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© Copyright 2000 Rogers Media. The following article first appeared in the May 2000 edition of
BENEFITS CANADA magazine.
Retiree benefits come of age
Aging boomers and rising healthcare expenses are forcing employers to rethink their benefits
strategies. Plan sponsors and members can work together to contain costs and develop effective solutions to
the challenges that lie ahead.
By Michael Warren
Most plan sponsors are all too aware of the fact that, every year, their retiree healthcare plan consumes
more and more dollars. There are powerful demographic and economic forces at work, driving up the cost of
employer healthcare plans, for both active and retired employees. Consequently, there is an urgent need for
employers to reconsider the purpose of their plans. They must also determine whether or not the current
design meets their objectives and how to contain costs without jeopardizing the purpose of the plan.
WHO WILL PAY?
Recent trends in hospital stays show a reduction in the number of days per admission, and a decline in rate
of admissions per 1,000 people in the population. In Canada, the average number of days per admission has
dropped to 9.97 from 11.05 between 1994 to 1997, marking a 10% overall reduction. The number of admissions
per 1,000 people declined to 106 people from 128 during the same period. Both indicators are closely
related to age, however, and as the population matures, these averages will soar.
While 12% of the population is currently over 65 years old, that proportion is expected to hit 20% within
20 years. If current admission rates and days per admission are projected into the future, the result is a
dramatic jump in the number of required hospital days from the current 31.5 million days to nearly 56
million days in 2026 (see "Projected hospital stays in Canada," above). Almost 90% of the increase is
attributable to our aging population.
Demographic trends are putting intense pressure on healthcare administrators to find more effective
treatments in order to avoid unnecessary hospitalization. Already, many people are treated as out-patients,
instead of occupying a hospital bed for weeks, thanks to advances in surgery, therapies and more accurate
diagnostic equipment. While this is positive for employees, it will shift costs onto employer-sponsored
plans since drugs and other items that were once provided as a part of in-hospital care become
out-of-hospital expenses.
A major portion of unavoidable hospital costs occur at older ages and in the last year of a person's life.
Plan sponsors should brace themselves for the likelihood of a double hit in cost increases: more hospital
days due to the increase in the number of older retirees, and more out-of-hospital costs (drugs, nursing
care, assistive devices, etc.) for employees under 65 years old.
The shift to an older population represents a significant challenge to our use of healthcare resources.
Ultimately, an increase in costs will be borne by the taxpayer or employer-sponsored plans, or paid for in
terms of reduced service and longer waiting lists. Difficulties are already beginning to emerge in the
hospital system, putting more pressure on homecare resources. At the same time, not all of the new and more
expensive drugs will be covered by provincial drug plans for seniors.
We can expect continued cost-shifting from the government tax-supported sector to private
employer-sponsored plans. There will probably be amendments to the Canada Health Act, giving provinces more
control in the areas of coverage, user fees and individual insured arrangements. Employers need to be aware
of these developments and make informed decisions today, redesigning their retiree plans appropriately.
In view of recent trends in healthcare, some caps or limitations on benefits are on the horizon. Drug
formularies are being implemented and employers are looking to third parties to decide whether or not new
drugs should be covered by the plan. Similarly, provincial plan deductibles and co-insurance levels are
being frozen at current levels.
ASKING QUESTIONS
An analysis of existing claims is revealing. It's important for sponsors to ask: Where are the claims
coming from? Which divisions? Which age groups? And, are they the result of any specific drugs or
procedures? Sponsors also need to examine whether or not they need a drug formulary and if their plan has a
benefits provision that is loosely worded, or an area in which implementing a maximum would make a
significant difference to controlling costs. At this point, it is also prudent to ask if a change in
deductibles or co-insurance levels is in order. In addition, audits of providers may be considered as a
non-intrusive approach to cost containment that can produce significant savings.
Another option to consider is some form of cost-sharing between the sponsor and retirees. Retiree
contributions often make a lot of sense, particularly if the plan is designed in a way that offers choice
as to the level of benefits and participation in the plan. In such an instance, retirees may be willing to
pick up a significant share of the cost of the healthcare plan. At the same time, the post-retirement
accounting expense numbers will be dramatically affected, since the liability
will be reduced by the expected value of future retiree contributions.
