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Dealing with today's sharply increasing OPEB liabi

The time may be right for employers to develop strategies for managing health benefits for retirees – so-called ‘other post-employment benefits’ (OPEB). Several factors are responsible for OPEB’s emergence as a major issue for employers.
OPEB has become a significant operating statement cost and balance sheet liability. According to data compiled by The Segal Company, Canada’s 50 largest public companies had total OPEB liabilities of $15.5bn (e11.9bn) in 2003 – a combined liability for which there are no dedicated assets.
The actual OPEB liability may be considerably larger than the reported liability as a result of OPEB sponsors computing their respective liabilities using long-term assumptions which underestimate the true position.
Analysts are starting to question the financial implications of the recorded OPEB liability, and the likely magnitude of the actual long-term liability, in the same way as pension fund deficits have been recognised as balance sheet distress factors.
Employees who value OPEB may turn to litigation if they perceive that these benefits are vulnerable. Employers are watching closely a class-action suit launched by former employees of the Ontario government who are fighting an attempt to reduce the benefits of employees who have already retired.
There are a number of advantages associated with addressing OPEB, including:
q Limiting the expense and its growth;
q Improving the balance sheet, thereby increasing shareholder value;
q Minimising the risk of litigation.
Effective OPEB management entails a number of steps and employers should consider the possible merits of:
q Developing a strategic plan – a well defined strategy is essential to guide discussions about plan design and liability. The strategy should reflect the employer’s philosophy and goals regarding benefit security, total rewards, workforce renewal, and recruitment and retention;
q Defining the scope of the OPEB promise – before an employer can begin an informed consideration of design and financing alternatives, a clear and realistic understanding of its current obligation may have advantages. That understanding can come only from an actuarial valuation that considers current plans and their costs. From this benchmark measurement, alternatives can be developed and their value measured;
q Documenting the OPEB plans – unlike pension plans, there is no regulatory requirement in Canada to file a plan document for OPEB. Nevertheless, having a precise OPEB plan document can be helpful for clearer understanding;
q Managing the cost of OPEB – there may be opportunities to limit increases in claims and control the liability through design of plan features, such as deductibles, co-insurance, annual and lifetime maximums, care management and subsidy management;
q Managing the overall cost of retirement benefits – surprisingly few employers focus on the relationship between pension benefits and OPEB, yet both are important components of an overall retirement security programme.
Managing OPEB is a worthwhile undertaking. The stakes are high, but so are the opportunities to reduce costs and taxes while preserving employee appreciation and security.
Ron Olsen is a vice-president of The Segal Company, based in Toronto, Canada. The Segal Company is the US and Canadian member of the Multinational Group of Actuaries and Consultants. Further details can be found at www.mgac.org

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