The end of retiree benefits?

Employers want to remain competitive by offering employees attractive total compensation packages, including rewarding loyal workers in their retirement years. Still, factors such as slow economic growth, government cost-shifting to employers and retirees, rising healthcare costs and longer life expectancies are making traditional retiree benefits increasingly unsustainable. Employers are looking to control costs and rethinking their roles as retiree benefits providers.

Offering retiree benefits creates significant long-term obligations for employers, and there’s no effective way for employers to fund these costs in advance. With the changing nature of employment in Canada, employers don’t want to be responsible for providing lifetime retiree coverage, especially if they turn out to be the last employer for a short-service employee (typically, those working for the company for roughly three to five years).

So just how can Canadian employers support retired employees?

Effects of the shift
The ongoing trend for employers is to reduce or eliminate coverage, but this has serious implications. Older employees may have made retirement planning decisions based on the understanding they’d have group coverage. Any changes may spur some workers to delay retirement in order to maintain access to group coverage. And some retirees may take legal action if employers make changes to their group coverage plans. (The courts often consider current retirees and older employees close to retirement to be vested in these benefits, making it difficult to take away retiree benefits after they’ve been offered.)

Employers considering reducing or eliminating retiree healthcare coverage are aware of the burden they’re placing on employees. Canadian workers are accustomed to having employer-sponsored healthcare benefits during their working years and may be unprepared for this cost after retirement. Moving away from traditional coverage plans will require a shift in the way Canadians think of and plan for retirement.

Canadian retirees are often ill-prepared to pay the costs of significant unexpected illnesses. And having to pay may push some into financial difficulties. Employers should be aware of the effects of passing on the financial burden of benefits to retirees.

From payer to facilitator
To control rising benefits costs, employers have been moving away from the payer role toward a facilitator role for new hires and younger, low-service employees.

Solutions range from managing risk exposure through changes to their current plan designs (introducing cost-containment features such as managed drug formularies, annual or lifetime limits, cost sharing through co-payments or contributions, and removing non-essential benefits such as out-of-country coverage), replacing traditional benefits with healthcare spending accounts, providing only catastrophic coverage or simply arranging access to insurer-provided plans at the retirees’ cost.

New solutions, inspired by the U.S., let employers act as facilitators to give access to coverage. DC plans, where employers contribute toward an account that is used to fund benefit needs in retirement, would also be an attractive option to employers if tax-efficient vehicles become available to accumulate these funds.

As part of the shift, some employers now offer group benefits plans for retirees that are voluntarily fully paid by retirees. Some eliminate or reduce their retiree benefits plans but provide retirement planning support, information and education instead. The support is meant to help retirees find suitable plans through private insurers. This shift can be a cost-effective way to transition employees into retirement while also reducing the risks and liabilities of providing full healthcare coverage after retirement.

With so many individual health insurance products available, it’s difficult for retirees to compare the best-suited solution for their needs, especially with costs estimated to be 25% to 30% higher than group insurance and with coverage being more restrictive. In this context, an employer simply helping retirees to make better healthcare coverage decisions is a valuable and low-cost benefit.

Retiree-pay-all plans are an option that would limit the financial impact on employers, but many employers may not want to continue sponsoring a plan and deal with the governance and administration involved (e.g., collecting premiums, changing design and adapting it to legislative changes, negotiating with providers, answering retiree calls).

Another alternative is to offer an insurer’s conversion product to retiring employees. These products allow retirees who participated in an active group plan to purchase individual retiree coverage, at their own cost, from the same insurer without the need to provide evidence of good health. Unfortunately, these products tend to be expensive with strict limitations in coverage, especially for drugs and out-of-country coverage, and there is no outside party to act on behalf of the retiree when needed.

Given the changes south of the border, could similar solutions be developed in Canada? Retiree benefits exchanges in the U.S. combine a broad portfolio of benefits programs offered by multiple insurers. Agents help retirees select the carriers and products that meet their needs in the areas of drug, extended medical, dental and vision benefits.

Percentage of Americans employed at private sector companies offering health coverage to early retirees

Source: Employee Benefit Research Institute

A retiree exchange places insurers’ products in competition in order to drive costs down over time and transfer administration to a third party, reducing costs for employers and retirees. However, there are a limited number of insurers in Canada, and it’s unclear whether they would be ready to reduce their profit margins on individual health products. A lack of standardization in Canada could also make comparing products challenging.

Perhaps a better solution for Canada is the preferred vendor approach. The solution would be developed by an independent firm that would act as a sponsor of a voluntary retiree program to be offered to their clients’ retirees. After a due diligence review, the company would select the insurer to offer competitive benefits, premiums and services. The idea is to create some leverage to provide an approach that is more aligned with traditional group benefits and more cost-efficient than what the individual insurance market offers.

Canadians age 65 and over now make up 14% of the total population and consume 45% of healthcare dollars. However, by 2041, this demographic will make up 25% and is projected to consume approximately 80% of healthcare costs, predicts a 2013 Canadian Institute for Health Information report.

The liabilities associated with retiree benefits will only rise in the future, and this will significantly affect employers’ bottom lines. To reduce costs and risks, employers will likely continue to eliminate or reduce their sponsored retiree plans.

It’s clear employers must consider new approaches. The right solution would have to consist of comprehensive, streamlined benefits management, DC facilitation and compliance with evolving legislation on the employer’s side. Retirees would need one-stop, online shopping that meets all insurance needs, personalized experience and a call centre that provides access to experienced, objective benefits counsellors with retiree-specific expertise.

Employers need to explore creative and innovative solutions to save retiree healthcare coverage in Canada. They need to face the challenge of retiree benefits head on by evaluating alternatives that provide opportunities to educate employees on their needs during retirement, and then facilitate access to solutions.

Darrin Bull is a principal in the health and benefits business in Mercer’s Vancouver office.

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