US carmakers General Motors and Ford Motor Co. recently remarked that they made significant improvement in their plans due to rising interest rates used to calculate the cost of future pension payments to retirees. Both GM and Ford are burdened by what is considered as some of the largest pension obligations among all companies in the United States, as they try to free up more cash to invest in future models.
Higher interest rates lower the cost of future pension payments. This means that pension shortfalls could fall without larger payments by the companies. This allows companies to spend and invest more on their business and less on retirees, allowing them to develop and build more competitive cars like the Chevrolet Impala and Ford Fusion as well as to post better-than-expected profits.
Michael Razewski, principal at Douglas C. Lane & Associates, remarked to Bloomberg that “it's one less thing investors have to worry about on the risk side."
Razewski added to Bloomberg that the less Ford has to focus on funding the pension, the more the carmaker could focus on driving innovative products and services and meeting customer demand. Both GM and Ford have been spending lots of moneys to finance their pensions, which is currently one of their major challenges.
Ford is planning to contribute $5 billion in cash to its pension this year, on top of $3.4 billion and $1.1 billion in 2012 and 2011 respectively. Ford’s pension payments are almost at par to the $5.5 billion the US carmaker has earmarked to capital spending in 2012. [source: automotive news - sub. required]