(Originally published here.)
Chrysler is majority-owned by Fiat, the Italian car maker. The minority owner, with a 41.5 percent stake, is the United Auto Workers Chrysler Health Care Trust, which was established to provide health-care benefits to Chrysler’s retirees. Bloomberg News reports that the two sides disagree on Chrysler’s underlying value.
According to the trust, its stake is worth $4.2 billion — more than one-third of the trust’s total assets. Fiat says the stake is only worth $1.7 billion. It’s easy to be amused by this enormous difference of opinion, but the scuffle reveals a serious problem: Chrysler’s retirees are overwhelmingly dependent on the fortunes of a single company. Even worse, that company is their own. It’s terrible pension management.
Suppose you work at Chrysler and are 10 years from retirement. All your pay stubs show a significant chunk of your total compensation going toward your pension and health benefits. You have every reason to think that you have earned what will eventually be given to you — even if Chrysler itself collapses. This isn’t an unreasonable expectation, especially if your contributions to Chrysler’s pension plan were big enough and the fund invested appropriately. In that scenario, you are hedged against the collapse of Chrysler the company. You might lose your job, but you could still collect the portion of the pension you are owed.
If Chrysler’s pension stupidly put a big chunk of its savings into Chrysler the company, however, the hedge disappears. Your ability to retire is then contingent on the health of your employer, irrespective of all your efforts to save. You would have been better off paying less into the pension plan and taking a higher salary upfront.
To its credit, Chrysler’s health-care trust wants to liquidate at least part of its stake in Chrysler the company by selling shares in an initial public offering. That would allow the fund to diversify and protect its beneficiaries. As with so many transactions, the big obstacle is the price. Neither side was willing to provide comments to my Bloomberg News colleague.
I’m certainly in no position to judge who is right, although the truth is probably somewhere in between. My suspicion is that Fiat is giving a low-ball estimate in the hope that it can buy the rest of Chrysler cheaply and that the health-care trust is probably overstating its holdings. Private and public pensions are notorious for aggressively discounting their liabilities and overestimating future returns on their assets.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)