Has the death knell sounded for post-retirement benefits?

As costs rise and Canadians live longer, plan sponsors consider eliminating health-care benefits for retirees

A wave of converging factors is crashing down on employers, forcing them to consider the viability of continuing to offer health-care benefits to retirees. Five years ago, accounting rules were changed to require Canadian organizations to include the accrued cost of post-retirement benefits for both retirees and current employees on financial statements. Since then, increased longevity, escalating health-care costs, government cutbacks and expensive new drugs have all contributed to the economic crunch.

The rapidly rising cost of health care is the primary reason some employers do not offer post-retirement benefits, according to Hewitt’s 2004 Trends in Canadian Retirement Programs survey. For those that do (54 per cent of the 174 survey respondents), rising health-care costs are cited as the biggest threat to post-retirement benefit programs, followed by accounting costs and the large number of employees retiring in the next decade.

Challenges to changes

If the price of continuing to offer retiree benefits is so onerous, why do so?

The primary reason, perhaps, is a legal one. In the 1993 decision in Dayco (Canada) Ltd. v. CAW-Canada, the Supreme Court of Canada considered the question in a unionized context of whether an employer could alter retiree benefits following retirement. The court concluded that such benefits could be changed or even terminated as long as the collective agreement provides this option. If it does not, the employer is obligated to continue to provide the same benefits to already retired employees.

This restriction only applies to benefits for those who have retired. Employers can change benefits offered to current employees, as long as those employees are given reasonable notice of the change. If the employees do not like the change, they — unlike retirees — have the option of looking for work elsewhere.

Since the Dayco decision, employers have been careful to reserve the right to change retiree benefits in both collective agreements and employment contracts. Nevertheless, they have been reluctant until recently to make any changes in this area, even for active employees.

When asked why they provide post-retirement benefits to newly hired employees, survey respondents indicated the main reason is to provide a competitive total compensation package. Moreover, 90 per cent believe they are successful in meeting this objective by providing these benefits. It would thus seem that attraction and retention have been the real motivators behind these programs.

Post-retirement benefits in flux

All that is about to change, however, according to survey respondents. In 2003, few had made any changes to the post-retirement benefits offered three years earlier, though a good number had thought about it. Of those survey respondents that offered post-retirement benefits, 40 per cent indicated they had considered making reductions or cutbacks, but did not follow through primarily due to concern about negative employee reactions.

This concern is about to give way to the need to control costs, however. Survey respondents indicated they anticipated making significant changes by 2006.

As cost and other pressures increase, fewer employers are implementing these programs and more are making changes — at least to coverage that will be offered to existing employees once they retire, if not to current retirees. If competitors are not offering post-retirement benefits, employers are not likely to do so of their own accord.

Cost containment strategies

This does not necessarily mean that employers are eliminating future retiree benefits completely. They are looking for ways to contain costs. What strategies are employers using to manage post-retirement benefit costs? The following tactics are being implemented with increasing frequency.

•More stringent eligibility requirements: Higher age or service requirements to earn entitlement to post-retirement benefits. Given the impending shortage of labour as the baby boomers retire, this approach has the additional benefit of encouraging employees to stay on the job longer.

•Cost-sharing: Many retirees would rather share costs than have no coverage at all. Employee cost-sharing can be increased explicitly by paying a portion of the premium or through plan design modifications such as increasing co-insurances or adding per prescription deductibles.

•Flexible retiree benefit plans: Flex for retirees is becoming more common, especially at organizations that offer this type of benefit plan to active employees. Hewitt’s 2005 flexible benefits survey indicates that, for organizations with flexible benefit plans, one-third offer flex coverage to retired salaried and non-bargaining hourly employees, more than doubling in prevalence from 2002. The two main reasons employers implement flex are to better meet diverse employee or retiree needs and to more effectively contain future benefit cost increases.

•Defined contribution approaches: Some employers hope to manage the recent double-digit medical inflation, which has a significant impact on the accounting obligations, by offering a defined contribution type of plan. The defined contribution may be applied toward an employer-sponsored health-care plan or deposited in a health-care spending account (often with catastrophic coverage). The contribution level and potential indexing are determined by the employer, and more importantly known in advance.

While health-care cost containment measures have focused on benefits for active employees, retiree coverage is under scrutiny as employers face ballooning increases in that area as well. Certainly some Canadian organizations are reluctant to leave former employees without health-care coverage in their golden years, but present and future circumstances have led all to consider ways to control retiree benefit costs.

Jason Kolysher is a benefits consultant in Hewitt Associates’ Calgary office. He can be contacted at (403) 232-1188 or [email protected].

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