Rethinking retiree benefits

There is no legislation or statute stating that an employer cannot make changes to retiree benefits. However, employers can be sued by non-unionized, active or retired employees, usually in a class action. The legal ability to unilaterally change retiree benefits for those who have already retired depends on whether their benefits vested on retirement, the scope of the vested rights and whether the employer has reserved a right to change benefits after retirement.

To determine whether a right is vested, and the scope of the vesting, each case has to be carefully analyzed on its own facts, looking at all of the communications given to retirees both before and during retirement. This process can be time-consuming and complicated, often with an uncertain outcome. For these reasons, many employers have chosen to focus solely on future retirees when making changes.

Generally, an employer will have much greater latitude to make unilateral changes for future retirees than for current retirees. Advance notification and grandparenting of long-service employees are among the means available to manage the risk of a challenge from the non-unionized, active employee group. With unionized employees, the legal risk is a grievance if the employer’s actions breach the collective agreement. The employer’s ability to make changes may be constrained by the union contract.

Retirees have an interest in the employer achieving sound cost management to ensure the plan’s long-term viability. The ability to work with the retiree group on plan changes—or to offer the choice of an improved cost-managed plan—may lessen the legal risk.

Changes to retiree benefits also incur human capital risks. It may be more difficult to attract older workers if retiree benefits aren’t offered, and to retain them if the benefits at another company are more attractive. The notice period may encourage those eligible for retirement to retire sooner in order to secure their retirement entitlements. Furthermore, an unhappy retiree population could negatively affect current employees, the company’s reputation and its position in the community. These possible outcomes must be balanced against the financial risks of inaction, since healthcare inflation will continue to outpace general inflation for the foreseeable future and the retiree population will only grow.

Reviewing the employer’s role
The purpose of pursuing alternate plan designs is to put cost control in the hands of plan sponsors. In Mercer’s 2008 Quick Poll, 80% of respondents believe that the employer’s role in providing retiree healthcare benefits is moving from payer to facilitator. As a facilitator, the employer ensures that retirees have access to a retirement benefits plan, but may provide for—and pay for—little or none of the plan’s cost. This requires employers to do the following:

1. Develop a benefits plan philosophy based on the employer’s role in meeting retirees’ needs.

2. Determine a long-term, sustainable level of participation.

3. Design and implement a plan that creates the desired employee and retiree behaviour, and that has the appropriate cost-sharing.

4. Ensure good governance by putting a process in place to monitor and manage the plan on a regular basis.

Shifting focus
Almost certainly, the economic downturn will shift attitudes about lifetime benefits. There is a risk that retiree benefits will disappear over time or be fundamentally altered. Clearly, more responsibility for the benefits plan—and for the cost of benefits—will shift to retirees and future retirees. Plan participants need to start planning and saving for this aspect of retirement.

If employers can achieve cost savings with retirees, they may be motivated to keep retirement benefits in place. If both groups can agree on necessary changes to the current plans, this would also encourage employers to continue offering benefits. Access to tax-saving vehicles today, which provide for future healthcare coverage during retirement, could benefit all parties as well. Plan sponsors may be incented to continue with retiree benefits programs, and employees need to integrate saving for retirement benefits into their overall financial plans for retirement. Creative thinking and flexibility could lead to a win-win situation for all parties.

Ellen Whelan is a principal with Mercer, and Elizabeth Brown is a partner with Hicks Morley Hamilton Stewart Storie LLP.
ellen.whelan@mercer.com
elizabeth-brown@hicksmorley.com

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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the November 2009 edition of BENEFITS CANADA magazine.