Bloomberg.com, September 19, 2007, Wednesday

Bloomberg.com, September 19, 2007, Wednesday
http://www.bloomberg.com/apps/news?pid=20601087&sid=ax5Xu7c3yMAc&refer=home

GM Seeks Shift to 401(k) Pensions for New Employees (Update5)

By Jeff Green and John Lippert
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Sept. 19 (Bloomberg) -- General Motors Corp. would give new union members 401(k)-style retirement plans instead of traditional pensions for the first time under a proposed United Auto Workers contract, people with knowledge of the talks said.

GM's push toward individual investments instead of a guaranteed monthly check means the biggest U.S. automaker wants to scale back three landmark gains by the UAW in the past half- century: a fixed pension, company-paid health care and an annual cost-of-living raise.

The negotiations give Chief Executive Officer Rick Wagoner a chance to shed tradition and ensure GM's survival before the next contract expires in 2011. Since the current accord was created in 2003, GM has announced plans to shut 12 North American locations and eliminated more than 34,000 workers while losing $12.4 billion over 2005 and 2006.

``They know the old ways don't work -- they're not competitive,'' said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee. ``They modernize their factories, and they have to modernize their pay scale.''

Such changes are also designed to allow GM to build vehicles at lower costs. GM, Ford Motor Co. and Chrysler LLC estimate they pay $25 to $30 more an hour to American factory workers than Toyota and Honda Motor Co. do at their U.S. plants. The two Japanese automakers are gaining U.S. market share at the expense of their U.S.-based competitors.

To narrow the gap, GM also has proposed freezing cost-of- living raises to help pay for a union-run fund that would take responsibility for retiree health care, said the people, who asked not to be identified because they aren't authorized to speak publicly.

Future Health Costs

The UAW won't easily agree to such changes, said David Lipsky, a professor of collective bargaining at Cornell University in Ithaca, New York. ``All these changes would be radical,'' Lipsky said. ``Is the UAW willing to go along with it is another question altogether.''

The health-care fund would relieve the 99-year-old automaker of $50 billion in future union health costs. New UAW hires would also receive a set amount of cash for medical care each year after they retire, instead of an unlimited plan, according to the people familiar with the proposals, which may not be accepted.

General Motors shares fell 61 cents to $35.16 at 1:31 p.m. in New York Stock Exchange composite trading. They had advanced 16 percent this year through yesterday.

GM spokeswoman Katie McBride had no comment on the substance of the negotiations. UAW spokesman Roger Kerson didn't return phone calls seeking comment.

Talks resumed this morning after a recess last night, McBride said.

Other Proposals

Other proposals include a cap on out-of-pocket health-care costs for retirees and active workers, and lump-sum bonuses if the union accepts a wage freeze, the people said.

The union may be willing to negotiate on the trio of core ideals -- pension, health care and raises -- to save jobs. GM is closing 12 North American locations by the end of next year after 34,400 union workers agreed to retire or take buyouts last year.

``The most sacred benefit for the UAW is employment,'' said Dan Poole, who helps manage $31 billion at National City Bank in Cleveland, including GM shares. ``This is clearly a sign of how serious things are getting.''

The two sides have been exchanging proposals under an hour- by-hour contract extension since the previous four-year agreement expired Sept. 14. The UAW on Sept. 13 chose GM as its ``strike target,'' a designation that means the union wants to reach an agreement with GM first and then try to adapt the terms at Ford and Chrysler.

Swaps

Credit-default swaps based on GM debt fell 25 basis points to 577.5 basis points yesterday, according to Deutsche Bank AG. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

The people familiar with the 401(k) proposal didn't provide figures on potential costs savings because there are no final agreements. Such plans can limit risks for both sides, said a professor who is an arbiter for employer-union benefit issues.

``For the company, you spend the money today and you've fulfilled your obligation, it's over,'' said Paul Gerhart, a professor at Case Western University in Cleveland. ``For the employee, you get the money in the bank and it's not something that can be taken away from you if the company gets in trouble.''

Fixed-Income vs. 401(k)

In a traditional fixed-income pension, union workers are guaranteed a set yearly payout, which is $36,000 for current GM retirees. With a 401(k), also called a defined contribution plan, the employee and the company make payments to the worker's own retirement fund. The worker's eventual payout depends on how much of a return the account earns on the investments.

From 1986 to 2004, 101,000 single-employer plans in the U.S. ended their defined-benefit programs, according to the Washington-based Pension Benefit Guaranty Corp. The number of private-benefit plans dropped 73 percent to about 30,000, from a high of 112,000 in 1986.

GM and Toyota provide UAW workers at their New United Motor Manufacturing Inc. joint venture in Fremont, California, with retirement pay that is one-third funded by a traditional pension with the rest from a 401(k), said Sean McAlinden, an analyst at the Center for Automotive Research in Ann Arbor, Michigan.

That plan costs the automakers about half as much as a traditional pension, he said.

The benefit of a shift from a pension to a 401(k) isn't necessarily in upfront payments to employees, said Dallas Salisbury, CEO of the Employee Benefit Research Institute, a nonpartisan group that tracks pension issues in Washington.

``It's over the very long term, and what they eliminate is balance-sheet liability and balance-sheet volatility,'' he said.

Frozen Pensions

Last year, GM said it would freeze the pensions of 36,000 nonunion salaried workers and switch to a 401(k). It also has capped health-care spending for salaried workers at 2006 levels.

``Management has made the changes,'' Poole said. ``Now they're coming to the union.''

Ford and Chrysler are operating under indefinite contract extensions while the GM talks continue. The contracts cover 180,681 active workers and 419,621 retirees and surviving spouses at GM, Ford and Chrysler.

GM and the UAW have agreed on the need for a so-called Voluntary Employee Beneficiary Association, or VEBA, to take retiree health-care obligations off company books, the people said. The fund would protect benefits if GM were to go bankrupt.

``It's a lot to sell in that big union in a short amount of time, for something they've never done before,'' said Richard Block, professor of labor and industrial relations at Michigan State University in Lansing, the state capital. ``They've seen the handwriting on the wall, so everything is sort of up in the air.''

To contact the reporters on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net ; John Lippert in Southfield, Michigan, at jlippert@bloomberg.net .
Last Updated: September 19, 2007 13:40 EDT