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Employers weigh shifting retirees to Medicare

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Now that employers are getting comfortable with strategies for extinguishing their long-term pension commitments to employees, they are focused on offloading other retirement obligations.

Chief among those are the costs of retirees’ health care.

That’s what Aon Hewitt found when it surveyed 548 companies about their plans for managing retiree health coverage costs.

“We saw tremendous pension settlement activity during 2012, and that trend is continuing in 2013. Companies looking to shrink benefit liabilities on their balance sheet may explore the viability of settling their retiree health care obligations as well,” said Milind Desai, retirement actuary at Aon Hewitt. “At present, there are a number of tax, legal and market hurdles that limit the feasibility of settling retiree medical program commitments in a cost-effective manner, but this may change in the future.”

As employers found with pension obligations, where there’s a will, there’s a way. And the Patient Protection and Affordable Care Act may represent the solution they have been seeking, says Aon.

In response to rising health care costs and the requirements of the PPACA, Aon reports, “many U.S. organizations have or are seriously considering sourcing post-65 retiree health care benefit coverage through the individual Medicare plan market. … More than 60 percent of employers are reassessing their long-term retiree health strategies due to the PPACA.”

Aon says more than a quarter of companies would consider a retiree health care settlement strategy for all or a portion of their retiree group, “if the market environment could support it on a cost-effective basis.”

Companies appear to favor “a retiree benefit ‘buy-out’ that enables organizations to fully or partially eliminate their ongoing retiree medical commitment.”

Examples include:

  • Purchasing life annuities to provide a fixed-income stream in lieu of ongoing medical coverage;  
  • Establishing and funding a VEBA trust to support continued retiree benefits;  
  • Making direct cash lump-sum payments to retirees.

“Of those companies that have already decided to make strategy changes for their post-65 retirees, more than 40 percent have moved forward with one that will direct retirees to the individual market for coverage, oftentimes accompanied by a defined contribution subsidy. Of those companies expecting to make changes to their post-65 retiree strategies in the future, more than half indicate strong interest in this approach,” Aon reports. 

“With the PPACA legal and political landscape generally clarified, employers are looking to control cost, manage risk and source coverage through the most efficient means possible,” said Maureen Scholl, CEO of Health Care Exchanges for Aon Hewitt.

“Individual market-based retiree health care sourcing strategies can create significant savings opportunities for all stakeholders. We expect to see many employers apply these strategies where possible and supplement them with modified group-based programs for those retiree populations where individual strategies do not make sense.”

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