Instead of ending coverage, some companies are
turning it into a 401(k)-like perk
The nation's pension crisis, it turns out,
is only the second-largest long-term liability
facing U.S. businesses. Far greater are underfunded
health-insurance promises to current and future
retirees. The companies that make up the Standard
& Poor's 500-stock index are an astonishing
$321 billion shy of what they need, according
to senior analyst Howard Silverblatt at Standard
& Poor's Corp. (which, like BusinessWeek,
is owned by The McGraw-Hill Companies). By yearend
the Financial Accounting Standards Board is
likely to require companies to put this liability
on their balance sheets, a step that could shrink
shareholder equity by as much as 9%.
Many companies have been trimming those costs
by dumping retiree health care entirely. In
1993, 40% of large employers offered such benefits
to those over 65. By 2005 just 21% did, says
Mercer Human Resources Consulting.
But rather than drop benefits altogether, "a
lot of clients are saying: 'Let's re-engineer
our retiree (health) plans,"' says Edward
Kaplan, national health practice leader at consultants
Segal Co. A small but growing number of companies
are trying one new approach: transforming retiree
insurance into a 401(k)-type perk. Instead of
promising to pay, say, half of a retiree's premiums,
no matter how costly, these companies are setting
aside a fixed amount for each pensioner's medical
care. After that, retirees are on their own,
even if costs top what's in their account.
About 5% of employers who offer benefits have
switched to such defined-contribution accounts,
including DaimlerChrysler, which will move managers
and other nonunion workers into one in 2007.
An additional 13% have simply capped yearly
retiree health spending. Another 25% are considering
such changes, Mercer found.
INTEREST ACCUMULATES
Embarq Corp., a $6 billion telecom firm spun
off during the 2005 merger of Sprint and Nextel
Communications Inc., is weighed down with more
retirees than workers, and its medical obligations
may be underfunded by up to $600 million. To
address the problem, the Overland Park (Kan.)
company is setting aside $1,300 for every year
an employee works past age 50. The money accumulates
with interest but doesn't legally belong to
workers the way a 401(k) does, though they can
use it to buy health coverage upon retirement.
Companies such as Embarq are sticking with
retiree coverage because they fear losing an
aging but skilled workforce. Embarq's average
employee is in his or her late 40s, has 24 years
of service, and highly values retiree benefits.
Embarq switched with the backing of its unions.
Says Randy Parker, director of benefits: "We
made a conscious decision to continue coverage
because of our demographics."
One of the first Embarq retirees to use such
an account, Alice Alfano, 67, retired last year
after 17 years at the local phone company in
the Orlando area. Because she was older than
50 when the plan began, Embarq credited her
with about $32,000 at retirement. That was enough,
Embarq figures, for a Medicare supplement policy
for the rest of her life.
On her own, Alfano would be paying $79 a month
for a group policy Embarq offers from CIGNA
Corp. But her husband, Fred, 63, is also on
her plan. So the couple will pay $489 a month
until he is eligible for Medicare at 65. That
will eat into a good chunk of the funds in her
Embarq account, but she figures it's better
than no benefit at all. "Who knows if I'll
live to 80 or 85? I'll use the money…until it's
gone," she says. For Alfano, at least,
that flexibility is worth.
THE STAT
$321 billion: The amount of unfunded retiree
health obligations of S&P 500 companies
