When it comes to funding retiree healthcare benefits, will employees be left with only crumbs?

Staying with a company 20-plus years until retirement is rare these days. What’s even more rare is a company that still offers retiree health benefits. According to a Watson Wyatt survey of 500 major Canadian employers, fewer than half of employers provide medical coverage for their retirees. “That fluctuates quite significantly between sectors,” says François Poirier, senior group and health consultant, with Watson Wyatt Worldwide. According to the survey, that number can be as high as 60% (for the financial sector) and as low as 27% (for non-manufacturing).

And if employers aren’t eliminating benefits, they’re certainly cutting back on them. “We’re seeing a shift from where a plan sponsor would fully pay for a program to where a plan sponsor provides access to programs—but the cost is picked up by the employees,” says Liz Sargeant, assistant vice-president, voluntary benefits, group benefits, with Sun Life Financial Canada.

Reasonable Options

Employers cite the familiar arguments for this shift: double-digit health inflation (about 13% for prescription drugs, medical plans and hospital coverage, according to the latest Buck Consultants Canadian Health Care Trend Survey), accounting for post-retirement liabilities on balance sheets and provincial offloading of more and more benefits responsibilities to employers. And the onslaught of baby boomers approaching retirement within the next five to 10 years is simply the unwanted icing on the cake. “If you’re an employer with a retiree plan, those are all negative things,” says Ron Hoskins, assistant vice-president, strategic planning and research, Manulife Financial, Canadian Group Benefits.

But employers can find ways to manage these issues and their associated costs. Provided that the language in employee booklets and contracts for retiree benefits and HR policy is transparent and clearly reserves the right to make changes to its benefits plan from time to time, employers may contemplate making changes to their benefits plan design, says Riza Sychangco, vice-president, with Aon Consulting. But they must provide reasonable notice—typically, at least two to three years, she adds.

One option is to implement Health Care Spending Accounts (HCSAs) for retirees. According to Aon Consulting’s 2006 Canadian Benefits Trends Survey, based on 2007 renewals, post-retiree benefits were costing organizations, on average, $1,543 per member per year. With an HCSA, the employer provides a set amount for healthcare for employees to use rather than providing ongoing coverage. The basic dollar value gives employees funds they can use to either purchase individual healthcare insurance (without the employer fully absorbing the costs) and/or have their health-related expenses reimbursed, says Sychangco. “If the $1,543 were a defined benefit, it would attract the health inflation increase year over year. Rather than attracting a 13% [health inflation] increase, the employer could increase the HCSA by 2% or 3% to keep up with the change in the Consumer Price Index,” she says.

Or there’s cost-sharing the drug plan, which employers could link with years of service. For example, for an employee with more than 25 years of service, perhaps the drug plan will be fully paid by the employer in retirement, but if an employee has between 10 and 20 years, [the employer] could pay 50% of the cost, says Christiane Bourassa, a principal with Towers Perrin. “Instead of giving everything to everyone, [the employer] can make choices based on their objectives.”

Employers can also offer retirees a transition to an individual plan. Known as a “conversion product,” it’s a privilege given to an employee to convert to an individual plan when group coverage is terminated—in this case, when he or she retires and is no longer an active employee. Although this is individual insurance provided at a cost to the employee, he or she does not have to show any evidence of insurability (access to individual, portable insurance coverage levels without a medical exam), says Sychangco, provided that he or she applies for coverage within the allotted time frame.

A more rare approach in Canada is settlement. In this situation, the employer offers the retirees a sum of money, for example, in exchange for forfeiting their benefits. There have been a few instances of it in the U.S., but it is fairly new in Canada, says Bourassa. It’s fairly complex, she continues, because when it’s done on a voluntary basis, the information has to be well thought out and well organized—retirees must have all of the necessary information to make a decision about taking the money versus keeping the healthcare coverage.

To Prefund or Not to Prefund

Aside from restructuring the benefits plan design or providing access to individual insurance, prefunding is an option that’s been floating around the benefits world for a few years. Prefunding is the ability to set aside money for a future liability. However, at this point, there is no tax-effective vehicle in Canada allowing employers to do this.

