Automakers look at trust funds to manage retiree benefits

March 1, 2007

Detroit's Big Three automakers are considering shifting future retiree healthcare costs to union-controlled trust funds and are eyeing a new contract between Goodyear Tire & Rubber Co. and the United Steelworkers (USW) union.

Goodyear and USW have agreed to establish a VEBA, or Voluntary Employees' Beneficiary Association, to cover the cost of retiree medical benefits.

According to Derek Guyton, FSA, principal, MAAA, FCA, worldwide partner, Mercer Health & Benefits LLC, Chicago, VEBAs are established to hold money for health and welfare benefits. "Once money is deposited into the VEBA, it must be used for the benefit of the employees, dependents and retirees," Guyton explains. "The money mostly comes from the employers-although employees can deposit after-tax money in some circumstances-and the employers receive a tax deduction. Most VEBAs are used to hold funds for claims incurred but not yet paid, and many also are used to hold funds for future retiree medical benefits."

"When Goodyear began negotiating for a new labor contract last summer, we identified several goals. One of them was reducing our post-employment benefit costs," says Ed Markey, vice president of public relations and communications at Goodyear, Akron, Ohio. "The USW has agreed to VEBAs with other employers as well." Markey adds that the VEBA is part of the new labor contract, ratified by the union membership on Dec. 28, 2006, and is still pending court approval. That process takes approximately six months.

"The rising cost of healthcare for both active and retired employees is an issue that a great many American companies face," Markey says. "For Goodyear, this was an issue that impacts our competitiveness. Goodyear is the largest tire maker in North America with a significant manufacturing presence in the United States; our major competitors are based overseas." Similarly, the Big Three automakers say that the increasing cost of healthcare has hindered their ability to compete with foreign manufacturers.

WILL IT WORK?

It has been reported that some experts are wondering if there are enough similarities between Goodyear and the automakers to make this a likely option.

"This approach will mostly appeal to situations where an employer very much needs to reduce their retiree liabilities and the union is willing to trade off changes in the plan for benefit security," Guyton says. "It's too soon to say this is a trend, and might just be a blip driven by changes to accounting standards and particular business situations."