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© Copyright 2000 Rogers Media. The following article first appeared in the March 2001 edition of
BENEFITS CANADA magazine.
Saving retiree benefits
With the spotlight on the high price of post-retirement benefits, employers are looking for quick
fixes. Pre-funding is a remedy with merit.
By Hugh O'Reilly
What do changes in accounting rules, a supreme Court of Canada decision, government cutbacks and expensive new
drugs have in common? All of these factors combined create real problems for employers and employees when it
comes to non-pension, post-retirement benefits programs.
Changes to accounting rules, which came into effect in Jan. 2000, require employers to include the full
projected cost of post-retirement benefits--not just annual premiums--for current active employees, as well
as retirees, on their financial statements.
This change has put public companies in a position where the full cost of these benefits and their impact
on a company's bottom line have attracted the attention of board members, senior managers and analysts. As
a result, cost containment or elimination of these expenses has become the central focus of discussions and
concerns raised about retiree benefits.
Some might think that the easy solution to this problem is to simply eliminate or reduce retiree benefits.
One of the problems with this approach, however, is that the decision of the Supreme Court of Canada's
CAWvs.Dayco ruling in 1993 stands in the way of taking away retiree benefits.
In this case, the Supreme Court ruled that retiree benefits were vested benefits that could not be taken
away from retirees. As a result, the benefits of the current retiree population cannot be eliminated or
cutback unless the employer has reserved the right to amend its plans and has communicated this power to
employees. The legal reality is that only in exceptional circumstances can benefits be taken away from
retirees without their consent.
Government cutbacks in areas such as out-of-country medical and provincial drug coverage have made matters
worse. Increasingly, the cost of drug benefits is shifting from the public sector to private plans. The
advent of new drugs that are designed to treat the ills of aging baby boomers will only exacerbate the
problem as governments are reluctant to pick up these costs.
Employers have chosen to try and contain costs by reducing or eliminating post-retirement benefits for
current, active employees and by curbing over-use. This type of solution works from a cost containment
perspective because, over time, retiree benefits will be significantly reduced. But, over the long term, it
actually results in a much larger issue.
THE BETTER WAY
The baby boomers are aging, and they will be in need of post-retirement benefits. In the absence of
government support and private plans, how will their needs be addressed? Fred Holmes, national practice
leader, group health and welfare with Toronto-based Buck Consultants, thinks there is a better way to
address the issue than reducing or eliminating benefits. He believes that the changes to accounting rules
should be followed to their logical conclusion--pre-funding of post-retirement benefits.
"Setting up a group or individual non-pension benefits plan that accumulates assets on both a
tax-deductible and a tax-deferred basis is the best way to go," says Holmes. "Treat it like a registered
retirement savings plan or a pension plan and allow people to save for all of their benefits needs." This
way, he believes, funds will be in place to satisfy all plan members' future needs.
The concept has merit. The issues that will inevitably arise as baby boomers age, and the crisis in
post-retirement plans are problems that won't disappear on their own. Government sponsored pharmacare and
homecare solutions may come eventually. But in the meantime, Ottawa should give Holmes's concept some
consideration.
Hopefully, at minimum, this kind of practical thinking will ignite a much-needed debate on potential
solutions to the post-retirement, non-pension benefits dilemma that is being faced by employers and aging
baby boomers alike.
Hugh O'Reilly is a partner with Torys in Toronto. horeilly@torys.com.
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