Delphi Corporation: Pension Plans and Bankruptcy
Released: 2014-01-23T00:00:00

Introduction

The economic downturn that began in December 2007 had a significant impact on U.S. manufacturing in general and automobile manufacturing in particular. The automotive industry underwent major restructuring in 2008 and 2009. To facilitate the restructuring, the U.S. government provided two U.S. automakers—General Motors (GM) and Chrysler—with financial assistance. In addition, on February 20, 2009, the Obama Administration announced the creation of the Presidential Task Force on the Auto Industry. The task force was a Cabinet level group, which was led by Secretary of the Treasury Timothy Geithner and the Director of the National Economic Council, in the Office of the President, Larry Summers; it consisted of Cabinet and other executive branch officials. The Task Force was to "discuss recently submitted restructuring plans from Chrysler LLC and General Motors Corporation" and "to conduct additional analysis and form initial recommendations in their [members of the Task Force's] areas of expertise."

U.S. automakers deal with an extensive network of parts suppliers and components makers. These companies faced financial difficulties as a result of the setbacks in the automotive industry. Companies in the automotive supply chain were also a concern of some policy makers during the restructuring.

Delphi Corporation is a "Tier 1" supplier that provides parts and components directly to vehicle manufacturers; GM is Delphi's largest customer. In 2005, Delphi declared bankruptcy. As part of Delphi's reorganization, GM agreed to assist Delphi by assuming some of the company's pension liabilities. GM declared bankruptcy on June 1, 2009, and in July 2009, GM announced that it would not assume any of Delphi's pension liabilities. The Pension Benefit Guaranty Corporation (PBGC) assumed responsibility for Delphi's defined benefit (DB) pension plans.

Once the PBGC assumed responsibility, some Delphi retirees may have seen their pension benefits reduced if their monthly benefit was larger than the statutory maximum benefit that the PBGC may pay. Some union workers whose pensions have been reduced by the PBGC may be receiving supplemental "top-off" benefits provided by GM. GM negotiated agreements with some of the unions who represent some Delphi workers to provide supplemental benefit if the pensions are transferred to the PBGC. GM honored these "top-off" agreements when Delphi's pensions were terminated.

In September 2009, a group of current and future salaried employees filed a lawsuit against the PBGC seeking restoration of their pension benefits and claiming that the Delphi pensions were wrongly terminated. The case has not yet been resolved.

Background on Delphi Corporation

Prior to 1989, GM directly owned many of the makers of parts and components for GM automobiles. In 1989, GM combined many of these suppliers into one subsidiary company (Automotive Components Group, or ACG). ACG was renamed "Delphi" in 1995. In 1999, GM sold (or "spun-off") Delphi by conducting an Initial Public Offering (IPO) of Delphi common stock. Since 1999, Delphi has been a separate publicly owned corporation, although GM continued to be Delphi's largest customer.

Delphi workers who had been participants in the GM pension plans were transferred to newly formed Delphi pension plans. Workers who had accumulated benefits in GM pension plans had their benefit obligations transferred to Delphi plans. According to GM, GM transferred assets sufficient to cover these benefit obligations.

Delphi's workforce consisted of hourly employees and salaried employees. In general, the hourly workers were union members whereas the salaried workers were not. The groups of workers had separate benefit plans. To win their approval for the spin-off, GM made agreements with the unions to protect certain post-retirement health and pension benefits. Because they were non-union and therefore not subject to collective bargaining procedures, GM did not need the salaried workers' approval for the spin-off and salaried workers did not receive any benefit guarantees.

Background on Pension Benefits

About half of the U.S. workforce participates in one or more employer-sponsored pension plans. The two kinds of pension plans are defined contribution (DC) and defined benefit (DB) pension plans.

In DC plans, contributions from individual employees—and often their employers—are placed in tax-advantaged accounts that accrue investment returns. The accounts are then used as a source of retirement income. In DC plans, individual employees usually direct the investment decisions in their own accounts and bear the risk for investment losses. These DC plans are known as 401(k), 403(b), or 457 plans, based on the appropriate sections of the tax code. Employees are responsible for most of the decisions affecting their individual accounts.

