On October 28, Mike Powell and the writer met with Ines Craviotto, Chief Financial Officer and Vice President of Finance, and Dave Courtney, financial analyst for our pension plan, at GMCC's headquarters, to review the status of our pension plan for the quarter, in this case as of June 30, 2016. Also present was Kevin Tighe of Willis Towers Watson, actuarial consultant to GMCC. Though Hallowe'en was only three days away, the information was not very scary.
Not scary, but not exciting either. Although the plan return was positive overall, it fell short of the benchmark. The favourable performances within our portfolio were offset by Public Equities and Real Estate for the quarter and the two previous quarters. The fund managers are monitored on a regular basis to ensure they are meeting the fund's objective and turnover does occur. There are six asset classes in our plan, and fixed-income makes up 61% of the current asset mix. We are basically at the target of our de-risking strategy that has been pursued for four years. Return-seeking funds account for 39% of the whole. Low interest rates for the quarter continues the trend for the year, which increases liabilities, however, our de-risking strategy of high fixed income is helping to reduce the impact.
We sought clarification about some topics that have arisen in the meeting with GMCC executives August 25 or in conversations with GENMO members.
PYCB Prior Year Credit Balance
People outside GM including some politicians thought that when the governments bailed out GM with 4 billion dollars, the hourly and salaried plans must then be fully funded. Kevin detailed the use of the PYCB (Prior Year Credit Balance) from its inception in 2009 until it was used up by 2015. A deficit in any one year must be made up over the next five years. But a deficit in the next year has five years to be made good; and so on. The sponsoring company must make a minimum payment each year to work toward that target and is also allowed to use PYCB to offset funding obligations. To help GMCC through the financial turmoil, and provide cashflow certainty as pension contributions can vary greatly year to year, the governments negotiated that each minimum payment would come partly from GMCC and mostly from the PYCB for five years. The benefit of the up-front $720 million allowed growth in assets rather than spreading out that contribution over several years. All gone now; the PYCB has provided $720,200,000 and now GMCC makes the full annual minimum contributions.
Pension Benefit Guarantee Fund
Ontario backstops crumbling pension plans to a maximum of $1000 per month. But as part of the bailout negotiations, our salaried and hourly plans were excluded from this insurance plan. This saves GMCC about $14 million in annual premiums, based on the September 1, 2015 valuation results. The premiums would decrease over time as the funded status of the plans improves. To re-acquire this coverage, our plans have to reach full solvency funding for three consecutive year, which is highly unlikely to happen.
GM Canada Profitability
At the August 25 meeting, GMCC stated that GMCC managerially gets consolidated under GM North America (GMNA). As reported in GM's financial statements, GMNA's costs and breakeven point have been lowered and profits increased since the meltdown. But because GMCC is not a public company but part of a global corporation, there are no public documents that display performance for the Canadian subsidiary.
Sources of Pension Contributions
GENMO has been concerned about future contributions to the pension funds if manufacturing in Canada winds down. It was explained that contributions are made by GMCC and the business has three sources of revenue. The vast majority of GMCCs profits come ultimately from Marketing, the sale of vehicles. However, other activities receive "profit" from the Corporation as markups on their costs. Manufacturing and Engineering generate income on a cost-plus basis. These markups are arms' length returns and benchmarked on an annual basis.