Critical crossroads for retiree health benefits.

• Author: Macey, Scott J.
• Position: Pensions

Not long ago, companies enthusiastically adopted and expanded retiree health programs with seemingly little concern for the long-term financial implications. The programs were relatively inexpensive, there was not an excessive number of retirees or older workers close to eligibility, no advance funding was required and financial disclosures were few or nonexistent.

Retiree health programs were a great vehicle for achieving favorable relations with unions and union workers, as well as for generating career commitment by salaried workers. Unfortunately for both employers and employees, this situation has changed dramatically: today, the benefit to retirees and the financial burdens to employers are intersecting at a critical crossroads.

The Problems ... and Opportunities

Healthcare programs in general are very expensive, and costs continue to rise dramatically. Many companies and industries that previously adopted generous programs now have more retirees than active employees, and this ratio and associated costs continue to grow. The financial disclosures are significant and burdensome, the expense often imposes a drag on the stock price and the current cash outlay for retiree health benefits has saddled many companies with unsustainable and noncompetitive costs. Also, investors, lenders and others are now looking closely at companies' pension and retiree health obligations.

Although the general picture may seem relatively bleak, many companies have undertaken initiatives to manage their programs with creativity, discipline and sensitivity. Moreover, many companies, industries and trade associations are lobbying hard to encourage Congress to adopt a Medicare drug benefit that includes favorable provisions for coordinating with employer-sponsored retiree health plans, and thus ameliorating some cost increases.

Since the adoption of FAS 106, plan sponsors have become increasingly sensitive to the financial implications of these programs. Now, financial input into and oversight concerning the management of and decision-making regarding these plans has become critical.

Evaluating Possible Plan Changes

Taking stock of the present landscape--the financial, legal, design, operational and demographic aspects of a company's present plan--is critical to analyzing its options, limiting long-term financial burdens and planning for the future.

Such an evaluation includes several elements. Perhaps most critical for plan sponsors is the flexibility to modify or curtail plans, the funding regimen...