The Teamsters union and United Parcel Service Inc on Sunday said they reached a tentative five-year agreement that will raise parcel workers' wages and increase the company's contributions to funds providing pensions and benefits.

The deal -- the largest labor pact in the U.S. private sector -- comes 11 months before the current contract is due to expire and is subject to employee ratification.

The Teamsters' UPS members have never rejected a contract agreed to by the union's leadership.

After we concluded our last contract early in 2002, our customers expected us to get this done early, UPS spokesman Norman Black said. We're very happy to have done just that.

The agreement comes after a year of talks and covers about 240,000 full- and part-time union members at the world's largest parcel delivery company, UPS said.

Wall Street analysts have mentioned uncertainty over when and how a new contract would be agreed as an issue to watch for UPS stock. UPS shares closed at $75.10 on Friday.

The UPS deal with the International Brotherhood of the Teamsters includes increases in wages and benefits of $9 per hour per worker over the life of the new 5-year contract to take effect on August 1, 2008, union officials said.

That compared to comparable increases of $8.75 per hour per worker in the current six-year contract with the Teamsters, said Ken Hall, chief negotiator for the Teamsters with UPS.

The deal also includes a provision allowing UPS to withdraw some UPS Teamsters members from their current multi-employer pension plan, the Central States Pension Fund, and establish a new jointly trusteed single-employer plan for them.

UPS said it will make a pre-tax $6.1 billion payment to the Central States plan in connection with the withdrawal.

Details of the deal will be released in coming days. But the union said in a statement that UPS will fully fund the new jointly-trusteed plan.

Analysts have calculated that pulling out of the plan would help UPS reduce labor costs and improve competition against its main rival, Memphis-based FedEx Corp. FedEx is a non-union operator and is currently fighting off attempts to unionize contractors at its ground delivery unit FedEx Ground.

PENSION RULE CHANGES SPUR DEAL?

The current Teamsters contract expires July 31, 2008. If ratified most provisions of the new agreement will take effect on August 1, 2008. But the union had set an October 1 deadline to reach a new agreement.

We made it very clear to the company that we needed to reach a tentative agreement by October 1 so that our members could ratify a contract before new pension rules that could adversely affect our members take effect on January 1, 2008, said Teamsters General President Jim Hoffa, co-chairman of the Union's National UPS Negotiating Committee.

These are the largest increases in the history of this contract and the largest for any national contract with any employer in recent years, Hall told Reuters.

A source at UPS said the new pension rules in January concern how multi-employer pension plans are classified according to financial stability. The Teamsters wanted a new plan in place to protect employees and the $6.1 billion payment will cover all UPS outstanding liabilities to the Central States plan, the source said.

The Teamsters' Hall said about 43,000 union members were expected to shift from the current Central States Pension Fund to the new jointly trusteed pension fund on December 26, 2007.

The Teamsters also said on Sunday they had a tentative agreement to represent 125 drivers and dockworkers at UPS Freight in Indianapolis. UPS had said it would not stand in the way of Teamsters efforts to unionize a terminal at the less-than-truckload unit.

We have reached a handshake agreement on a contract... which does include some wage enhancements, UPS's Black said. If it is ratified we understand the Teamsters will try to use it to convince other UPS Freight employees to join the union.

UPS bought UPS Freight, formerly known as Overnite Transportation, for $1.25 billion in 2005. The company employs some 15,000 drivers.

The Teamsters deal with UPS comes less that a week after General Motors Corp and the United Auto Workers Union reached a landmark new contract for 73,000 UAW workers at the struggling U.S. automaker.

The centerpiece of that contract was the shift by GM for health-care liabilities for its retired union workers to a new trust fund in 2010. GM will put $24.1 billion into that fund by the start of next year, the UAW said on Friday.

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