DB pensions are employer-funded pension plans through which employees accrue monthly benefits using a formula based on a combination of the number of years of service and salary. For example, a plan might offer a benefit of 1.5% multiplied by the number of years of an employee's service multiplied by the average of the employee's highest five years of salary. So a worker who was employed for 30 years and averaged $50,000 for the final five years of employment would receive a benefit of $22,500 per year or $1,875 per month. Employers are responsible for ensuring that there are sufficient funds in DB pension plans to pay for current and future benefit payments.

Employee Retirement Income Security Act

The Employee Retirement Income Security Act (ERISA; P.L. 93-406 ) protects the interests of participants in qualified employee benefit plans. ERISA requires that benefit plans be operated solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries. Among other provisions, ERISA protects workers' pensions by establishing vesting requirements (how long a person has to work to be entitled to benefits); funding requirements (how much the employer must set aside to pay for current and future benefit obligations); and pension insurance (which will pay participant benefits in case of the plan sponsor's bankruptcy). Under ERISA, participants in DB plans do not own the plan assets, but have a claim on the amount of their vested benefits. Pension plan sponsors may not reduce workers' vested pension benefits.

Pension Benefit Guaranty Corporation

ERISA established a government corporation to insure the pension benefits of workers in private sector DB plans. When an insured DB pension plan has insufficient funds and cannot pay all of the promised benefits to the workers, the plan may be "terminated" and the retirees receive their benefits from the Pension Benefit Guaranty Corporation (PBGC). Not all underfunded pension plans are trusteed by the PBGC. The PBGC pays the pension benefits to which workers are entitled, up to limits established by law (29 U.S.C. 1322). The PBGC does not pay benefits for unpredictable contingent events or for a portion of benefits increased in the five years prior to termination. The benefits to retirees paid by PBGC do not come from taxpayer funding, and the benefit obligations of the PBGC are not obligations of the United States. To pay for its benefit obligations, the PBGC collects insurance premiums from employers that sponsor insured pension plans, receives funds from pension plans it takes over, and earns money from investments.

PBGC Maximum Guarantee

The maximum guarantee for a pension that was terminated in 2009 is $4,500 per month ($54,000 per year) for retirees who begin receiving pensions at the age of 65. The amounts are reduced so that retirees receive "actuarially neutral" pension benefits if they choose benefits in a form other than straight life annuity or if they begin receiving benefits before the age of 65. For example, the maximum benefit for individuals who retire at 65 years old and choose a Joint and 50% Survivor Annuity benefit is $4,050 per month ($48,600 per year). For retirees that choose to receive single life annuity benefits at 55 years old, the maximum benefit is $2,025 per month ($24,300 per year). The PBGC reported in 2006 that 84% of retirees who receive benefits from the PBGC are paid the full benefit amount they earned under their retirement plan.

Major Events of Delphi Pension Plans Since 1999

Pension Benefits and the Delphi Spin-Off

As part of the spin-off in 1999, GM continued to pay the pension benefits to workers who retired prior to October 1, 2000. The pension benefits of workers who retired on or after October 1, 2000, became the obligations of the various Delphi pension plans.

GM also entered into Benefit Guarantee Agreements with three unions representing its hourly employees: the United Auto Workers (UAW); the International Union (IUE-CWA); and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers Union (USW). These agreements obligated GM in the event of a termination of the Delphi hourly pension plans to supplement the benefits for workers who received the statutory maximum benefit from the PBGC. GM agreed to pay each covered employee the difference between the benefit received from the PBGC and the benefit the individual would have received had the plan not been terminated.

Salaried employees did not have similar agreements in place. This is most likely because the agreement of salaried employees was not necessary to complete the spin-off.

Delphi Bankruptcy and Pension Plan Terminations

Delphi filed for bankruptcy in October 2005. As part of the bankruptcy reorganization plan, GM agreed to the transfer of up to $3.4 billion of liabilities from the Delphi Hourly Plan to the GM Hourly-Rate Employees Pension Plan. On September 29, 2008, Delphi transferred liabilities of approximately $2.6 billion and assets of approximately $0.5 billion from the Delphi Hourly Plan to the GM Hourly-Rate Employees Pension Plan.

On June 1, 2009, GM filed for bankruptcy. It subsequently received U.S. government financial assistance to assist with its reorganization. In July 2009, GM advised Delphi that it would not assume the Hourly Plan and would not transfer additional liabilities from Delphi to the GM pension plans. Because GM declined to assume additional liabilities from the Delphi pension plans, the PBGC terminated the Delphi pension plans, effective July 31, 2009.

