Union-run health care may be the way of the future

Companies could reduce exposure to high benefit costs

Until General Motors and the United Auto Workers (UAW) tabled their talks – at least temporarily – about creating a retiree health fund, it looked as if a union-run health care trust might be included in their new collective agreement. GM has argued for such an arrangement, also know as a voluntary employees’ beneficiary association (VEBA), in order to restore profitability and regain a competitive edge against foreign car manufacturers.

A VEBA is a vehicle that allows companies to transfer the responsibility for providing a benefit to a trust, along with some, but not necessarily all, of the cost of providing the benefit.

Unions have a long history of providing pensions and benefits in Canada. One class of employees for whom this has been well-suited is construction trades. Because they tend to work for a variety of employers (many small and some transient) and have a stronger relationship with their hiring hall, allowing the employer to pay a rate per hour and have the union administer the benefit makes good sense. Other unions have sponsored their own pensions or health and dental plans in order to provide benefits for employees of small companies that don’t have the size or sophistication to do so.

The auto industry doesn’t fit into this mould. However, some other large companies, including Goodyear and Dana, have opted for VEBAs recently.

What is the benefit for the company? The VEBA reduces the financial uncertainty resulting from rising benefit costs. It does so by transferring it to the union. Also, companies that are able to reduce this uncertainty have seen their stock price appreciate considerably as a result, 25 per cent in Goodyear’s case.

What is the benefit for the union? Its members get to keep benefits that are no longer vulnerable to bargaining pressure. However, the benefits then become vulnerable to underfunding. The companies want to contribute a percentage of the cost of providing future benefits. Estimates run between 60¢ and 70¢ on the dollar. They also want to contribute stock rather than cash. That is not ideal for the union, but it might be better in the long run if the stock’s value increases.

The union will be assuming the responsibility that the company is being relieved of. If conservative funding rules and good returns conspire, it will make money. If health costs continue to increase sharply and returns are disappointing, it will be left holding the bag for its retired members.

The Big 3 are at a crossroads. They need to reduce their U.S. health costs and the market and financial experts believe this will do it. The UAW would rather not have to provide benefits, but it will do so rather than lose them. Active employees, the ones who will vote on ratification, almost certainly fear job loss and wage cuts more than benefit reductions. There are hard decisions to be made, but indications in the press suggest that they will be made, and that VEBAs will be part of the deal.

VEBAs have been around since 1928 and are a creature of the U.S. tax code. They don’t exist in Canada. But, when the financial markets see a good idea, they have a habit of transplanting it.

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