Funding options for retiree medical benefits.

• Author: Bachler, Kevin L.
• Position: BENEFITS

"Retirement readiness" is a term used to gauge how financially prepared baby boomers are to transition away from the workforce into their golden years. It might also serve to describe the optimum level of assets a corporation must accumulate to cover the retirement expenses for their baby boomers--not only for pensions, but health care expenses as well. Fortune 1000 companies have long provided post-employment medical coverage for their employees, but are now facing uncertainty regarding the best approach for funding this increasingly expensive retirement benefit.

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In fact, determining the proper funding strategy can be just as challenging as deciding whether or not to continue to absorb rising healthcare costs for a growing retired employee population. And no funding strategy should be embarked upon without including tax, legal and accounting advisors to help navigate the risks of implementing any new program.

While U.S. corporations' ability to continue providing this valued benefit has taken a number of hits in recent years, employees' expectations of receiving the benefit have not. Despite the sobering truths--76 million baby boomers are becoming eligible for retirement benefits at a time when the cost of health care has been rising annually at double-digit rates--a 2007 retirement confidence survey reports that its respondents were four times more confident (32 percent versus 8 percent) about receiving employer-provided retirement health insurance than they were about the Medicare system continuing to provide benefits of at least equal value.

So, while companies may consider benefit curtailment, finding ways to effectively fund all or a portion of the benefits is often a part of the retiree medical "solution." Experts agree that for companies choosing to maintain retiree medical benefits, a review of funding best practices is necessary. While many companies continue to use a "pay as you go" approach to dealing with accrued liabilities, there are other funding opportunities that should be explored.

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Increased Scrutiny of Unfunded Corporate Liabilities

The pension reduction trend and corporate accounting scandals of the last few years have raised serious concerns about benefit security, especially among employees and retirees. In response to questionable corporate financial practices, Congress passed the Sarbanes-Oxley Act and shareholders, companies and ratings agencies have increased their scrutiny of unfunded corporate liabilities, including those associated with retiree medical expenses.

Consider that among the S & P 500, the aggregate unfunded liability for other post-employment benefits (OPEB)--made up primarily of retiree medical expenses--is $292 billion. By all accounts, industry experts agree this liability will have a significant impact on evaluations, income and balance sheets, and will become a...