A flexible pension plan gives employees the opportunity to save for retirement years in a tax-effective
manner. Since retiree healthcare benefits cannot be directly pre-funded by the plan sponsor, the firm can
better achieve its objectives by allowing more options for saving and profit-sharing while employees are
working, so that they can better afford to contribute to the healthcare plan when they retire. This
total package approach creates a feeling of partnership as the firm and employees work and save
together to ensure that appropriate healthcare benefits are affordable in retirement.
EFFECTIVE STRATEGIES
Apart from cost-saving measures, sponsors need to consider the effectiveness of the benefits program as a
part of their total compensation strategy. An effective plan takes into account which group of employees
the firm wants to retain and give benefits to, and looks at eligibility requirements in this light.
In this context, plan sponsors need to look at alternative strategies and their impact on attraction and
retention of staff, particularly of key individuals. As the baby boom generation begins to retire, the
provision of retiree benefits becomes an important consideration for many individuals. On the other hand,
an early retirement subsidy or a window of opportunity to retire early can be expensive, not simply because
of the pension cost and the shift in post-retirement accounting costs, but because these programs encourage
employees to retire at precisely the time when the company needs to keep their skills and experience.
Eligibility rule changes may be considered as part of an overall attraction and retention strategy. Also,
such changes can have a major impact on the accounting liability, largely because the overall rate of
accrual may be reduced. At the same time, an analysis of their impact can be combined with a review of the
early retirement provisions.
To make important and effective decisions about changing plans, sponsors need to take the pulse of
employees and determine what their attitude is towards different forms of remuneration--cash, savings,
profit-sharing and benefits plans in general.
A well-designed employee survey is an important first step in establishing a compensation strategy (see
"Taking the pulse of your workplace,"right). For example, a recent Watson Wyatt study reveals that
employees who are satisfied with their benefits report a 58% level of commitment to their work. Indeed, the
results of employee surveys can be illuminating. They form a stepping-stone in the benefits redesign
process. The objectives are three-fold: enhancing the perceived value of the benefits plan, both for active
employees and retirees; attracting and retaining the best staff; and protecting the plan against large and
uncontrollable increases in cost. Now is not too soon to begin.
Michael Warren is a group actuary with Watson Wyatt in Toronto.
*** ***
Projected hospital stays in Canada
When current admission rates and days per admission are projected into the future, we see a dramatic
increase in required hospital days, from the current level of 31.5 million days to nearly 56 million days
in 2026. Almost 90% of the projected increase is attributable to seniors.
Source: Watson Wyatt, Toronto
*** ***
Taking the pulse of your workplace
By Owen Parker
A recent Watson Wyatt study reveals that employees who are satisfied with their benefits report a 58% level
of commitment to their work. This contrasts sharply with employees who are dissatisfied with their benefits
and indicate only a 29% commitment level. Since employee commitment is strongly associated with retention,
companies that know the commitment level of their employees can more readily address retention-related
issues.
Employee feedback surveys are an important means for determining the commitment level, as well as other
important facets of the organization's working environment.
Well-designed employee feedback surveys typically reflect several distinct phases, including:
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Project planning.The project team plans the details of the initiative, decides on the research
methodology and prepares a communication plan.
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Issue identification. Pin-pointing the issues that will constitute the survey through interviews, focus
groups, reviewing previous surveys and searching archival records.
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Survey design. Developing the questions and format of the survey, and finalizing the method of data
collection.
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Survey administration. Distributing the surveys and collecting respondent data.
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Data analysis. Conducting a statistical examination and practical review of the quantitative data and
qualitative comments from the survey.
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Data reporting.The preparation of a feedback report, either in detailed or summary form, for the firm's
executives and employees concerning survey results, usually with implications and recommendations
included.
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Action planning. The survey findings are used as a means for developing organizational priorities and
suggesting appropriate actions.
Employee surveys are a comprehensive and convenient means for assessing the attitudes of plan members
towards their firm, job and leaders. With the growing need to recruit and retain the best possible people,
the information gained from surveys is becoming even more critical for understanding employee issues, and
developing effective human resource policies and programs.
Owen Parker is senior research manager with Watson wyatt in Toronto.
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