Approaching retirement can be an emotional time for some employees. Add to that the prospect of reduced or even the total elimination of health benefits, and boomers can be forgiven for reluctantly starting life as retiree.
What is the current environment like for plan sponsors who do believe there is a moral obligation to at least consider the plight of long-term employees facing the future without benefits? With the number of retirees increasing each year along with the double-digit cost inflation experienced over the past decade, many plan sponsors have been thinking about this issue for many years—albeit with an eye on rising healthcare costs for active employees too.
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The state of retiree benefits
The reasons some employers continue to provide retiree benefits in the current business and demographic environment varies. It could be due to collective agreement, to be competitive or just because it is the right thing to do for long-term employees.
Historically, retiree benefits were paid for on a pay-as-you go basis. Employers didn’t have to record the liability for claims on balance sheets; just pay for claims as they were incurred. That all changed in 2000 when the Canadian Association of Chartered Accountants (CICA) modified the accounting rules for retiree benefits.
Since then, the future cost of those liabilities had to be accounted and funded, which made the cost of the plan for active members increase significantly. As a result, many employers—even some of the country’s largest—found it financially impossible to give retirees the same coverage as active plan members.
What’s covered
Governments are also feeling the impact of rising health costs, created by an aging population and some provinces are devoting almost 50% of their budgets to fund healthcare. Consequently, we’ve experienced a constant shift of coverage to the private sector and a reduction or elimination of some provincially funded services.
Drug benefits management is also more earnestly tackled by plan sponsors and some of the newest and most expensive drug therapies require special authorization in order to make provincial plans the first payer. Retirees will experience this push-pull first hand as they try to manage their drug claims directly with the provinces where deductibles are increasing and where covered drugs are more restricted.
Due to those restrictive formularies, employees retiring today will face a provincial drug plan that covers 3,500 to 6,000 drugs compared to upwards of 13,000 drugs in an active formulary under an employer sponsored plan. For example, in Ontario, only 29% of the drugs in a typical active sponsored plan are covered by the Ontario formulary. However, there can be a significant variance of what’s covered when the other provinces are considered. This variance is difficult for the average Canadian to understand. Helping retirees prepare for the financial impact of a retirement without an employer sponsored plan is even more difficult given the variability of provincial plans.
In fact, seven of the top 10 most costly drugs are not expressly covered by any provincial formulary but it might be possible to have them covered under certain circumstances. These are the biologics that can save lives if used properly and in the right situations. And that’s the problem. As a retiree, you just don’t know what you can expect from your provincial plan.
It’s true that costs related to paramedical services such as chiropractic, massage and physiotherapy reduce as people age, while nursing care costs are 14 times higher for an 85 year old compared to the costs for a 55 year old. The Canadian Cancer Society estimates that over 40% of the population will develop cancer in their lifetimes and 43% of those new cancer patients will be at least 70 years of age. With statistics like those, both retirees and employers want—and need—solutions.
What’s affordable, realistic
The affordability gap is widening for employees too. They have seen their portion of benefits plan costs increase during the past several years and expect the employer to offer alternatives.
A survey of plan members in 2009 by TRG Group Benefits, found that employees were increasingly concerned about both the current cost of health coverage and how that will impact their retirement. This concern is driving a paradigm shift in the workplace with more employees showing a willingness to pay more out of pocket in order to have sustainability and predictability of costs.
How does this translate to the retiree?
Managing increased costs due to claims trends is not just for active employees. The concerns are the same in managing retiree claims; increased cost per prescription, biologic drug therapies and increased claims due to age.
These factors make employers reluctant to simply extend benefits into retirement without significant plan design changes such has high deductibles, managed formularies, special authorization for drugs excluded from provincial formularies and reduced care for elective services. Plan design changes are definitely part of the solution but some of these elements are still slow to finding their way into plans for active members.
Product development from the insurance industry has been very good in the last five years but there has been little in the area of retiree benefits other than offering some scaled down voluntary plans where the retiree is expected pay the entire premium directly.
While this is better than no option at all, the industry needs to do more. Relying entirely on provincial plans will simply become increasingly unrealistic, but so is expecting plan sponsors to fill the entire gap.
What plan sponsors can do—whether they offer voluntary benefits or not—is to make sure their employees understand what their healthcare costs could be in retirement and ensure that is incorporated into their overall retirement plan.
Greg Pallone is the managing director with TRG Group Benefits in Vancouver.