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Actuaries: Workers Know Firms Can Cut Retiree Medical

By Staff Writer

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U.S. accounting rules should recognize that employers usually have the ability to reduce or eliminate post-retirement health benefits, according to two committee leaders at the American Academy of Actuaries.

Jeffrey Petertil and Adam Reese, co-chairpeople of the Joint Committee on Retiree Health at the American Academy of Actuaries, Washington, have emphasized the tentative nature of retiree health benefits in a comment letter sent to the Financial Accounting Standards Board, Norwalk, Conn.

FASB has proposed a package of pension accounting reforms that could require employers to report their accumulated post-retirement health benefit obligations on their corporate balance sheets. Up till now, employers have reported that information in footnotes to their financial statements.

Actuaries and accountants use the acronym “OPEB,” for “other post-employment benefits,” to refer to obligations for retiree health benefits and related benefits.

Few companies set aside much cash to fund retiree health benefits, and “OPEB calculations” are extremely sensitive to actuarial assumptions and actuarial projection methods, Petertil and Reese write.

Companies already have narrowed or eliminated many retiree health plans, Petertil and Reese note.

“While retiree and employee groups protested early changes to plan sponsors, court cases usually did not find a vesting of benefits and cases were decided in favor of the plan sponsors,” the actuaries write. “As a result, major reductions continued and recent changes have met with less resistance by retirees.”

Few employers will bother to keep “health care promises that cannot be legally enforced,” the actuaries write. “Accordingly, we believe that employers have placed implicit and not-yet-spoken limits on their OPEB benefits….The participants may have discounted the future value of any currently provided retiree health benefits.”

The current draft of the FASB OPEB accounting proposal does not recognize the implicit limits on employers’ real retiree health plan costs, or the fact that many employers explicitly have retained the right to cancel or change the retiree health plans, the actuaries write.

In a separate letter, William Sohn, chairperson of the actuarial academy’s Committee on Pension Accounting, writes that the committee welcomes FASB’s efforts to update pension accounting rules but disagrees with a proposal to include an allowance for future salary inflation in the balance sheet liability for pensions.

“Including an allowance for future salary growth is inappropriate in a balance sheet liability and is likely to lead to an unwarranted cutback in defined benefit plan sponsorship,” Sohn says in a statement.

It would be more appropriate to use a measure of pension obligation that does not include an assumption about future salary growth, Sohn writes.