GM Pension Asset Allocation

GM has been getting a lot of press recently about its deteriorating credit ratings, its underfunded pension, and its possibility of bankruptcy due to deteriorating financials. One of the biggest problems is its huge number of retirees, and the pensions it needs to pay to them. In the past, they have forecast a 9% rate of return for their expected pension returns, which some say is rather optimistic. The traditional media has a particularly annoying habit of leaving out the real details, so I had to do a bit of research on my own to find out what GM's pension situation is really like. I though it'd be particularly interesting to look at their asset allocation in which they plan to use to achieve this 9% rate of return.

According to this ValueLine report, GM has $115.9 billion in pension assets as of September 2005, but its pension obligation is listed at $184.9 billion. So, exactly what are they doing with their huge pension fund? Here's a published report on GM's Pension from December, 2003 that gives some details on asset allocation.

U.S. Equities    24-28%
Foreign Equities 17-21%
Global Equity    41-49%
Global Bonds     32-36%
Real Estate       8-12%
Alternatives      9-13%

This contrasts with their past history of allocating:

Equities                55-60%
Bonds                   30-35%
RealEstate/Priv. Equity 10-15%

The report states that they had considered shifting more into bonds to lower volatility, but that was deemed non-optimal due to low returns. Instead, they opted to shift assets into asset classes where active management generated higher excess returns with low correlation to stocks and bonds. In particular, such assets might include emerging market equity, emerging market debt, domestic high yield, small cap equity, real estate, private equity, and absolute return (hedging) strategies.

They consciously reduced exposure to large cap equities and diversified quite nicely into non-correlated assets. Overall, it looks like a reasonable financial plan. Diversifying to non-correlated assets makes financial sense. The main risks, however are that they are relying upon the skill of active managers to deliver outstanding returns. It's a big question mark whether those managers can do that. Unfortunately, the report doesn't give any more details on the asset classes and managers chosen.