Benefits-rule migraine - retiree health benefits

Nation's Business, Oct, 1988 by Donald C. Bacon

Benefits-Rule Migraine The profits and net worth of some companies could be wrecked by a new accounting rule on future retiree health benefits.

Imagine that you are the chief financial officer of a thriving business and you have just been told that, while you weren't looking, a huge debt had crept in and was about to consume your company.

The obligation, an amount beyond your wildest nightmare, represents the cost of financing health-care benefits for retired employees. The Financial Accounting Standards Board (FASB) will require employers to disclose accrued costs of those benefits and list them on financial statements as an accrued liability. The private-sector board has authority to regulate accounting procedures for businesses.

Merely recording the liability threatens not only to wreck profits and net worth for years to come but also to impare your company's credit, stock value, employee relations and good name.

Burdened with that grim information, what do you do?

If you are like some executives hit with similar news in recent months, you might, in effect, blame the messenger. Employee-benefits consultants and actuaries, frequently the bearers of bad news, say that, in the past year, they have been booted out of more middle-and upper-management offices than they can count.

"Those chief financial officers and human-resources administrators didn't want to be the character to go upstairs and tell the chief executive officer that they had an amazing problem that represented as much as 50 percent of net worth," says Fred Van Remortel, a managing director of Brown Bridgman & Company, an employee-benefits consulting firm based in Burlington, Vt. "Their way to deal with that was to say, `Get the hell out of here; don't you talk about it--to us or anybody else. Just get out.'"

Adds Steven J. Ferruggia, director of group actuarial practices at Buck Consultants, Inc., of New York: "We're seeing a little less resistance now. Gradually people are awakening to the magnitude of the problem."

The result is that employers are becoming convinced that they can no longer treat retiree health-care benefits as a kind of gift that continues only as long as the company is willing to pay for it. Instead, as court rulings repeatedly have affirmed, such fringes generally must be seen as open-ended contractual commitments, a form of deferred compensation, that the employer must provide regardless of the cost or inconvenience.

The forthcoming accounting rule has many company officials in near panic because they see it as the first step toward mandatory prefunding of the liability during employees' working years, much as employers already are required to prefund employee pensions.

Other authorities believe that, mandatory or not, prefunding is inevitable once the liability is recorded on a company's books and begins to gnaw at profits. As Van Remortel puts it: "Without prefunding, you cannot mitigate the impact of that balance-sheet recognition." Thus, employers soon could be shelling out each year four to eight times more for health-care benefits than they currently are paying.

"It is, in our view, the most significant single financial problem to face corporate America in a long time," says Van Remortel. "It hits virtually all corporations--big and small--relatively the same, except for those that do not have retiree health care."

That makes the issue a concern not only for the 86 percent or more of all medium-to-large-size companies that include health care in their retirement packages, but also for up to 62 percent of smaller businesses--those with fewer than 1,000 employees--that offer such benefits. Even the smallest firms could be more heavily affected than previously believed: A recent study found that among companies with 50 employees or fewer, at least 42 percent provide health care for retired workers.

Comments James Klein, deputy executive director of the Washington-based Association of Private Pension and Welfare Plans, Inc.: "For many small companies, this won't be an issue if they don't currently provide retiree medical benefits, although it will be the kind of thing that certainly will discourage them from providing those benefits in the future.... That will result in greater demand on the public sector to do it, and the means higher Medicare and Social Security taxes, and, of course, small businesses already are suffering under the burden of high payroll taxes."

Generally, the bigger companies, with millions or even billions of dollars in unfunded health-care liabilities, have been first to begin dealing with the problem they see as a looming financial crisis. Many newer, smaller companies with retiree plans but few retirees remain only vaguely aware of the liability issue, according to employee-benefits experts. Some of those employers, they note, may have more at stake than many bigger corporations.

"We're hearing a lot from the big companies right now, but the ones that are going to be most adversely affected are smaller ones that can't afford the swing in costs," says Jonathan C. Dopkeen, benefits specialist with the Mercer Meidinger Hansen consulting firm in Chicago. "We have seen examples where, if prefunding for retiree health-care benefits is required, annual costs go from doubling for the biggest companies up to as much as 20 to 30 times current costs for some of the high-tech companies that have few retirees now but see lots in the future."