How to deal with retiree needs under OPEB.

• Author: Ostuw, Richard
• Position: Other Postemployment Benefits - Includes related article on retiree benefits

How to deal with retiree needs under OPEB

At the root of the OPEB obligation quandary are the employees these benefits protect. How much should a firm consider the people factor in making its retiree-coverage decision? A lot, says one benefits consultant, and he offers a new plan design that does so. Most large companies provide medical benefits for retirees. Nearly all recognize the cost on a pay-as-you-go basis. Soon, however, there will be new accounting standards for postretirement welfare benefits that will require employers to recognize the cost of these benefits during employees' working years.

What will this mean for employers? And how might a company deal with the new rules? It could let earnings decline, thereby allowing shareholders to absorb most of the increase in costs. If profits are relatively high, the actual impact of the increase in expense might not be severe, making this a practical course of action.

It could also reduce benefits to protect earnings, thereby placing the cost burden on employees and retirees. If pay and benefits are competitive, this might be an acceptable step.

Or the company could increase the price of its products, essentially making its customers pay for the added benefit expense. If its products are not extremely price sensitive, this might be a suitable option.

This example highlights two points: First, the change in accounting rules is a serious business problem, not simply an accounting or benefit issue. Second, there is no easy solution to the problem. Ultimately, what this, or indeed any, organization decides to do depends on the magnitued of its liabilities for retiree benefits, its overall compensation and benefit philosophy, its human resource objectives, and its long-term needs and resources. Tough decisions are required no matter what course an employer takes.

The big picture

In reviewing alternatives, companies will have to reexamine and, in many cases, modify their commitment to current and future retirees. This requires careful consideration of a number of critical factors. Among them: Legal status--If an employer has not clearly communicated its right to modify benefit plans and has made no benefit changes in the past, it may have forfeited its legal ability to reduce benefits for current retirees. Even if it has effectively retained its legal right--by virtue of past practices and clear, consistent communication--it may decide not to make any changes to avoid litigation by retirees...