GM announced that it would fulfill its obligations to the Hourly Plan retirees by supplementing the pension benefits of those retirees who were receiving the maximum benefit from the PBGC. According to GM,

[a]s a result of bargaining at the time of the spin-off, General Motors Corporation did agree to supplement pension benefits for certain limited groups of hourly employees and retirees in the event that the Delphi hourly pension plan was terminated. As with other union agreements that it has assumed from the old GM, General Motors Company will honor these commitments.

Termination of Delphi Pension Plans

ERISA provides for three types of single-employer pension plan terminations: standard, distress, and involuntary. The plan administrator initiates a standard or distress termination, whereas the PBGC initiates an involuntary termination. The Delphi pension plans were subject to an involuntary termination. Under 29 U.S.C. 1342(a), the PBGC may initiate involuntary termination proceedings if one of the following criteria is met:

the plan has not met the minimum funding requirements or the plan has been notified by the Treasury Secretary that a notice of deficiency concerning the initial tax on a funding deficiency has been mailed; the plan will not be able to pay benefits when due; a distribution of at least $10,000 has been made to a participant who is a substantial owner of the sponsoring company and, immediately after the distribution, the plan has unfunded nonforfeitable benefits; or the long-run loss to the PBGC "may reasonably be expected to increase unreasonably if the plan is not terminated."

The PBGC indicated that the Delphi plans met several of the criteria for termination. Delphi had not made required contributions to the pension plans in the previous four years and the plan had assets to pay for only half of its benefit obligations.

The PBGC has assumed responsibility for the following pension plans sponsored by Delphi:

Delphi Hourly-Rate Employees Pension Plan—approximately 47,176 participants, Delphi Retirement Program For Salaried Employees—approximately 20,203 participants, Packard-Hughes Interconnect Non-Bargaining Retirement Plan—approximately 1,383 participants, ASEC Manufacturing Retirement Program—approximately 533 participants, Packard-Hughes Interconnect Bargaining Retirement Plan—approximately 165 participants, and Delphi Mechatronic Systems Retirement Program—approximately 148 participants.

On September 14, 2009, the Delphi Salaried Retiree Association (DSRA) filed a lawsuit against, among others, the PBGC, the U.S. Treasury Department, and the Presidential Task Force on the Auto Industry. Some of the DSRA's claims include

the termination of the Delphi Retirement Program for Salaried Employees was in violation of the Due Process Clause of the Fifth Amendment to the U.S. Constitution; the termination of the Delphi Retirement Program for Salaried Employees was in violation of ERISA; and the agreement between GM and the unions representing hourly employees to "top-off" the hourly employees' pensions was a violation of the Equal Protection Clause of the Fifth Amendment to the U.S. Constitution. The DSRA says that GM, acting as a government actor owing to the U.S. Treasury's role in the GM bankruptcy, unfairly discriminated against the salaried employees "solely on the basis of their choice not to associate with a union." The DSRA feels that GM's bankruptcy in June 2009 voided the 1999 "top-up" agreements and that GM renegotiated and provided the "top-up" to the unions' pension plans for political motivations.

The DSRA sought a preliminary injunction to prevent the PBGC from reducing the payments to the pension plan participants while the case is pending. On January 26, 2010, the court ruled that the PBGC could reduce the payments. The DSRA subsequently claimed that the PBGC has violated the terms of that ruling. On September 9, 2011, the U.S. district court dismissed the claims against the U.S. Treasury. The PBGC remains a defendant in the case.

The DSRA submitted an affidavit from a pension actuary stating that the PBGC miscalculated the benefit obligations of the Delphi plans and that the pension plan for salaried employees was 86.52% funded. It also said that it was rare for pension plans with this amount of funding to require termination. According to PBGC estimates, at time of termination the plans for the Delphi Salaried Employees had $2.4 billion in assets and liabilities of $5 billion. The PBGC indicated that it expected to be responsible for about $2.2 billion of the plan's estimated $2.6 billion in underfunding.

The Delphi court case remains ongoing.

Delphi emerged from bankruptcy in October 2009 after a group of Delphi's lenders purchased most of Delphi's assets. In addition, GM purchased Delphi's steering business and four manufacturing facilities located in three states (Indiana, Michigan, and New York). Delphi reported $13.8 billion in sales in 2010. For comparison purposes, the company reported $26.9 billion in revenue in 2005.

