The contract agreement reached between General Motors and the United Auto Workers union early Wednesday turns on a historic plan that is fraught with risk: moving the struggling automaker’s $50 billion retiree health-benefit plan into a union-controlled fund.
Industry analysts say the idea will be watched closely by governments and private industry as the nation deals with the crippling financial issue of how to pay for medical costs of an aging workforce.
But the plan, unprecedented in size, faces myriad potential perils because health-care costs continue to spiral for all companies, making management of medical benefits difficult for any company. Increasingly, employers are getting rid of retiree health benefits or largely increasing the costs for retirees to participate in medical plans.
“The auto industry has its back to the wall, but in another decade or half-decade, governments and other industries that have rich health-benefit-plan designs and low employee contributions may look at this,” said Todd Swim, a worldwide partner with the Chicago office of Mercer, an employee benefits consulting firm. “This is probably one of the most significant initiatives in the last couple of decades. The promise of retiree benefits is going to be altered somehow for most everybody.”
GM’s tentative contract with the UAW, ending a brief national strike, rewrites the relationship between the two sides, giving each something of what it needs as Detroit’s unionized Big Three struggle to cut costs and regain their footing. In North America, the world’s largest car market, GM, Ford and Chrysler are playing catch-up to foreign brands like Toyota, which have the advantage in every critical respect: cost flexibility, production efficiency and market share growth.
In the months heading into negotiations, the union had signaled its recognition that the Big Three needed to cut costs while at the same time insisting that its 73,000 active members and 340,000 retirees deserved to have their jobs and benefits protected.
While terms of the contract were not released and will face scrutiny by members who will vote as soon as this week whether to ratify, the scope of the deal suggests that GM wins by unloading a $50 billion retiree health-care liability that was a drag on its earnings and credit rating. Losing that liability could free up as much as $3 billion a year in cash flow, analysts said, giving the company deeper pockets to invest more in its core business of building cars and trucks.
The UAW, which has maintained extraordinarily generous benefits for its members while most other corporate workers have lost traditional pensions and gotten used to high medical deductibles, didn’t want to make those kinds of sacrifices. So it agreed to take over the retiree health fund.
Gaining control of the fund guarantees benefits for retirees going forward, even in the now unlikely event that GM goes bankrupt.
The union also appears, as part of the broad contract, to have won more job security for those members now building the company’s vehicles in the U.S. On Wednesday, GM Chairman Rick Wagoner said the new contract “will allow us to maintain a strong manufacturing presence in the United States along with significant future investments.”
The deal also is expected to give workers signing bonuses instead of raises and may give new hires lower wages.
Taking on the health plan is seen as both key to the deal and a dramatic roll of the dice by the union, which had always relied on company-paid benefits. Ron Gettelfinger, the UAW’s president, downplayed the risks, saying it would cover retiree costs for “the next 80 years.”
“That will secure the benefits of our retirees and every seniority employee who is on the rolls,” Gettelfinger said. “I think our retirees will be exceptionally pleased with this contract.”
Analysts say the risks to the union and its members over the health fund come from the unknowns. Health-care costs can rise faster than expected, members may live longer, and investments may not pan out as planned, leaving the union short of money to cover the bills. Some analysts speculate that GM would come to the rescue if necessary.
Dale Yamamoto, a health actuary for Hewitt Associates, said the union will have to look far down the road in estimating health-care costs, earnings on investments and the mortality rate of its members to come up with the right dollar amount. “That’s a huge risk because there could be huge swings in their obligations.”
Another issue is that the union, rather than management, would have to enforce efforts to control costs. And it may be more difficult for a fellow union worker to deny health benefits than management, adding to costs. The sheer number of people in the plan is also a burden. GM’s union autoworkers are retiring at a rapid rate with nearly two-thirds of the active workers eligible for retirement in the next five years. GM currently has 340,000 retired UAW workers and surviving spouses.
Although health plans like this, known as a voluntary employee beneficiary association, or VEBA, have been around since 1920, no plan has taken on such a large obligation, analysts say. From their first VEBA in 1986, the steelworkers union is involved today in more than 40 such deals. “We’ve not had any situations where the funds went belly up,” said Wayne Ranick, a steelworkers spokesman in Pittsburgh.
However, a VEBA for retired Caterpillar Inc. workers ran out of money in 2005. Retired workers have sued the firm and the UAW. A Goodyear plan designed to cover $1.3 billion in health-care costs isn’t operating yet.
Other non-union companies that have set aside funds for retiree medical-care costs have had difficulty managing the benefits. The problem comes from failing to anticipate the rapid rise in health-care costs.
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“When given the money to run these programs, it becomes a very difficult challenge,” said Mercer’s Swim. “It’s easy to criticize, but it’s hard to find a solution.”
Union leaders said they weren’t surprised by the agreement to create a VEBA because they knew retaining health-care benefits for workers and retiree was a mandate, and they understood that the unionized auto industry was faced with a decision to cut costs or risk falling further behind the foreign automakers, which operate non-union plants with much greater cost flexibility.
Frank Joyce, a former spokesman for the UAW, said Gettelfinger set the mood for the 530,000-member union when he laid out the scenarios for its bargainers. “He said, accurately and correctly, that this is not about the traditional ups and downs of the industry. This is about fundamental change.”
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