Pension Trusts Strapped
By Sharon Terlep and Matthew Dolan
The Wall Street Journal
November 7, 2011
http://online.wsj.com/article/SB10001424052970203707504577011901934288534.html

Retirement trust funds created to cover
billions of dollars in medical costs for unionized
workers and their families are running short, forcing
the funds to cut costs, trim benefits, and ask retirees
and companies to pony up more cash.

The biggest such fund-a trio of United Auto Worker
trusts covering benefits for more than 820,000 people,
including Detroit auto-maker retirees and their
dependents-is underfunded by nearly $20 billion,
according to trust documents filed with the U.S. Labor
Department last month.

The funds, known as VEBAs, or voluntary employee
beneficiary associations, are being hit by rising
medical costs and poor investment performance. Their
funding comes in part from company stock, rather than
just cash payments, making them vulnerable to the
market's volatility.

Fearing a shortfall, the UAW is looking for answers in
its U.S. government-orchestrated bailout deals with
General Motors Corp. and Chrysler. The union, under new
labor accords reached last month with GM, Ford Motor
Co. and Chrysler, will seek to divert 10% of active
workers' profit-sharing checks into the VEBA funds, but
the plan still needs to clear legal hurdles and could
get blocked by the auto makers.

Improved investment returns could reduce the shortfall
over time. And, if the union doesn't win approval to
transter funds, it has some leeway to make benefit cuts
before the funds run short of cash because UAW retirees
still get richer benefits than most retired workers,

Without some sort of intervention, the gap could grow
quickly. This past summer, Joe Ashton, the UAW's top
official dealing with GM, said the VEBA performance was
weighing on the union. "It's definitely an issue," he
said.

The UAW also isn't the only union being squeezed.

In Pittsburgh, the United Steel Workers union is
laboring to provide benefits to tens of thousands of
employees covered by more than 30 VEBAs. "No matter how
good your investment performance is, you are not going
to be able to keep up with health-care inflation," says
Tom Conway, vice president of the USW. "The trustees
are having to take a serious look at increasing
premiums, and the retiree contribution has to be
bigger."

Union-run VEBAs gained popularity in the last decade as
a way to clear retiree-benefit obligations off
companies' books and shift the burden to independent
trust funds. Often, they were last-ditch efforts by
unions to salvage health-care benefits for their
members amid major restructurings or bankruptcies. But
now that the VEBAs are running low on cash, unions are
the ones doing the slashing.

Two years ago, when the UAW VEBA cut its ties with auto
makers and became an independent trust, it quickly
trimmed some prescription benefits, including free
Viagra, and boosted co-payments for retirees. Next
year, it will increase deductibles and out-of-pocket
payments by participants, according to a statement
posted on its Web site this fall.

Vincent Forbes, a GM retiree from Lansing, Mich., says
he has managed without the dental and vision benefits
he lost in the shift to the VEBA. "It's the reality of
what people are dealing with today," he says. "Other
people have to pay for these kinds of benefits. I don't
mind paying a little bit more."

VEBA benefits are considered generous by many standards
and many other retirees have lost benefits as companies
eliminated retiree health-care funding. Just 26% of
large U.S. companies that provide health care extend
those benefits to retirees, down from 37% a decade ago,
according to the Kaiser Family Foundation.

The UAW first agreed to let the Detroit Three auto
makers offload their obligation to fund health-care
benefits for retirees in a 2007 labor agreement. By the
end of that year, GM had spent $4.6 billion on health
care for active and retired workers, more than it spent
on steel.

Under the 2007 pact, the auto companies paid into the
separate trust immediately and agreed to a series of
future payments. Combined, the three auto makers
committed $54 billion. Today, the trust is one of the
largest private health-care providers in the nation.

Since then, the Detroit car companies have heralded the
agreement as transformative because their health-care
costs had made them uncompetitive with their
nonunionized rivals.

In 2009, when GM and Chrysler fell into bankruptcy, the
government-brokered restructuring allowed the auto
makers to use more company stock to fulfill their
obligation to contribute to the VEBA. (The trust cashed
out its holdings in Ford in 2010.)

That year, it also became clear that the UAW would have
to do something to shore up the VEBA. The fund was
stretched because returns were falling short of
assumptions and health-care costs were rising faster
than expected, people involved in the restructuring
say. The volatility increased after the UAW agreed to
accept more payments from GM and Chrysler in stock. GM
shares have dropped 28% since its IPO last year,
further affecting the VEBA's bottom line.

GM declined to comment.

"At that time, everybody understood the VEBA would
probably not cover all of retirees' health care
benefits and that the UAW or trustees of the VEBA would
have to made decisions about cutbacks," said Steven
Rattner, who headed the Obama administration's bailout
and restructuring of the U.S. auto industry. "It was
going to their problem, not the companies' problem."

The UAW VEBA has indeed fallen short of the 9% annual
return that was assumed at the fund's creation to be
enough to provide current benefits to retirees for 80
years, says UAW President Bob King . Health-care costs,
meantime, have risen far more quickly than the 5% a
year assumed by the union.

According to VEBA trust officials, the funds for all
autos averaged a 9.7% rate of return in 2010. They
decline to say how the funds have performed in 2011
but, in response to written questions, they say the
fund has adopted a more conservative assumption of 7%
going forward. At GM, the fund currently has total
assets of $33.23 billion and total benefit obligations
of $44.68 billion, resulting in an $11.4 billion, or
26%, shortfall.

In negotiations this year with GM, union bargainers
sought help to cover itsVEBA costs, according to two
people familiar with the discussions. GM quickly shot
down the idea but the two sides reached a compromise.

The UAW, if it clears legal hurdles, will look to
transfer 10% of the profit sharing GM pays current
workers under the contract directly to the VEBA. Such a
step is expected to increase funding by around $40
million a year. The original court settlements bar the
company from making additional direct contributions,
but they permit this transfer, according to lawyers who
worked on the deal. GM, in negotiations, expressed
"serious threshold accounting, tax, legal and other
concerns," according to UAW documents. If those
concerns are addressed within a year, the union could
begin diverting cash.

Mr. King, speaking to reporters, said he is "really
confident" the transfer from profit sharing will clear
regulatory hurdles.

____________________________________________

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