Daimler bears $1 billion Chrysler pension risk

Reuters |
May 21, 2007 - 10:00 amFRANKFURT (Reuters) -- DaimlerChrysler has assumed a $1 billion risk from Chrysler should its pension plans be terminated before an agreement with U.S. agency Pension Benefit Guaranty Corporation (PBGC) expires in five years.

A spokesman for Daimler said today that it had shouldered the risk as part of a deal to sell its loss-making U.S. unit Chrysler to buyout firm Cerberus Capital Management, confirming a statement from the PBGC late last week.

"We have said that with the closing of the transaction, the topic of pension obligations is settled. If there is something coming, then we know what is coming," he said, adding that the agreement was based on PBGC's model, which calculates risks in the event that the pension plan were terminated immediately.

Daimler said it was not taking a provision for the risk because it did not expect this hypothetical case to occur.

A federal corporation created under the Employee Retirement Income Security Act of 1974, the PBGC monitors corporate transactions that might jeopardize the financial security of U.S. defined-benefit pension plans and arranges protection for the plans and the pension insurance program.

"Both Daimler and Cerberus have made significant financial commitments to strengthen Chrysler pensions. Daimler has agreed to provide a guarantee of $1 billion to be paid into the Chrysler plans if the plans terminate within five years," PBGC interim director Vince Snowbarger said in a recent statement.

He also said that under its new ownership, Chrysler would make $200 million in pension contributions over the next five years above and beyond the legally required minimum.

"I commend both Daimler and Cerberus on their willingness to work with the PBGC to protect the retirement security of Chrysler workers and retirees," Snowbarger added.

PBGC receives no funds from general tax revenue but is financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.

Daimler had not mentioned the pension agreement when it announced the sale, but Merck Finck analyst Robert Heberger played down its significance.

Referring to a comment by Daimler CEO Dieter Zetsche regarding risks for Daimler if Chrysler went bankrupt, the analyst wrote: "This is more than 'basically none', but we consider $1 billion a very moderate risk," the analyst wrote.

"In addition, Chrysler's future partner, Chinese Chery, wants to renegotiate its contract with Chrysler regarding the production of smaller cars for Chrysler, arguing that the situation now has changed. We consider both issues after-pains after the announced divorce of Daimler and Chrysler, without changing our positive view on Daimler," Heberger added.