And some are not convinced that a prefunding model is the answer for every employer. According to a recent Mercer survey, 63% of employers would use a tax-effective vehicle if it were available. But when asked if an employer should be required to prefund, only 22% said yes. “They’re saying, ‘If someone got us a tax-effective vehicle, yeah, we’d probably use it, but don’t force us to,’” says Ellen Whelan, principal, health and benefits, with Mercer. That’s similar to the U.S. model. “They’ve got some tax-effective vehicles like the VEBA [Voluntary Employees’ Beneficiary Association] and the 401(h), but again, not a whole lot of employers do it. Certainly, nobody’s fully funding it.”

However, one possible prefunding vehicle for employees in its nascent stages is the Tax-Free Savings Account (TFSA), announced earlier this year in the federal budget. “I’ve already had some discussion with some of my clients,” says Poirier. “It’s a good taxeffective tool. It’s been presented as a retirement savings tool, but nothing is mentioned that it has to be used for retirement income purposes only.”

Although it is much too early for any kind of definitive rules and set-up, consultants and insurers are considering the TFSA’s viability. But that, in itself, leads to some questions that can’t yet be answered. Can the TFSA be set up like a group registered retirement savings plan (RRSP) as part of a flex plan? Can unused flex dollars be flowed through to a TFSA similar to an RRSP? Can an employer mandate employees to use the money for healthcare? Could there be governance issues?

“If the investment vehicles used for [the TFSA] are the same investment vehicles used for the [group] RRSP, then it would likely require the same type of governance as capital accumulation plans do,” says Sychangco. “This would also introduce another layer of complexity in administration and taxable benefit calculations.”

But if employers aren’t be interested in implementing a TFSA for healthcarefunding purposes, could they ever expect Canadians to fund their future healthcare needs themselves? That’s a stretch, says Whelan. “Most of us haven’t had to pay for our own healthcare yet. I work in this field and I’m not saving for my retirement healthcare needs. I haven’t had to pay today; why would I start setting aside money? That’s the mentality most people have.”

According to a recent Sun Life Financial survey, 51% of Canadians have not taken any steps to pay for their healthcare in retirement. Only 9% have factored healthcare into their retirement savings. “A lot of [retirees] are going to be surprised that they don’t have the health benefits in retirement that they thought they might, or comparable to what they had while they were working,” says Hoskins.

Labour Woes

Working in retirement is certainly an option suitable to both employer and retiree. Attracting and retaining talent will be a challenge if the current labour force projections from Statistics Canada are accurate. It projects that the working-age portion of the population will decline in the next two decades, from 70% down to roughly 62% by 2030. If employers could entice some of their baby boomers to remain for a few more years, this would be a start toward addressing the upcoming labour shortages.

In a 2007 Mercer study looking at the cost of employer-paid benefits as employees age, it found that, for most types of coverage—except hospital care and some other major medical coverage—the employer’s costs actually decreased as employees aged. “It’s an interesting message to employers. Maybe it’s cheaper to keep your older people around,” says Whelan. “Unfortunately, drug [costs] don’t start coming down until over age 78, but dental, vision care [and] paramedical costs all decrease with age. Building in the effect of governmentsponsored drug plans and depending on what else your plan covers, your 65- to 70-year-old employee may actually be cheaper than your 45-year-old employee.”

Whelan has clients interested in attraction and retention using retiree health benefits, but their main concern is how to define a retiree—particularly in light of recent phased retirement provisions. “[Is the employee] active [or] a retiree for the accounting requirements for the post-retirement benefits?” asks Whelan. “They’re working three days a week and drawing a pension. Things haven’t been hammered out.” It’s especially important for drug coverage, which is used more often by those in the 65-plus category than by thirtysomethings. Poirier suggests that employers need to consider how cost-sharing arrangements are disseminated across different employee groups. For example, including 65-plus employees into the overall employee base may spread costs across the entire group, but where the premium will decrease for the 65-plus, it will increase for the active employees.

