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United Auto Workers’ Voluntary Employee Beneficiary Association Gets Investment Staff in Order

October 20, 2009
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The new United Auto Workers voluntary employee beneficiary association won’t officially open for business until January 1, but the association—with more than $37 billion in assets—has a chief investment officer and is looking for managing directors to oversee equity, fixed income and risk management.

Eric Henry, who resigned in August as executive director and chief investment officer of the $15.6 billion Texas Municipal Retirement System in Austin, will lead the VEBA’s investment staff as chief investment officer.

The association was created through agreements with General Motors Co., Detroit; Ford Motor Co., Dearborn, Michigan; and New Chrysler Corp., Auburn Hills, Michigan; to shift the remainder of their retiree medical care obligations to the new trust.

Ridgeway Partners, with U.S. offices in New York and Boston, was hired by the VEBA to assist in recruiting candidates for the positions. Ridgeway officials declined to comment.

The VEBA’s equity and fixed-income managing directors will report to Henry. It was not clear to whom risk management personnel will report.

The VEBA was created through labor contracts with the three auto companies before GM and Chrysler filed for bankruptcy protection this year. Both companies emerged from their bankruptcies weeks later under a bailout plan that gave the VEBA part ownership in the restructured companies.

Ford did not file for bankruptcy protection.

The association has an 11-member board made up of five of UAW officials and six independent members, all appointed by the union.

The three-member investment committee consists of two independent trustees: Olena Berg-Lacy, former assistant secretary of the Department of Labor’s Employee Benefits Security Administration, and Robert Naftaly, retired president and chief executive of PPOM, an independent operating subsidiary of Blue Cross Blue Shield of Michigan. Berg-Lacy is now a board member and senior advisor for Financial Engines Inc. of Palo Alto, California.

The third member will be UAW trustee Daniel Sherrick, director of the union’s legal department.

Other independent board members include: Teresa Ghilarducci, Schwartz professor of economic policy at The New School for Social Research, New York; David Baker Lewis, chairman and CEO of the law firm Lewis & Munday, Detroit; Marianne Udow-Phillips, director of the Center for Healthcare Research & Transformation, a nonprofit partnership between the University of Michigan and Blue Cross Blue Shield of Michigan; and Edward Welch, professor emeritus at the School of Labor and Industrial Relations, Michigan State University, Lansing.

The names of the independent trustees came from a 2008 filing in U.S. District Court in Detroit about the VEBA. Names of the other UAW members on the board couldn’t be obtained.

The three automakers will not have board representation or involvement with the VEBA. Their only obligation is to provide startup funding, which will permanently end their commitment to provide retiree health care to employees who belong to the UAW under earlier labor contracts.

The UAW will run the VEBA as a single fund combining all the automaker contributions, although it will have separate accounts for GM, Ford and Chrysler to pay the medical benefits for each company’s retirees.

The VEBA is expected to be based in Ann Arbor, Michigan, and its asset size would rival that of very large pension funds.

UAW officials declined to provide details about the VEBA, including how it is structuring its investment management and use of money mangers and consultants. Henry and Berg-Lacy and other trustees couldn’t be reached for comment.

The VEBA is expected to rely on external managers in managing its assets. The fund will consist of a combination of widely diversified investments and securities of the three auto companies.

Of the Big Three, GM will make the biggest contribution to the VEBA.

Contributions by GM to the VEBA consist of:
• 17.5 percent of GM stock.
• $6.5 billion in GM preferred stock with a 9 percent interest rate.
• A $2.5 billion note.
• GM warrants entitling the VEBA to acquire an additional 2.5 percent, or 15.1 million newly issued shares, of GM common stock.
• $9.4 billion in diversified investments from GM’s internal VEBA, which will be disbanded.

The GM warrants would be exercisable at a price of $126.92 a share of GM stock anytime before 2016. At that price, GM would have total equity value of $75 billion.

GM has not released current estimates of the value of its stock, which isn’t traded. The company hopes to begin trading the stock publicly in 2010.

Ford is contributing a total $13.1 billion in funds and securities. Under a ratified agreement with the UAW earlier this year, Ford will restructure its VEBA debt obligations into a $6.5 billion note payable in Ford stock or cash at the company’s option and a $6.6 billion note payable in cash, both due 2018.

Chrysler’s contributions will total $4.59 billion in a promissory note and company securities.

GM and Chrysler have filed proposals with the Department of Labor’s Employee Benefits Security Administration seeking exemptions under ERISA to contribute company securities to the VEBA. The EBSA, which must approve the exemption, has opened a 45-day period for each proposal for submission of public comments on the proposals.

GM filed its proposal in September; Chrysler’s proposal was filed this month.

The VEBA is searching for independent trustee companies to oversee the securities of GM and Chrysler. The hiring of the independent fiduciaries is a primary condition of the DOL exemptions, if granted.


Filed by Barry B. Burr of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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