WASHINGTON - The United Auto Workers has endorsed the prohibited transaction exemption application General Motors submitted to the Department of Labor in order to make a cash/stock contribution worth $10 billion to the company's pension plan for hourly workers.
In a letter to the Labor Department supporting the application, the UAW said the proposed transaction would be in the best interest of the plan and the participants.
"We believe that the terms of the PBGC/GM Agreement provide appropriate protections against the risks that would otherwise be associated with the acquisition and holding of a large block of employer securities," the letter said.
Bill Hoffman, UAW's director of social security added: "What you need to look at is that there will be significant new money going in and there will be enormous safeguards. It looks like a win-win situation if it goes forward."
If the Labor Department gives its approval, GM would contribute $4 billion in cash and 177 million of its Class E common stock, estimated to be worth $6 billion, to its U.S. hourly pension plan. Currently, the plan has an unfunded liability of $22.3 billion, the largest for any pension fund in the U.S.
The application and its two voluminous exhibits disclosed details on the transaction and the pension fund that previously were unavailable. GM contends the terms of the contribution are highly unlikely to be duplicated.
On one hand, the contribution would puncture GM's ballooning unfunded liability, but the contribution also would cause the fund to have a significant holding in its own company stock.
The application said the 177 million shares represent 40% of the Class E stock, whose dividends hinge on the performance of GM subsidiary Electronic Data Systems Corp. The shares would comprise 20% of the GM pension fund, according to United States Trust Co. of New York, which would become the fiduciary and manager of the stock contribution.
In a letter from U.S. Trust officials to GM, which was enclosed in the application, U.S. Trust said the proposed contribution wouldn't violate the 1974 Employee Retirement Income Security Act, which says the fiduciary must act in the best interest of the participants and beneficiaries. The U.S. Trust letter said the contribution would significantly reduce the plan's unfunded liabilities, that the stock contribution has strict, negotiated transfer rights, and that the reduction in the liability would help avoid any further reduction in the company's credit rating in the next downturn in the economy.
GM has been dropping from its AAA rating in 1978 to the current BBB+ rating by Standard & Poor's Corp., New York.
ERISA also says fiduciaries must diversify plan assets to reduce risk, or clearly show it is not prudent to diversify. U.S. Trust did not make clear whether the contribution was intended to diversify plan assets or, in the firm's opinion, it was not prudent to diversify the assets in this case, said William A. Schmidt, partner at Paul Hastings, Janofsky & Walker, Washington, and former counsel for regulations at the Department of Labor's solicitor's office.
"Even though it looks like U.S. Trust is stepping up to a fair amount of fiduciary responsibility, the basis for their conclusion - that it meets diversification requirements, isn't clear," said Mr. Schmidt.
Still, others said GM, in addition to its regular contribution, is trying to make the plan healthier with this large contribution.
"We could continue to make required contributions and see a snail's pace reduction, or we can give (the pension plan) a shot in the arm," a GM spokeswoman said. "How can there be risk in that the contribution is something that we'd otherwise not do?"
If the Labor Department grants the exemption, U.S. Trust would have restricted ability to sell the shares for the pension fund on an annual basis.
"We were trying to strike a balance between giving the pension plan as much liquidity as possible and not scaring the dickens out of the market," said Alok Bhatla, GM's director of business development, who worked on the registration rights with U.S. Trust.
U.S. Trust would be allowed to go to the market twice a year to make a "substantially underwritten offering" or a negotiated transfer, Mr. Bhatla said. With the negotiated transfer, the plan would not be able to sell more than 2% or roughly $300 million of the stock to any one person, he said.
The plan also would be allowed to piggyback an offering of the stock if GM decided to make an offering as well.
U.S. Trust agreed to manage the stock under these terms because it said it was concerned how the market would react to one entity holding a significant amount of the stock. If investors saw the pension plan intended to sell the shares quickly, investors might try to sell their shares before the pension plan, which could decrease the stock's value.
"It would be smart to take some time to sell the stock," Mr. Bhatla said, adding the plan intended to be a long-term holder.
In addition, GM would have a limited ability to use the credit it will accumulate through the $10 billion contribution. Pension law allows plan sponsors who contribute more than the required amount to use that surplus as a credit to reduce future payments. The $10 billion contribution would be in addition to GM's regular contribution, estimated to be a total of $8 billion through 1996.
GM would not be allowed to use the surplus as a credit through next year. But beginning with the 1996 plan year, GM could use part of the cash contribution as a credit so long as the company holds back a portion of the cash equal to 25% of the contributed value of the stock.
In addition, beginning with the 1998 plan year, GM could use $1.5 billion in stock credits per year. This $1.5 billion cap limits how much stock credit surplus can be used as a contribution to the fund.
In 2003, all restrictions on the credit balance would be lifted.
The restrictions on selling the stock and using the surplus to the fund as a credit are to assure the reduction of the underfunding is done responsibly. "These are restrictions on the trustee that (it) has agreed to," the GM spokeswoman said. "It's to document an orderly disposition of the stock. The objective is to maximize the return to the plan and not be disruptive to the market."
