A new survey from Mercer reveals that employers continue to struggle with a desire to offer post-retirement benefits in an environment of escalating healthcare and financial costs. Organizations are being forced to balance the desire to provide employees with post-retirement benefits and the need to control escalating costs.
According to Mercer’s 2008 Post-Retirement Trends survey, in the last three years one-third of Canadian companies surveyed have made reductions to the benefits that they provide for retired employees. Moreover, 21 per cent of companies expect to make reductions in the next three years, compared to 5 per cent who expect to make improvements. Mercer anticipates that the number of companies making reductions may differ significantly from the expected 21 per cent as a result of current economic conditions. Ironically, the uncertainty about a recession and fear about a prolonged recovery may cause employers to come to different conclusions about their post retirement plans:
- Some organizations may defer planned changes because discount rates are currently higher than they were a year ago, which will reduce their accounting liabilities, producing a potentially false sense of comfort about the cost of the plan
- Other organizations, which were not planning to make changes, may be forced to because of the economic climate and the uncertainty about the future.
The top reasons cited by respondents for reducing benefits are the fact that accounting costs and liabilities are too high and increasing too quickly. Respondents also noted that the annual cash costs of maintaining current retiree benefits are too large.
“As the costs associated with the provision of retiree benefits increase, it follows that Canadian companies must address the corresponding increases in the accounting liabilities for their post-retirement benefits plans,” said Ellen Whelan, leader of Mercer’s Post-Retirement Benefits Group. “Given the financial impact of retiree benefits combined with continued growth in the number of retired employees, employers are weighing the benefits and costs, and as a result more aggressive reductions to post-retirement benefits are expected in the next few years.”
While most survey participants consider the provision of benefits to be important for the attraction and retention of employees, as costs escalate, a significant number of employers are changing their attitude toward the provision of retiree health care.
The survey shows a significant shift away from employer responsibility for these benefits to the role of the employer as a facilitator. A considerable number of employers, 86.5 per cent, believe governments should be lobbied to provide tax vehicles for the prefunding of retiree health benefits, and 74 per cent stated that governments should be prefunding a portion of health care for baby boomers for reasons of intergenerational equity.
The survey also found that companies are being forced to realign their total rewards spending, with the most significant cost savings being achieved by the elimination of retiree benefits for new hires and current actives. As well, organizations considering future reductions will be relying less on traditional cost containment measures and turning to non-traditional alternatives such as fixed employer contributions and catastrophic medical plans with spending accounts.
Mercer’s 2008 Post-Retirement Trends survey is based on data submitted by 94 Canadian organizations, covering a total of 132 benefit plans. The 2008 poll provides an update to Mercer’s 2004 and 2005 Post-Retirement Trends polls which sought to determine what actions companies from across Canada were taking to address issues arising from escalating accounting costs and liabilities in light of the adoption of accounting standards CICA 3461 and FAS 106. These standards require employers to recognize an annual expense and accrue a liability for non-pension post-retirement benefits during the working lifetime of active employees.
For more information, visit www.mercer.ca.
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