Battle of the benefits
Obama’s healthcare reform will be the biggest new law affecting US companies in 2013. But will it have an impact on pension funds? Healthcare and retirement benefits are managed separately, but a change in costs for the former will eventually affect the latter.
The financial impact of healthcare reform could be severe enough for employers to reduce, or even eliminate, contributions to retirement plans, according to Sheldon Smith, employee benefits lawyer at Bryan Cave. Speaking at the American Society of Pension Professionals & Actuaries (ASPPA) annual conference last month, Smith cited a Willis Group study that found 56% of employers believe the reform will increase costs. “There’s only so much money to go around, so employers will start to prioritise and start to shift costs for benefits,” Smith commented.
“The challenges employers will face when implementing healthcare reform echo the same ones they wrestled with when traditional pension programmes began giving way to defined contribution plans,” explain Mercer consultants, Rick Guzzo and Katie Noonan. The Patient Protection and Affordable Care Act (PPACA) “presents employers of 50 or more workers with two alternatives”, Guzzo and Noonan say. “One is to fulfil the requirement to offer a health-insurance plan, valued above a calculated threshold, to all employees deemed eligible for such a benefit. Alternatively, employers can elect not to provide such a benefit and instead pay a ‘shared responsibility’ penalty per eligible employee beyond the first 30. For many employers, the choice to provide health-insurance benefits or not will be driven by estimates of the comparative costs of the two alternatives.”
But their choice may go further. “We don’t have any surveys,” says Edward Ferrigno, vice-president for Washington Affairs at the Plan Sponsor Council of America. “However, anecdotally, we know that uncertainty about the structure and costs for healthcare have tended to put retirement plan enhancements on hold.”
Steven Nyce, senior research associate at Towers Watson, warns: “It is very difficult to isolate which kind of decisions employers may take in response to increasing healthcare costs, whether for example they will cut pay rises or cut matching contributions to 401(k) plans.” Nyce points out that rising healthcare costs are not new. “It has been going on for decades already, squeezing other aspects of the total compensation package including cash pay and retirement benefits. The Obama’s reform will be another opportunity for employers to re-calibrate rewards for their employees.” According to the last Employer Survey On Purchasing Value in Health Care conducted by Towers Watson and National Business Group on Health, reviewing healthcare benefits as part of their total remuneration and retirement strategies will be a priority for around a quarter of companies.
“There is some evidence that increasing healthcare costs are crowding out other benefits and accelerating trends such as closing defined benefit pension plans or reducing in general the value of retirement benefits,” says Nyce. Large companies may maintain current healthcare benefits, but they are also looking at ways to reconfigure them, for example, by asking for higher contributions for the coverage of family members, imposing penalties or offering incentives to adopt a healthier behaviour.”
One sure direct impact on pension plans regards retirement healthcare benefits, which used to be part of pension plans. They pay all or part of supplementary healthcare insurance premiums for medical expenses not covered by Medicare, the federal health insurance programme. The number of pension plans offering those benefits was already declining, but PPACA will hasten the end, according to the Employee Benefit Research Institute. Companies will either increase retirees’ premiums or cut the benefit altogether, leaving retirees to buy cover from the healthcare insurance exchanges that States must set up by 2014.
Local governments are also facing difficult choices about healthcare and retirement benefits for public employees. The City of Pontiac, Michigan, for example, faces a mounting retiree healthcare bill it cannot pay. Mayor Leon Jukowski would like to insure the city’s pension plan that is 150% funded and use the extra money to fix the healthcare problem.