How to meet your OPEB obligation.

• Position: Includes related articles - Special Report: Health Care

In the wake of Statement 106, seven panelists examine the value of Prefunding retiree medical benefits and discuss the techniques that have worked for them.

How effectively are companies today addressing the need to set aside funds to pay for future health benefits? How much is their approach driven by financial considerations?

What funding vehicles do they use? Given certain limitations these vehicles have, can help be expected from a Congress reluctant to cut revenue sources?

These were among the issues on the agenda of a recent panel discussion organized by Actuarial Sciences Associates (ASA). Sharing a broad range of practical experiences, the seven panelists agreed the decision to pre-fund is an allocation of resources issue, but noted that pre-funding is viewed differently by retirees and current employees and must be handled differently for union employees and management employees.

The panelists' overall objective: Make funding tax-efficient. Their overall consensus: Business should make do with the vehicles it has now.

The roundtable participants were: Donald D. Cameron, senior vice president, Large Corporate Market Division, Massachusetts Mutual Life Insurance Company; John Erlenborn, partner, Seyfarth, Shaw, Fairweather & Geraldson, and one of the authors of ERISA; Neela K. Ranade, vice president of Welfare Benefits Consulting, Actuarial Sciences Associates; Frederick W. Ruebeck, director of Investment Administration, Eli Lilly; Dallas Salisbury, president, Employee Benefits Research Institute; and J. E. (Jack) Stair, Jr., senior consultant, DuPont. The moderator for the panel was Michael J. Gulotta, president and CEO, Actuarial Sciences Associates.

The following is an edited version of their discussion.

GULOTTA: Now that the FASB has issued Statement 106 on Accounting for Postretirement Health Benefits, corporations are addressing two questions: whether or not to pre-fund their obligation and, if they do pre-fund, how to do it. Is there a greater need to pre-fund, now that income statements and balance sheets will show the current and accrued expense for postretirement benefits? Companies are also concerned about identifying the size of their liability and how they can change it by changing either the plan design or their assumptions. And, of course, some are asking if they should provide the benefits at all.

RUEBECK: Ideally, companies will identify what their liabilities are, then look at alternatives for funding. But what often happens is that companies look first at the design of their plans, and then think about the funding.

ERLENBORN: Well, before FAS 106, a number of companies began to look at VEBAs for pre-funding. Congress responded by amending the law, making it much more difficult to use a VEBA. That's why many companies are looking at plan design changes to limit the liability.

STAIR: I have a more basic question. Is it fundamentally sound to take money away from the business and put it in trust funds? This raises the issue of allocation of resources. And do employees really feel better by having these liabilities pre-funded? I'm not convinced that there's been a hue and cry across the land that the benefits need to be pre-funded.

SALISBURY: Clearly, retirees would feel a lot better if they knew the liability was pre-funded, but active employees would rather have that money in their paychecks. In a recent EBRIGallup survey, 68 percent of active employees said their decision to take a job would be affected by whether or not there was a health benefit. But only 29 percent said a pension plan is vital. The number who placed first priority on a retiree health plan didn't even register. Employees first want economic security today; then they worry about tomorrow. And they don't look primarily to their employers for retiree health benefits; they look to Medicare.

RANADE: But there is concern that Medicare benefits are being cut back.

GULOTTA: With the emergence of baby-boomer retirees and the pressures on Medicare, there is also concern that the burden is being turned over to the next generation of taxpayers. The public policy analysis of pre-funding has to start from understanding the ramifications of a lack of funding, the trend to defined contributions plans, and the evident fact that people are not saving money.

CAMERON: I don't think you're going to get government action until you have a groundswell of public opinion that voices a concern about the viability of the system to take care of them, be it a government plan or employer-sponsored plans. Until then, the tendency to push the problem off to the next generation will continue.

GULOTTA: in looking at pre-funding, to what extent will corporations attempt to achieve a balance between the financial perspective and the human resources/ employee relations perspective?

RUEBECK: The decision to fund will ultimately be a financial decision-whether you can show an attractive return for pre-funding and have that return reflected in the current operations of the company. A tax-deductible contribution, with earnings that are compounding tax free, is the only way that a pre-funding investment can compete with the corporate cost of capital.

ERLENBORN: But I don't see Congress allowing tax benefits or tax breaks at this time, given the nation's budgetary problems. Assuming they will be willing at some time to provide a funding vehicle on a tax-preferred basis, I think they will demand minimum standards for vesting, participation, and funding at the same time. SALISBURY: What is technically possible under existing law may have absolutely nothing to do with legislative intent. So to the degree that companies decide to approach retiree medical benefits through 401 (h), through some defined benefit or defined contribution plan, or through another type of qualified arrangement, they're clearly saying that these vehicles have had the blessing of the Congress for decades and that they take care of the issue of non-forfeitability.

ERLENBORN: The vesting of defined benefits is a difficult issue. After five years, you may be vested, but vested in what? Up until now, if you stayed in one company until you retired, you might or might not be vested. But if vesting of health benefits was required, then after being vested, if you move to another company, you would have partial vesting in each company. In a defined contribution plan, that's manageable; in a defined benefit plan, it's not.

GULOTTA: Yes, vesting is a sensitive issue, and, in considering tax-favored funding, Congress may be affected by whether or not there is individual vesting of benefits. It's a lot easier...