By John W. Miller 

PITTSBURGH--In spite of a program to cut costs, Alcoa Inc. agreed to a generous five-year pact that gives workers annual raises and preserves health and pension benefits to avoid any labor-related disruptions in deliveries to key auto customers.

The pact, which covers 6,100 workers at 10 U.S. plants, "ensures labor stability as we continue the transformation of Alcoa," said Bob Wilt, chairman of Alcoa's employee relations council.

The five-year contract guarantees raises of 2.5% for each of the first three years and 3% for the final two years, according to union officials. In addition, current workers will retain company pensions and new hires will be offered pensions instead of private 401(k) investment plans. Union officials said health-care premiums, which the company sought to increase, were kept at current levels.

Under the pact, which must be ratified by workers, Alcoa can more easily lay off up to 35 workers at a time, giving it more flexibility to adapt to business cycles.

Monica Orbe, a spokeswoman for Alcoa, declined to comment on the specifics of the deal "because of our agreement with the union that it communicate details to employees."

The USW won the raises and concessions on pensions and health care because Alcoa "didn't want a strike," said Steve Morris, president of local 309, which represents workers in Alcoa, Tenn., the town that was named after the company.

The deal removes uncertainty for Alcoa as it navigates a tough time in the aluminum industry, which has been wracked by a global oversupply that has driven down prices by more than a third since 2011. In response, Alcoa has cut raw smelting capacity around the world and invested where demand is strong: making automotive sheet and aluminum parts for planes. The company, which lost $2.3 billion last year, has also vowed to cut costs. It recently cut production in Brazil and closed plants in Australia and New York, moves that eliminated 10%, or 421,000 tons, of its smelting capacity.

The underpinning of the favorable deal was strong demand from the auto industry, according to union officials.

Alcoa recently invested $575 million to expand plants in Alcoa, Tenn., and Davenport, Iowa, that make sheet aluminum for the auto industry. Detroit has started the process of using more aluminum in mainstream vehicles such as the Ford F-150, a development aluminum executives call the biggest boost to their business since the beer can went from steel to aluminum in the 1970s. Mr. Morris, the local president, said Alcoa doesn't want to risk losing orders it has in hand for the expanded plants from Ford Motor Co. and General Motors Corp.

Robert Bruno, a professor of labor relations at the University of Illinois, said the deal appeared remarkably favorable to the union. "The present labor environment is very harsh," he said. "But you'll find pockets where there's expansion, where there's a growing market, and that's where [unions] have the opportunity to have some leverage." In the case of Alcoa, he added, the company didn't want a strike "because they wanted to recoup quickly on their recent investments."

The last USW strike involving Alcoa was a six-week protest in 1986, said union officials.

The contract must still be ratified in a vote by workers. R.J. Hufnagel, a USW official, said the vote would likely happen in the next week or two. "All the local presidents voted unanimously to recommend this deal, " he said. "And when that happens, generally it passes."

Mr. Morris, one of those endorsers, said, "since 2001, this is the best deal we've had."

Write to John W. Miller at john.miller@wsj.com

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