On March 31, 2011, the PBGC announced that it had redeemed the PBGC's stake in Delphi for $594 million. The PBGC acquired the stake in Delphi as part of the pension plan termination proceedings. The PBGC indicated that it did not know how this action would affect Delphi retirees' benefits, as the PBGC is continuing the process for determining final benefit amounts for Delphi retirees. The PBGC has indicated that final determinations on benefits will be completed in 2013. On March 5, 2013, the Congressional Auto Industry Pension Task Force Representative requested an update on the status of final benefit determinations for the Delphi Salaried pension plan. On March 12, 2013, PBGC indicated that it expected to complete final benefit determinations by September 30, 2015.

On August 13, 2012, the House Ways and Means Committee Chairman Dave Camp sent requests to the White House Counsel, U.S. Department of Treasury, and PBGC for documents related to Delphi and GM's interest in Delphi. On October 3, 2012, Chairman Camp indicated that while the PBGC provided nearly a complete response, the Treasury provided an incomplete response. On October 4, 2012, Chairman Camp sent follow up requests to the U.S. Treasury and to the White House Counsel. On October 23, 2012, Chairman Camp sent additional letters to the U.S. Treasury and to the White House Counsel indicating that the Treasury's response to the October 4, 2012, request was "demonstrably incomplete" and that the White House Counsel's response was "unresponsive and perplexing." Chairman Camp indicated that he would "be forced to consider using compulsory process to secure production of the documents." The Congressional Research Service (CRS) is not aware of any public response from the U.S. Treasury or White House Counsel to Chairman Camp's October 12, 2012, requests.

The House Oversight and Government Reform Committee has held several hearings and made several requests to officials in the Obama Administration regarding GM's decision to honor the top-up agreements with the union workers. For example, on August 9, 2013, Representative Darrell Issa, chair of the House Oversight and Government Reform Committee, subpoenaed Treasury Secretary Jacob Lew for "information related to the Committee's investigation into the preferential treatment afforded to Delphi's unionized employees during the bankruptcy and taxpayer-funded bailout of General Motors."

The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) issued a report on August 15, 2013, entitled "Treasury's Role in the Decision for GM To [sic] Provide Pension Payments to Delphi Employees." The report noted that the decision to honor the top-up agreement was a joint decision by the U.S. Treasury and GM. The top-up agreement was honored because of the need to have the UAW approve GM's bankruptcy. The report also noted that GM did not top up the pensions of other former employees at Delphi because they did not have active employees at GM and had no leverage to hold up GM's bankruptcy.

Legislation and Congressional Hearings

In the 111 th , 112 th , and 113 th Congresses, legislation has been introduced and several committees have held hearings related to Delphi and the decision to top up the pensions of union but not salaried workers.

Legislation in the 113th Congress

Three bills were introduced in the first session of the 113 th Congress with regard to Delphi Corporation. These bills would extend the Health Coverage Tax Credit (HCTC), a refundable tax credit for 72.5% of an eligible individual's health care premiums. Retirees under the age of 62 who receive pension benefits from PBGC are among those who are eligible for the HCTC. The bills introduced are

H.R. 2783 , To amend the Internal Revenue Code of 1986 to provide for continued eligibility for the health care tax credit for PBGC pension recipients eligible for the credit at the end of 2013, introduced by Representative Tim Ryan on July 22, 2013, would extend the HCTC for those PBGC recipients if they were eligible for the HCTC in December 2013. S. 1446 , the Health Care Coverage for Displaced Workers Act, introduced by Senator Jay Rockefeller on August 1, 2013, would permanently extend the HCTC. S. 1859 , the Tax Extenders Act of 2013, introduced by Senator Harry Reid on December 19, 2013, would extend the HCTC until December 31, 2014.

