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Union approves historic contract with GM

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DETROIT—Members of the United Auto Workers last week ratified a historic contract with General Motors Corp. that will end GM's obligation to provide retiree health care benefits to UAW members and also establish a cash balance pension plan for certain new employees.

In its announcement of the agreement, which was approved by about two-thirds of UAW members, the UAW disclosed additional details about the centerpiece of the contract: the creation of a voluntary employees' beneficiary association to fund retiree health care coverage.

Meanwhile, the UAW and Chrysler Group last week tentatively agreed to a new contract, which also calls for a retiree health care VEBA that Chrysler would fund in exchange for the automaker no longer being liable for providing benefits. Additional details were not available late last week.

Under its pact with the UAW, GM will continue to provide retiree health care coverage—at an estimated cost of $5.4 billion—through Jan. 1, 2010, at which point its obligation to provide coverage to current and future retirees will end. GM now has roughly $50 billion in unfunded retiree health care obligations promised to current and future UAW retirees and their dependents.

On Jan. 1 2008, GM will make a cash contribution of $24.1 billion to a retiree health care VEBA, which the UAW will administer. GM also is liable for up to 20 additional annual VEBA payments of $165 million. These payments would be triggered at any time the VEBA's funding level is projected to be insufficient to provide current benefit levels for at least 25 years from the date of the required payment.

GM also is contributing a convertible note to the VEBA with a face value of $4.37 billion. This note, which will pay interest, can be converted into GM stock by VEBA trustees and then can be sold by the trustees.

Additionally, retirees and surviving spouses currently receiving pension benefits will receive an additional special monthly pension benefit of $66.70, offset by a $51.67 monthly VEBA contribution. The size of the special pension benefit and the VEBA contribution are fixed.

Additionally, new "non-core" entry-level employees will receive pension coverage through a cash balance plan. Under the plan design, employees will receive credits of 6.4% of pay, with employees' account balances credited with interest tied to the interest rate on the 30-year U.S. Treasury bond.

GM is the fourth major employer to announce adoption of a cash balance plan since Congress last year gave new plans protection from age discrimination suits. Other employers that have moved to cash balance plans over the last year include MeadWestvaco Corp., SunTrust Banks Inc. and, most recently, Dow Chemical Co.

Package delivery giant FedEx Corp. expanded an existing cash balance plan to cover many more employees.