Delphi, GM, UAW Reach Pact On Early-Retirement Plan

Klaus · #1 03-22-2006, 11:12 PM

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Delphi, GM, UAW Reach Pact

On Early-Retirement Plan

Auto
Maker Still Faces Daunting Turnaround

By JEFFREY MCCRACKEN and
LEE HAWKINS JR.

March 22, 2006 5:25 p.m.

DETROIT -- The landmark buyout and early-retirement program
reached Wednesday by General Motors Corp., its ailing part supplier
Delphi Corp. and their largest union, the United Auto Workers, marks a giant
step toward overhauling and shrinking the traditional North American auto
industry. But for GM, it isn't the end of the painful overhaul forced by nearly
two decades of losing ground to Asian and European rivals in the U.S.

Under a deal hammered out with UAW leaders in weeks of talks, GM
will finance early-retirement packages and buyouts ranging in value from
$35,000 to as much as $140,000 each to as many as 118,000 GM and Delphi
workers, including all 105,000 of GM's current UAW-represented work force. The
buyout plan appears to be one of the largest in U.S. corporate history, labor
experts said. In effect, GM is offering to take off the assembly line a
generation of workers, most hired when GM still dominated the U.S. industry from the early to late 1970s.

How many workers will sign up to leave is unclear. And the
buyout agreement is far from the last move in a long, complicated restructuring
process that could still be derailed.

Moving tens of thousands of workers off the active payroll --
essentially transferring their wage and benefit costs to the pension plan from
the profit and loss statement -- should help GM's bottom line, which seemed to
please investors.

GM's shares rose on news of the pact Wednesday but settled back
down later in the day and were up a penny, at $21.01, in 4 p.m. composite
trading on the New York Stock Exchange. The shares are slightly higher than on
March 8, the day before significant progress toward a deal was first reported.

<REPRINTSDISCLAIMER>Still, GM Chairman and Chief Executive Rick
Wagoner faces a series of challenges the big labor deal won't solve. Among them
are an investigation by the U.S. Securities and Exchange Commission into GM's
accounting, the struggle to find a buyer to reinvigorate GM's finance unit, and
growing pressure from GM's outside directors, particularly Tracinda Corp.
representative Jerome York, to stop the slide in U.S. market share and beef up
GM's product line.

Questions Still Loom Over Delphi

The deal also doesn't answer crucial questions at Delphi, such
as what Delphi's remaining hourly workers will be paid and what will they do.
Delphi Chairman and CEO Steve Miller has said he wants to cut average hourly
worker pay to $12 an hour from about $26. This deal also doesn't answer the
question about what plants will stay open or what products Delphi will stay in
or exit. The buyout deal must still be approved by a bankruptcy court, which
will certainly hear from a creditor's committee that was kept from
participating in the labor talks by GM.

Delphi has delayed three times a move to ask the bankruptcy
judge to void its existing labor contracts and another deadline looms March 31.
Delphi says it will void its contract unless a complete deal with the UAW is
reached, a move the UAW and other Delphi unions have warned might provoke a
strike, which in turn could quickly shut down production at GM.

Between the existence of the Jobs Bank, a UAW program in which
idle workers can still receive full pay and benefits, and older UAW worker
concerns about the security of their retiree health care, many workers may opt
to keep working. Nonetheless, the deal is noteworthy if for no other reason
than the sheer number of people who could take the offers. GM hopes the buyout
will get it most of the way toward its goal of 30,000 hourly jobs cut by 2008. Delphi hopes to eliminate an additional 13,000 hourly jobs.

GM estimates about 36,000 of its 105,000 UAW hourly workers are
eligible for 30-and-out retirements today and an additional 27,000 are eligible
to retire within three years. Delphi estimates about 6,000 of its 24,000 UAW
workers could retire today.

As many as 5,000 Delphi workers will have the option of
transferring to GM, where they can immediately retire or keep working for GM.

The details of the buyout and early-retirement offers include
the following: GM and Delphi workers with 30 or more years on the job as of
Oct. 1, 2005 -- the week before Delphi's bankruptcy filing -- will receive
$35,000 to retire and get a full pension and retiree health care. A UAW worker
retiring would receive a pension of about $3,000 a month. GM and Delphi workers with less than 30 years on the job, but at least 27 years on the job as July
1, 2006, can retire now and receive a slightly smaller pension but full retiree
health care until they reach 30 years with the company. A worker with 27 years
would receive $2,800 a month.

GM workers at plants that have been closed or will soon close
can retire with 26 years on the job. Those include plants in Oklahoma City, Baltimore, Lansing, Mich., Linden, N.J., and Muncie, Ind.

The sudden retirement of tens of thousands of GM workers would
be good news for GM's domestic pension plan. For one thing, the move would
reduce GM's pension obligations significantly. That is because when workers
retire prematurely, a company can reduce the liability it has recorded for
those employees, which is based on assumptions about how many years they are
likely to remain on the job. The reduction in pension liability will reduce
GM's pension expense, which in turn will boost income. GM says it can't
estimate the potential reduction in pension liability until it gets a better
sense of how many workers will accept buyouts.

