Post-retirement benefits in the crosshairs

Speaking at the spring conference of the Association of Canadian Pension Management’s Ontario Regional Council, senior consultant Ken Cooke told the audience many benefit plan sponsors never anticipated the magnitude of post-retirement benefits cost.

Over the past 20 years, life expectancy has been extended significantly and employers have found post-retirement healthcare costs ballooning. Retirees are now living longer and requiring more medication to remain active and healthy in their later years.

At the same time, provincial health insurance schemes have de-listed many services, leaving employer-backed health insurance covering ever more procedures.

Many medications have become cheaper over the past two decades as patent protection expired, but there has been an explosion of new tailor-made drugs hitting on the market. While these are more often effective, they are also far more expensive.

These costs are no trifling matter.

In one example Cooke presented, the cost to the employer providing life insurance alone for a 62-year-old employee is $2,000. Add healthcare insurance to age 65 and that obligation rises to $11,000. Tack on life and health insurance for life, and the cost soars to $40,000.

While 9% of companies have already reduced or eliminated PRB coverage for retired staff, another 2% plan to do so, and 14% are considering such a move.

So far, 21% of survey respondents said they had already cut back on post-retirement benefit (PRB) coverage for future retirees, while 5% are planning to, and 21% are considering it.

That’s not to say employers are planning to hang retirees out to dry completely, though. Six percent have provided new means for employees to save for their future healthcare costs, while 4% plan to do so and 31% are considering their options.

To get out from under these healthcare obligations, some employers are asking retirees to accept a cash settlement in lieu of continued coverage. Such programs are not without their own set of risks.

First off, the employer must have the cash on hand to pay for these settlements. Large companies with an army of retired ex-employees could require a huge sum to settle if all retirees accept the package.

Voluntary settlements also face another problem: they may be accepted by the healthiest retirees, who realize that the lump sum is of more value than the insurance, while less healthy retirees opt for continued coverage. On both sides of the equation, the company loses.

There may also be tax implications on settlements for the retiree, although those under 71 years of age may have space still available in their RRSP to shelter some or all of the cash.

Cash settlements offer the retiree added peace of mind if their former employer is struggling. Unlike pensions, post-retirement health insurance is not protected from a corporate bankruptcy, making cash in hand a much safer bet.

Cash settlements are not the only route available: health and welfare trusts may be set up, and individual insurance is a standby option. But some employers are considering using a relatively new structure to provide healthcare PRBs.

The tax-free savings account (TFSA) only became available on January 1, 2009, but it may be poised to become a key component in offloading PRB costs.

Employer-paid TFSA contributions are tax-deductible, and differ from traditional health insurance in that there is no post-retirement accounting liability. The employer pays in and can then wash its hands of the cost.

There is a danger that the employee will spend the money on something other than healthcare, but the employer’s liability would likely be next to nil. The ease of access might also encourage the employee to accept this program in lieu of long-term health insurance as it provides unlimited flexibility.

Because the eventual withdrawals do not affect income-tested benefits, the retired worker of the future, who has not dipped into the TFSA, would still qualify for provincial drug plan benefits.

Such a program would be especially appealing to younger employees, as the value of the account could grow dramatically by the time they reach retirement.

(05/14/09)

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