Tuesday, March 8, 2005

Delphi to cut retiree benefits

Auto supplier to slash medical insurance for 4,000 former white collar workers.

By Brett Clanton / The Detroit News

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Delphi Corp., the world's largest auto parts supplier, will stop paying medical insurance in 2007 for 4,000 retired salaried workers and thousands more future retirees.

Delphi will drop coverage for retirees once they're eligible for Medicare benefits, which the parts maker will supplement with private health care accounts, the company told employees Monday in an e-mail.

The move is expected to save the cash-strapped supplier $500 million, but it means Delphi retirees who expected lifelong coverage can expect to pay more for everything from doctor visits to surgery.

"It's a scary thing," said Terri Siladke, 54, of Fraser, who retired from Delphi in 2003. "I don't know what it's going to mean for me. It certainly wasn't expected."

Siladke worked for General Motors Corp. until 2000, when it spun off Delphi. She always believed Delphi retirees would receive the same benefits as their counterparts at GM.

The company informed employees of the change the same day Delphi's shares plunged following downgrades from two major Wall Street investment firms. On Friday, Delphi disclosed improper accounting transactions and fired its chief financial officer, moves that heightened concerns about its financial state.

Delphi's plan to eliminate health coverage for retirees underscores the challenges many U.S. suppliers face as they try to offset skyrocketing employee benefit expenses, rising materials costs and production cuts by Detroit automakers.

Given Delphi's prominence in the industry, other suppliers may look to follow suit. Last April, Troy-based supplier ArvinMeritor Inc. said it will eliminate supplemental health coverage of retirees over the age of 65 by 2006, and cut health care coverage to retirees altogether by 2023.

Delphi spent an estimated $1.1 billion on health care last year, and its costs have been rising.

By 2007, Delphi said it will stop paying health care for retirees who qualify for Medicare. "Instead, eligible salaried retirees will be able to use a new retiree medical account to defray the cost of purchasing Medicare coverage and/or other supplemental Medigap coverage," the company said in a statement.

Delphi will hire a private company to manage the new medical accounts, but it has not selected the company, Delphi spokeswoman Luce Rubio said.

Delphi currently pays for its retirees' health coverage with the exception of co-pays and deductibles. Under the new plan, salaried retirees will no longer have their medical bills paid at the time of a doctor's office visit. Instead, they will submit expenses to the private provider and be reimbursed for a portion of their expenses that are not covered by Medicare, Rubio said.

Medicare is a health insurance program for people 65 and older, some disabled people under 65, and people with permanent kidney failure.

Medicare's medical insurance program pays some of the cost of doctors and outpatient medical care.

For instance, Medicare's so-called "B" program charges $78 a month with a $110 annual deductible and covers up to 80 percent of the approved cost of a given service.

Delphi's new plan would help with the cost of the monthly Medicare premium. It also would supplement the cost of Medigap insurance, an optional program retirees can pay into to bridge the "gap" in what is covered by Medicare.

But it falls short of providing the same level of care under the supplier's existing program.

A recent survey showed that three-fourths of companies have required retired workers to pay a higher share of insurance premiums in the past year. In the survey, by the nonprofit health care policy group Kaiser Family Foundation and human resource consultant Hewitt Associates, 86 percent of companies said they planned to increase what retirees pay for health insurance in the next three years.

According to benefits consultant Watson Wyatt & Co., only 10 percent of companies are expected to offer any retirement health coverage by 2031.

While Delphi's plan likely will be applauded by investors in coming weeks as a prudent way to reduce costs, the company's shares took a beating Monday over the accounting issues that surfaced last week.

Analysts with Merrill Lynch and Credit Suisse First Boston downgraded Delphi shares after it acknowledged accounting irregularities dating back to 1999, problems which also resulted in the resignation of CFO Alan Dawes.

"The company's financial statements can no longer be relied upon and thus we cannot recommend that investors continue to hold shares in their portfolios," Merrill Lynch analyst John Casesa wrote in a research note Monday, explaining a changed recommendation to "sell" from "neutral."

Credit Suisse downgraded Delphi to "underperform" from "neutral." Analysts warned the auto parts maker may also be forced to reduce its dividend to preserve cash.

Delphi's stock price ended the day at $5.15 per share, down more than 5 percent, marking a new low.

Delphi has been hurt in recent months by soaring steel costs and production cuts by Detroit automakers.

Two weeks ago, Delphi CEO and Chairman J.T. Battenberg III announced plans to retire later this year. Delphi says Battenberg's retirement is unrelated to the accounting problems.

While it is still unclear what the ultimate fallout of the accounting investigation will be, Monday's events signaled that Delphi's troubles are far from over.

The question is "to what extent has the damage been done?" said Jim Gillette, an industry analyst with CSM Worldwide in Grand Rapids.

Delphi found accounting problems related to inventory transactions, rebate income, technology costs and disposal of assets. But more problems could surface as an investigation by the company's board continues.

Delphi officials have discussed preliminary findings with its auditor Deloitte & Touche, but the firm is still reviewing the findings.

"As a result, it appears that extensive restatements (of Delphi's earnings) will be required," Casesa said.

The supplier plans to have all restatements filed with the SEC by the end of June, said Claudia Baucus, a Delphi spokeswoman.

Of the stock downgrades Monday, Baucus said, "We're certainly disappointed with today's moves." But the company remains optimistic about its future. "Delphi is just staying focused on our long-term value creation strategy, and we're taking aggressive action to reduce our cost structure."

You can reach Brett Clanton at (313) 222-2612 or bclanton@detnews.com.