In December, GM outlined a revised strategy designed to deliver at least a 9% return at its pension plans, including increased allocation to such asset classes as emerging-market debt, high-yield bonds and real estate while reducing global equity allocation to less than 50%.
Some commentators feel that investing in more exotic asset classes and using hedge fund managers with the aim of reducing volatility is slightly odd. But GM treasurer Walter Borst insists that investing in additional asset classes will add to diversification and so reduce volatility on a portfolio basis. "We can do this because we have such large assets under management and expertise in house," he says. "Some people have said that by investing in some of these asset classes we must be adding risk. Well, some of the items might be more or less risky, but we like to think we're a little more sophisticated than that."
There's always the hope that the pension plan will keep performing above expectations as it did in the second half of 2003. GM has also just reduced the discount rate it uses to calculate the present value of its pension obligations by 75 points to 6%, compared with Ford's 6.25%. As the rate goes down, GM's pension obligation goes up. Analysts reckon this means there could be further upside in the pension plan if a higher discount rate is set in 2004 and 2005.
Yet it is still margin and market share that will make the biggest dent. As Merrill Lynch equity and credit analysts wrote in a recent report on GM's pension plan: "We believe that GM's pension problems may be alleviated by a lower discount rate, a boom in equity markets, or even cash contributions to the plan, but a true permanent fix will not be achieved until GM is able to maintain/gain market share for an extended period of time."