Legislation in the 112th Congress

The following legislation was introduced in the 112 th Congress with regard to Delphi Corporation:

S. 3544 (Senator Sherrod Brown) and H.R. 6404 (Representative Tim Ryan), the Delphi Pensions Restoration Act of 2012, were introduced on September 13, 2012. These identical bills would have established a fund to provide for retirement benefits of retired employees of Delphi whose pensions have been reduced by the PBGC and who are not subject to "top-up" agreements with GM. Funds would have come from the sale of stock, warrants, and other financial instruments acquired by the U.S. Treasury while providing financial assistance to GM. H.R. 4232 , the Restoring Essential Safeguards for a Transparent, Open, and Reliable Executive under FOIA Act, was introduced by Representative Michael Turner on March 21, 2012. This bill would have made subject to the requirements of the Freedom of Information Act (FOIA) (1) any instrumentality in which the United States owns any stock or equity in a corporation (other than through a pension fund) or (2) agencies or instrumentalities that carry out the authority or interests of the U.S. government in entities in which the U.S. government own an equity stake. Representative Turner indicated that this bill would have made the agencies that were carrying out the Troubled Asset Relief Program (TARP) subject to FOIA requests. The U.S. interest in GM was administered under the authority of the TARP program.

Legislation in the 111th Congress

The following legislation was introduced in the 111 th Congress with regard to Delphi Corporation:

S. 3526 was introduced by Senator Roger Wicker on June 23, 2010 and H.R. 6046 was introduced by Representative Christopher Lee on July 30, 2010. These identical bills would have required the Government Accountability Office (GAO) to evaluate the propriety of assistance provided to General Motors Corporation under the Troubled Asset Relief Program. H.R. 3455 was introduced by Representative Tim Ryan on July 31, 2009, and S. 1663 was introduced by Senator Sherrod Brown on September 11, 2009. These identical bills would have provided up to $3 billion from the Emergency Economic Stabilization Act of 2008 ( P.L. 110-343 ) to fund a Voluntary Employees' Beneficiary Association (VEBA) for former employees of Delphi or General Motors whose health care coverage was discharged as a result of the companies' bankruptcy. This bill would not have provided any pension benefits to any former Delphi employees. No further action was taken on either bill. H.Res. 591 was introduced by Representative John Boehner on June 26, 2009. Among other provisions, this resolution would have requested that President Obama transmit to the House of Representatives details of the role of the Presidential Task Force on the Auto Industry in any aspect relating to the levels of and reductions in the benefits of General Motors' and Delphi Corporation's employees and retirees. The resolution was reported favorably to the House by the Committee on Financial Services on July 24, 2009.

Congressional Hearings in the 113th Congress

The following congressional hearings were held in the first session of the 113 th Congress with regard to Delphi Corporation:

The House Committee on Oversight and Government Reform held a hearing on September 11, 2013, entitled "Oversight of the SIGTARP Report on Treasury's Role in the Delphi Pension Bailout." The Subcommittee on Government Operations of the House Committee on Oversight and Government Reform held a hearing on June 10, 2013, entitled "The Delphi Pension Bailout: Unequal Treatment of Retirees."

Congressional Hearings in the 112th Congress

The following congressional hearings were held in the 112 th Congress with regard to Delphi Corporation:

The House Committee on Oversight and Government Reform held a hearing on July 10, 2012, entitled "The Administration's Auto Bailouts and the Delphi Pension Decisions: Who Picked the Winners and Losers?" The House Committee on Oversight and Government Reform held a field hearing in Dayton, Ohio, on November 14, 2011, entitled, "Delphi Pension Fallout: Federal Government Picked Winners and Losers, So Who Won and Who Lost?" The Regulatory Affairs, Stimulus Oversight, and Government Spending Subcommittee of the House Committee on Oversight and Government Reform held a hearing on June 22, 2011, entitled "Lasting Implications of the General Motors Bailout."

Congressional Hearings in the 111th Congress

The following congressional hearings were held in the 111 th Congress with regard to Delphi Corporation:

The Financial Services Oversight and Investigations Subcommittee of the House Financial Services Committee held a field hearing on July 13, 2010, in Canfield, Ohio, entitled "After the Financial Crisis: Ongoing Challenges Facing Delphi Retirees." The Health, Employment, Labor, and Pensions Subcommittee of the House Education and Labor Committee held a hearing on December 2, 2009, entitled "Examining the Delphi Bankruptcy's Impact on Workers and Retirees." The Senate Health, Education, Labor and Pensions (HELP) Committee held a hearing on October 29, 2009, entitled "Pensions in Peril: Helping Workers Preserve Retirement Security through a Recession." Bruce Gump, Chairman of Delphi Salaried Retirees Association provided testimony.