Furthermore, if an employer uses retiree benefits to keep some of its older employees on the job, will the employer be looking after them for life? “The last employer [that an employee] works with is generally the one that ends up picking up the full bill for all the retirement years,” says Whelan. “So there’s a disincentive. You don’t necessarily want to pick up [healthcare costs for] somebody who’s over 55 just because they want to quickly retire and lock in benefits for life with you.”

Education is Key

Employers should be taking steps now to help employees understand and prepare for the healthcare burden they may have to shoulder in the future. “There really is a need to educate Canadians about what their level of involvement is going to be in their own personal healthcare in retirement,” says Sargeant. “We’ve gotten very used to figuring out how to plan for our retirement from a financial perspective, [but] we need to put some focus on planning for it from the health perspective.”

That health perspective can start through preventive measures while employees are still working. “You’ll see tons of innovation around health and wellness information available to plan members to better manage their health while they’re active,” says Brad Fedorchuk, vice-president, group marketing, with Great-West Life.

Employers should also ensure that the language used around retiree benefits is clear. This is especially important when it comes to retiree exit interviews, says Fedorchuk. “Whether [or not] you offer a retiree health program, you have to be very, very crisp in terms of, here’s what we cover or, more importantly, what we don’t cover.”

Focus on the Retiree

Right now, even with the double-digit health inflation, healthcare is stable. “We do have a decent government-sponsored healthcare system in Canada,” says Whelan. “People don’t generally go catastrophically without treatment.” That said, it’s important that employees know what they already have from a benefits standpoint. “We’re looking at it from the employer’s perspective,” says Bourassa. “We’re not taking the time to explain to retirees what they already have from the provincial plan, what their risk is and what they need to protect against.” That’s particularly true, says Whelan, when it comes to understanding the different types of benefits offered and their relative value. “Dental coverage, vision care—those are just nice to have. But [they’re] not catastrophic: you’re not going to die if you don’t get your teeth cleaned.”

There doesn’t seem to be an easy solution to the retiree health benefits challenge. Perhaps the message to employers and employees alike is, you can’t have your cake and eat it, too.

Retiree Benefits Considerations for Plan Sponsors

If you’re contemplating a change to your retiree healthcare benefits, here is a list of considerations to take into account.

  • How significant is retiree benefits as a component of your total compensation package? Your company needs to be prepared in case any legal issues arise. Make sure that you’re not creating a fundamental breach to your employment contract.
  • In recruiting new talent, are retiree benefits part of your recruitment tools during the hiring process? What is the composition of your workforce? Is it predominantly young and mobile? Or is it stable and middle-aged?
  • In implementing these changes to your retiree benefits, are you looking to introduce something else that will help offset any potential loss of benefits—for example, a health care spending account?
  • Are your employees entitlement-oriented—i.e., do you have long-tenured employees who are used to being looked after by the employer? It could be difficult to make changes in this type of environment.
  • Does your organization have any public relations concerns? If so, by implementing a change to the retiree benefits, the organization could again be in the spotlight for doing something that could potentially be seen as negative.

Remember, if your company is making changes to retiree benefits, make sure that there is concrete language in the HR policy, communications, employment letters and contracts to employees that specifically gives you, the employer, the right to change the benefits from time to time. And make sure that you provide reasonable notice—typically, two to three years. It is imperative that organizations that are considering such changes seek legal advice. Consideration should also be given to active employees nearing retirement eligibility ages when formulating a strategy to make changes to retiree benefits.

Provided by Riza Sychangco, vice-president, with Aon Consulting. riza.sychangco@aon.ca


Brooke Smith is associate editor of Benefits Canada. brooke.smith@rci.rogers.com

For a PDF version of this article, click here.

© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the May 2008 edition of BENEFITS CANADA magazine.


Copyright © 2018 Transcontinental Media G.P. This article first appeared in Benefits Canada.

Join us on Twitter