to-date market valuation of assets and liabilities. Next up: ensure that asset allocation is responsive to the funded ratio of the pension (assets divided by liabilities). Third step: asset management. Ryan recommends the creation of a "core portfolio" which matches assets to liabilities. Once these steps are completed, investors can focus on the final step: performance measurement. Total asset growth would be measured and assessed against total liability growth, allowing for adjustments in the "core portfolio. "Without a custom liability index, you don't have a scoreboard, [and] you can't possibly perform all the asset decisions you need," says Ryan.

To hear the full interview with Ronald J. Ryan on The Costa Report, visit www.thecostareport.com



 

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