Making changes to retiree benefits plans is the new norm for Canadian employers. While most employers expect to keep a retiree benefits plan in place, there is significant cost pressure driving a rethinking of ways to manage costs and prompting the introduction of alternate plan designs. With these changes come inherent risks, trade-offs and challenges, requiring employers to be mindful of the impact but also to remain steadfast in moving forward without delay.
Today, 40% of Canadian employers sponsor retiree benefits plans, according to Mercer’s 2008 Policies and Practices Survey. Most of these are traditional plans with generous provisions, often at no cost to the retiree. Although cost-sharing is on the rise, most plans are vulnerable to external cost pressures such as increased utilization, new medical technologies and government cost shifting.
Retirees, for the most part, have not had to pay for their healthcare to date and have generally not factored large healthcare costs into their retirement planning. They are fearful of being without coverage and aware that their need for health services will increase with age, and they want access to new medical innovations.
Impetus for change
Since 2000, Canadian accounting standards have forced employers to measure and record a liability for retiree plans on their balance sheets and take a charge to income for the cost of benefits that will be received in the future. This generally unfunded liability and expense charge for retiree benefits has grown faster than almost any other line item in a company’s financial statements. The top reasons cited for reducing retiree benefits in both the 2005 and 2008 Mercer Quick Poll are the size and rapid growth of these accounting costs, which affect a company’s profit each year and, potentially, its market competitiveness.
Mercer recently reviewed the retiree benefits liabilities of 10 companies, finding that both the liabilities and the charges to income have more than doubled between 2000 and 2008. During the same period, the revenues for these same companies increased by only 36%. While this is a small sample, directionally, the issue is the same for other employers, suggesting that they need to take action soon.
To complicate matters, the world is harmonizing to international accounting standards in 2011. This will further increase the balance sheet reporting figure for retiree benefits and potentially increase the volatility of the accounting expense, as there will be tighter restrictions on deferring gains and losses.
Although they were somewhat sidetracked by the economic crisis of 2008/09, employers should not lose sight of the goal to implement better cost-managed and cost-shared benefits programs. Economic recovery will most likely bring a return to escalating cost increases. As it takes time to implement plan changes and recognize savings—generally measured in years, not months—employers cannot afford to delay making changes in order to achieve long-term plan sustainability.
Taking action
Mercer’s 2008 Quick Poll showed that more than 50% of organizations with retiree benefits made changes to their plans in the last three years. Another 26% plan to do so in the next three years. This is a significant trend in employer-sponsored plans right now.
The changes made to date, and those planned in the future, are mostly plan cutbacks and are largely applicable only to future hires and future retirees. Most employers remain hesitant about making reductions that affect current retirees.
Employers that are making changes have relied on traditional cost-containment measures such as increasing deductibles, lowering co-insurance or introducing premium sharing. These employers may need to make changes as their plan costs remain exposed to rapid increases from external forces.
Employers planning to make changes in the near future expect to pursue alternative plan designs such as spending accounts and retiree flex plans. Retirees will have more flexibility but will also share more in the costs. Employers will also look to alternate sources of retiree benefits as insurers introduce new individual retiree products. Only 9% of employers that have retiree benefits programs are planning to eliminate them.