Furthermore, the reduction in pension liability will render the
domestic pension plan even more overfunded. At the end of 2005, the domestic
pension plan for hourly and salaried workers had a surplus of $6 billon,
according to GM. The surplus doubled from $3 billion the prior year because of
13% investment returns on the assets in 2005. GM declines to disclose the
current size of the domestic plan, which had $91 billion in assets at the end
of 2004. Updated figures will be included in the annual report, which last week
GM notified the SEC it will be filing late.

Although it may be some time before GM releases updated pension
figures, the surplus is likely to be larger than it was at the end of 2005, as
a result of GM's recent announcement that it will freeze the pensions of about
42,000 salaried workers effective Jan. 1. GM estimated the move will reduce its
pension obligations by $1.6 billion by the end of this year.

GM's buyout offer, which for some employees is contingent on
them giving up retiree health care and life insurance benefits, would also
reduce the company's postretirement benefits obligations, which were $77.5
billion at the end of 2004. The move will also reduce postretirement expense
and improve future cash flow.

Lessening the Pension Load

The buyouts will increase the ratio of retirees to active
workers, though this, too, would be good news for the company. While many
people assume that having a high ratio of retirees to active workers creates an
added burden on a pension plan, in fact the opposite is true: Once a worker
leaves his job, his pension no longer grows, and when he begins to draw his
pension, the pension liability recorded for him declines each year.

GM is also trying to buy out younger workers with fewer years on
the job. GM employees with less than 10 years of seniority can get a one-time
$70,000 buyout to sever all ties with GM and Delphi, including health care and
other benefits. Vested pension benefits wouldn't be impacted.

Workers with more than 10 years can get a one-time $140,000
buyout to do the same. Finally, workers with 10 years of service who are over
the age of 50 will be offered a thus far undefined "mutually satisfactory
retirement."

The offers will go out to workers immediately, according to the
UAW. Workers will have 45 days to accept the offers and an additional seven
days to rescind, said GM spokesman Dan Flores. He estimated buyouts and early retirements
should start before June 1.

Major credit-ratings agencies, which have GM rated deep into
"junk" territory, said the cost associated with the buyout plan won't
immediately jeopardize GM's credit ratings, but the deal itself isn't expected
to boost GM's ratings either. The agencies are still fixated on GM's ability to
turn around its North American operations and the fact that the buyout package
doesn't free GM from any financial assistance it could still need to provide
for Delphi to prevent a work stoppage.

"Our primary focus is on Delphi's ability to reach a
contract with the UAW so as to ensure no production disruptions, and we still
don't have a lot of details as to what a restructured Delphi would look
like," said Mark Oline, an analyst with Fitch Ratings. "If a Delphi strike lasts for any extended period, GM's liquidity would erode fairly
rapidly."

Because of that, GM has big incentive to provide more support to
Delphi, and GM could be tapped for input as Delphi and the UAW continue their
discussion over Delphi plant closures and future production, and GM will need
to use that opportunity to gain concessions for itself.

"This is likely the first round of the 2007 contract talks
for GM, with an eye towards reducing employee headcount and gaining facility
closures and potential wage and benefit reductions," Mr. Oline said.

Mr. Oline also said he is concerned about the fact that Delphi hasn't ruled out petitioning the bankruptcy court to have the current labor contract
revoked by the March 31 deadline, despite the buyout deal. The UAW has warned
it would strike if Delphi voided its contracts. Because of that and other
factors, "a lot of uncertainty remains in terms of a long-term agreement
between Delphi and the UAW."

"It appears that there still is no agreement reached in
terms of a long-term collective bargaining agreement between the UAW and Delphi, and that's something that will need to be done," Mr. Oline said. Standard
& Poor's, which also has cut GM's debt ratings to "junk" levels,
said the $2 billion in proceeds GM received from significantly reducing its
20.4% stake in Suzuki Motor Corp. should help bolster GM's liquidity as it
funds the buyout program. GM has estimated that its obligations to fund
retirements for Delphi workers could cost between $5.5 billion and $12 billion.
"That's definitely still a wildcard," said Bob Schulz, an S&P
analyst.

KEY OPTIONS FOR WORKERS



•GM and Delphi will offer $35,000 for normal or early voluntary retirements by workers with 30
years on the job, retroactive to Oct. 1, 2005.

•A "voluntary
pre-retirement" offer of gross monthly wages of $2,800-$2,900 for GM and Delphi workers with at least 27 years seniority, with formal retirement required at 30
years.

•GM hourly workers with at least
10 years seniority can leave with a onetime payment of $140,000, but will give
up health-care and other post-retirement benefits, excepting vested pension
benefits.

•GM employees of less than 10
years seniority will be offered a $70,000 buyout if they sever all ties with
GM, apart from vested pension benefits.

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