Oct. 1 (Bloomberg) -- United Parcel Service Inc.'s five-year tentative contract agreement with the Teamsters will allow it to pay $6.1 billion to gain greater control of some pensions and will provide pay and benefit increases for workers.

The two sides bargained through the weekend to reach the tentative accord last night, about 10 months before the current contract expires and before a union-imposed deadline of today.

The contract, if approved by the employees, would fulfill UPS's decade-old goal of withdrawing from the Central States Fund, a multiemployer pension plan for 42,000 Teamsters members at the company. UPS wants to gain greater stability in pension costs by shifting the workers a new plan run by the company and the union.

``By exiting the plan, we believe UPS eliminates a significant cloud of uncertainty from its long-term liabilities,'' William Greene, a Morgan Stanley analyst in New York, said in a report to investors. Leaving the plan may allow UPS to ``take a more aggressive approach to balance-sheet management, including more leverage to buy back shares.''

The Central States payment, for UPS's remaining obligations to the plan, was estimated by analysts at $3.9 billion after tax.

Moody's Investors Service and Standard & Poor's Ratings Services said they're reviewing their long-term debt ratings on UPS for possible reductions, citing the pension-fund agreement.

The current Aaa by Moody's and AAA by S&P are their highest ratings. UPS is one of eight companies ranked at the top by both Moody's and S&P, the two biggest credit-rating companies. The package-shipping company has had the Moody's rating since 1996 and S&P's since 1985.

Shares Rise

UPS shares rose 80 cents to $75.90 at 4:02 p.m. in New York Stock Exchange trading. They have gained 1.2 percent this year.

The accord calls for UPS to fully fund the new pension plan jointly administered by the union and the company. Details of the pay and benefit increases weren't disclosed. The agreement covers almost 240,000 drivers, clerks and package sorters at UPS, the largest employer of Teamsters. Members will vote on the tentative agreement from late October to late November.

``It's clearly more money than has ever been put into a contract for pension and health benefits,'' Ken Hall, director of the Teamsters parcel and small-package division, said. ``The average guy working for UPS has clearly told us they want us to focus on their benefits, pension and health care.''

Pay, Benefits Increase

Teamsters' pay and benefits will increase by about $9 an hour over the five-year term of the agreement, Hall said in an interview. That compares with an $8.75-an-hour boost agreed to in the six-year contract reached in 2002.

``This agreement will allow us to remain competitive in a challenging marketplace,'' Michael Eskew, UPS chairman and chief executive officer, said in a statement. Norman Black, a UPS spokesman, declined to discuss specific components of the plan.

A $9-an-hour increase in wage and benefits over the life of the contract would be less, on a percentage basis, than the 2002 contract, said Ken Paff of Teamsters for a Democratic Union, a group critical of the union's handling of the UPS negotiations.

``We're also very concerned about the Central States plan,'' Paff said today. The group is awaiting details of the tentative agreement to evaluate it further, he said.

Pension Effect

The pension-fund payment may result in a lower credit rating by boosting UPS's net debt ratio to almost 48 percent from 20 percent now, said Edward Wolfe, a Bear Stearns & Co. analyst in New York. It will cut earnings per share by about 17 cents in 2008 and 14 cents on an ``ongoing'' basis because of higher interest expense, said Wolfe, who rates UPS ``peer perform.''

``UPS could be back in this same position five years from now, paying another lump sum into some or all of the remaining 20 other underfunded Teamster pension funds in which it contributes,'' Wolfe said today in a report to investors.

The company probably will take a $3.9 billion charge for the payment this quarter and fund it with cash and debt, said Greene, who rates UPS ``equal-weight/attractive.'' UPS had about $2.1 billion cash at the end of June.

UPS employees belong to 20 other multiemployer pension plans. Labor is about 60 percent of the company's costs.

Freight Contract

Negotiators also agreed to a separate contract covering 125 drivers and dockworkers at UPS Freight in Indianapolis. The union hopes to use the contract to extend its representation to other UPS Freight locations. The freight unit operated as nonunion Overnite Corp. before being purchased by UPS in 2005.

The Teamsters accord follows about a year of talks, which concluded early enough to avoid driving away UPS customers and before the union's self-imposed target of today.

Most terms of the agreement take effect Aug. 1, with the pension change to occur Dec. 26, Hall said.

The Central States Fund has suffered as several unionized trucking companies have failed or been acquired during the past decade, leaving UPS and other remaining employers to bear greater liability for retirees covered.

The fund is about 47 percent underfunded, and faces a shortfall of about $18 billion, Thomas Wadewitz, a JPMorgan Chase & Co. analyst, has estimated. UPS doesn't break out how much it pays into the fund annually.

The union wanted to reach an agreement by today to allow for member voting before Jan. 1, when federal legislation approved last year to shore up underfunded pension plans takes effect. UPS's withdrawal must be approved by the pension plan's trustees.

The Teamsters historically opposed UPS's efforts to pull out of Central States, and the dispute was a key factor in the union's two-week strike in 1997. Union President James P. Hoffa, whose father James R. Hoffa helped organize Central States in the 1950s, reversed course this year, saying the change would benefit members' retirement security.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

Last Updated: October 1, 2007 16:07 EDT