2013
From the Wall Street Journal 9-7-13:
An August survey by Towers Watson, a professional-services company that runs such an exchange, found that 25% of employers are somewhat or very likely to discontinue their employer-sponsored plan for retirees who are 65 and older in 2014, with the portion climbing to 44% in 2015. (The firm surveyed 420 midsize and large companies.)
From another article in the WSJ:
More employers are considering dropping retiree coverage for those who qualify for Medicare, mainly to cut costs, and because Medicare now provides prescription-drug coverage and more managed-care options. Also, private health-coverage exchanges are making it easier for retirees to comparison-shop for supplemental coverage.
It should be mentioned that Towers Watson owns Extend Health, a private Medicare Medigap exchange likely to benefit significantly from the elimination of employer-sponsored coverage for Medicare eligible retirees.
I recall during my working years hearing and eventually telling employees how employee benefits were part of their total compensation. They were told they were earning a pension and in most large companies, retiree medical benefits. Given this deferred compensation resulted in lower compensation during working years (at least according to economic theory), is it unreasonable to expect the obligation to be honored? Apparently it is. Today, none of the commitments of the past seem to matter, the economic gain for employers for all those years of lower cash compensation is now one giant bonus… and a boost in earnings per share, which does matter far more than thousands of faceless retired employees (also known by the name of “liability”).
It’s not just health benefits that are being trimmed and eliminated or employer contributions frozen, pension too are being cut after years of employee expectations for a certain benefit. Employers change a plan prospectively. An employee expecting X $ suddenly finds that his pension will now be Y $.
Can you imagine a company telling a new employee her salary will be $60,000 a year, but at the end of the year saying “we really can’t afford that amount, you have to give back $15,000?
There is a lesson here, count on nothing except your own actions and planning and plan for every contingency you can. The next big move will likely be smaller employers concluding that paying the fine under Obamacare is cheaper than providing health benefits to workers.
QUINNSCOMMENTARY 
Dick, you state: “is it unreasonable to expect the obligation to be honored?” Certainly, if in fact the plan and plan sponsor made such a committment it would be unreasonable. Did the employer make such a commitment. Did the plan sponsor amend the plan to vest workers in their welfare benefit plans and vest them in the defined benefit pension plan’s current formula/accrual rate? Or, did the plan sponsor leave the “reservation of rights” provisions in the plan? I once heard a VP of HR for a subsidiary of my company tell a group that the company offered paid up life insurance for retirees. I asked him later to confirm that in fact the company had purchased permanent life insurance for retirees. His response, oh no, of course not – it was just term life insurance. I asked him to confirm whether or not the employer had “vested” retirees in this life insurance with specific provisions in the plan document and adjusted the reservation of rights clause. He responded, oh no, that was not necessary. Fact is, he lied to that employee group because soon thereafter, the subsidiary was moved to a new firm that did not offer retiree life insurance and, sure enough, active and already retired individuals saw retiree life abruptly ended. His own leadership team was offered the opportunity to negotiate vesting (or at least commitments in the purchase agreement) concurrent with the corporate transaction, with a reduction in the purchase price. The response from the senior leadership team, including from this VP, was no thanks.
Did the employer fully fund the benefits to accommodate the “promise”, or did the employer fund the benefits based on what was possible within the tax preferences in the Internal Revenue Code?
Fact is that most employers have never offered retiree medical. Fact is that most employers have never offered a defined benefit pension plan. Fact is that most employers will never offer either of those plans. And, fact is that if we had European style vesting – where you could not reduce accrual rates or drop coverage so long as individuals remained employed – employers would never have had the DB pensions and retiree medical coverage in the first place.
Why do we anticipate that the status quo will always be maintained? Why do we refuse to take employers at their word when they specifically incorporate and many times highlight their “reservations of rights” provisions? Why do we ignore employers decisions not to vest retiree medical? Why do we ignore prospective adjustments, time after time, in accrual rates – as the best predictor of the future of the plan?
Simply, here it is not “trust but verify”, it is “vest and fund”. Anything less is NOT a commitment. As I always say, pension promises without funding are mere dreams.
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Good post Dick, as usual. After 43 years to the day I retired from Honeywell. 3 years ago got the Dear Retiree letter advising that no longer would I have medical coverage as I was on Medicare. They contracted with Extend Health to assist those that lost coverage. As it turned out it was the best thing to happen as I had no idea that I was paying the largest portion of my retiree healthcare. I settled on AARP at half the cost and have been happy ever since. (Not sure that ObamaCare will change this but happy right now). Retiree’s are a “long term” liability. Most companies are reducing costs by dumping you after you go on retirement and have Medicare. It will not surprise me if the dump even the retiree’s that are not Medicare eligible. Thanks for your dedication of 40+ years, “Adios”.
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