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The Big 3 enter 1995 with a much smaller millstone around their necks, in the form of unfunded pension liabilities that dragged earnings down by billions of dollars in the last four years.

That benefits the bottom line tremendously, since the automakers can take the money they have been spending on pensions and spend it on something else. They are still obliged to make payments, just not the extraordinary payments they have been making. The pension plans can even make money, based on their investments.

Lower pension expenses alone represent an additional $1 billion-plus to total Big 3 net income in 1995, according to an analysis by Ron Glantz, auto industry analyst for Dean Witter Reynolds Inc. in San Francisco.

Unfunded liabilities zoomed in the early 1990s for several reasons, mostly because interest rates fell.

The companies are legally obliged to set aside enough money over approximately the working lives of the employees to pay each employee's pension. At any point, a company can calculate how much it will owe in pensions to the employees, assuming they all remain with the company until retirement. That amount can be thought of as how much the company needs to invest today at today's interest rates to be sure of paying pensions to all current employees.

If the amount of money in the fund today equals the amount it needs to invest, the plan is fully funded. If not, it has an unfunded liability. The amount that must be invested today depends on the interest rate the investments can earn.

When interest rates fell, it took more money invested today to meet tomorrow's obligations, even if those obligations stayed the same.

And in fact, they didn't stay the same because with each new union contract the companies' pension obligations for union employees were increased not just for future years of employment, but also for past service. This immediately created new unfunded liabilities. Also, a company's ability to prefund these obligations is restricted by IRS rules.

Companies can prefund salaried employees' pension obligations, and generally have.

Now, companies are catching up, because they are making money again, and interest rates are rising.

Chrysler Corp. hopes to have its pensions fully funded for 1995.

GM expects to whittle its unfunded pension liability from around $22 billion at the end of 1993 to less than $8*billion in 1994.

GM already contributed more than $5*billion through three quarters of the year. Another $6*billion or so in the form of shares of GM Class E stock, tied to the earning of Electronic Data Systems, requires permission from the U.S. government. Chrysler needs similar approval for part of its plan.

Ford Motor Co. has less of a problem with unfunded pension liabilities, because Ford was the first to bite the bullet and downsize, before the most recent recession.

You can reach Jim Henry at

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