Voluntary Employee Beneficiary Association
on Behalf of UAW Ford retirees
What is a VEBA? A VEBA is an independent trust fund, similar in many respects to a pension trust. Money contributed to the VEBA can be used only to provide your health care benefits. It can never be used for any other purpose. Even if Ford were to someday file for bankruptcy or be taken over by another owner, the money in the VEBA would be secure.
Solvency: During these negotiations, the UAW bargaining team insisted that the independent VEBA trust must be funded with sufficient cash and other assets to provide lifetime solvency based on current levels of medical benefits, using reasonable assumptions about health care inflation, investment returns and numerous other factors.
We enlisted the help and assistance of outside experts, including Lazard Freres and Milliman, two of the best investment banking and actuarial firms in the country. We made it clear to Ford we would never agree to a VEBA that is “short” on funding required to provide benefits at current levels on a lifetime basis.
We are pleased to report that after months of difficult bargaining, Ford agreed to fund the VEBA in a manner sufficient to provide benefits at current levels on a lifetime basis for current and future retirees, based on reasonable projections.
Contributions from active workers: A significant part of the funding for the independent VEBA trust is derived from sacrifices made by active UAW Ford workers, including continued deferral of the September 2006 3 percent wage increase, continuation of the 2 cents-per-quarter COLA diversion from the 2005 Agreement, an additional 4 cents-per-quarter COLA diversion over the 2007-2011 Agreement, and conversion of the value of a wage increase otherwise payable in 2008 into an ongoing contribution to the VEBA beginning in 2009.
$15.4 billion in contributions from Ford: In order to secure long-term funding for retiree health care, Ford will continue to pay for retiree health care directly until 2010 (at a cost of roughly $ 2.2 billion), and also contribute $13.2 billion in cash and securities to the independent VEBA trust. This figure does not include additional value based on potential long-term increases in Ford’s stock price. For example, if these funding components generate an additional $1.7 billion as described below, the total value in the independent VEBA trust would be $14.9 billion.
Funding for the independent VEBA trust, to be provided by Ford, will include:
• $6.5 billion in cash contributions, beginning Jan. 1, 2008, (although the VEBA does not take over responsibility for providing benefits until January 2010).
• A secured note with a value of $3 billion, payable over the next 10 years, with interest of 9.5 percent. This note is secured, meaning it is backed by assets at Ford Motor Co., which serve as collateral.
• Fifteen additional annual $52 million payments to the VEBA by Ford. These annual payments are worth $450 million on a present value basis.
• A financial instrument, backed by Ford, called a “convertible debenture” or “convertible note.” This note will have a face value of $3.3 billion, and Ford will be required to pay annual cash interest on the note for the benefit of the VEBA. In the event that the price of Ford common stock increases above a certain level, VEBA trustees may convert the note to Ford stock and then sell this stock in order to diversify assets in the trust. This “conversion” mechanism allows the VEBA to benefit from increases in Ford’s stock price. For example, if the price of Ford stock increases approximately 50 percent anytime over the next five years, the value of the note would be $5 billion. If the “conversion” is not triggered, the note will continue in effect, and the trustees can enforce Ford’s obligation to pay the trust the face value of the note, along with accrued interest.
VEBA trust pays benefits beginning Jan. 1, 2010: Starting Jan. 1, 2010, responsibility for retiree medical benefits will shift to the new VEBA. The VEBA will be required to continue benefits without change, in accordance with the earlier court-approved settlement agreement, to the end of 2011.
Sufficient resources to pay lifetime benefits: The funding level we have negotiated is expected to allow the VEBA to continue to provide benefits without change for the lifetime of current and future retirees. VEBA funding was calculated based on reasonable projections regarding medical inflation rates, investment returns and other factors. If actual experience is consistent with these projections, the VEBA will have sufficient assets to provide unchanged benefits on a lifetime basis. If actual experience is better than these projections (as a result, for example, of government action to finally address our country’s health care crisis), the VEBA’s funding status will exceed our projections, providing an additional layer of protection for your benefits. If actual experience is worse than projections (if, for example, investment returns are lower than projected on a long-term basis), the VEBA trustees may need to make benefit adjustments to maintain long-term solvency. But we have made every effort to obtain the necessary funding to minimize that risk. Your bargaining team believes the risk of a future VEBA shortfall is clearly preferable to the risk of relying on Ford to continue providing retiree benefits indefinitely.
Contributions by retirees capped at 3% until 2016, 4% afterward: In order to achieve long-term solvency, the UAW bargaining team did have to make one assumption about future cost savings. The 2005 settlement requires that monthly contributions (currently $10 single/$22 family) and co-pays and deductibles can increase by no more than 3 percent each year through 2011. Under the VEBA funding projections, we have assumed that this 3 percent cap on inflation increases remains in place through 2015 but will move to 4 percent starting in 2016. This change will have a relatively small impact. For example, in 2018 it would mean an expected monthly contribution $1 higher than it otherwise would have been. Twenty years from now, in 2027, the impact of the change would still be only $5 per month. Again, the actual experience of the fund may be better or worse than the projections, which may require the trustees to adjust these or other provisions over time.