IT’S A DILEMMA. CANADIANS ARE APPROACHING RETIREMENT in record numbers. Post-retirement benefits are traditionally unfunded and often loosely defined. How does an employer balance its desire to provide retirees with benefits with its need to control escalating costs? Many are making changes to the life, medical and dental benefits they provide to their retired employees.

Not to panic. The majority of Canadian employers are not looking to eliminate benefits, but rather they are seeking ways to control plan costs and manage risks today.

A poll, conducted by Mercer in November 2005, asked Human Resources(HR)professionals across Canada about changes to retiree benefits coverage. Responses from 213 plan sponsor participants, show that nearly 25% plan to reduce their retiree benefit programs and just over 9% plan to improve benefits to retirees in the next three years.

Employer-sponsored healthcare plan costs have been increasing rapidly as a result of several factors. Governments continue to shift costs by delisting services, which then fall to employer’s plans. A greater number of Canadians are accessing the healthcare system more frequently, particularly prescription medications, and for more specialized and expensive treatments. The costs have shocked many employers into rethinking the affordability of their current post-retirement benefits plans.

Start now by assessing and documenting the benefits you have in place currently for retirees. Run cost projections, under several scenarios, to understand projected future costs. Design and implement a plan that supports your corporate objectives within the framework of these financial projections. The new plan must support your HR and compensation philosophy, address the needs of retirees, and fit with your pension and benefits program for active employees.

Some employers are starting to shift from the traditional approach of being first-payer for retiree benefits to a shared responsibility model, where some cost sharing of benefits may be acceptable. Cost sharing can take the form of premium sharing, larger plan deductibles, and co-insurance features whereby retirees pay for an established percentage of drug costs, for example.

Healthcare spending accounts will become much more prevalent for providing retirement benefits in the future. Flex credits or dollars are allocated to a healthcare spending account, which the retiree can then use to cover the cost of traditional benefits, in excess of the employer’s plan, or to purchase other services. As well, many employers are considering providing access to retiree benefit programs as an alternative to paying for them. In this instance, the employer is a facilitator. For example, retirees would select and pay for their life insurance, but would not need to provide evidence of insurability if they were covered by an employer sponsored plan before retirement.

Employers must decide which aspects of healthcare they want to be responsible for, which coverages they want to facilitate and which benefits are no longer financially sustainable. Start communicating upcoming plan changes to employees and retirees early. Be clear that they will be expected to take responsibility for their future healthcare choices and to share in the costs of the program.

Employees need to consider the impact to their post-retirement benefits as a result of retiring early, living longer and employers reducing their contribution to retiree healthcare costs. It means individuals need to take their own expected future healthcare costs into consideration when financially planning for retirement.

Employers that strike a balance between keeping their employees and retirees satisfied, and managing the costs of the benefits plan to avoid a financial burden to the enterprise, will enjoy the satisfaction of having done “the right thing” while creating a competitive advantage for their organization.

Ellen Whelan is a principal with Mercer’s Health & Benefits business in Toronto.

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