Achieving Certainty: CFOs Expand Their De-risking To Other Post-Employment Benefits (OPEB)

Perspectives, April 2017

Increasingly, CFOs and treasurers are looking at not only de-risking pension plan liabilities but a more comprehensive view of all "OPEB" obligations, or "Other Post-Employment Benefits" reported on their balance sheets—including retiree healthcare, and retiree life insurance. Similar to pensions, OPEB obligations are disclosed on balance sheets, and can be significantly underfunded. In 2014, the aggregate underfunding of corporate OPEB obligations was approximately $196B, compared to pension underfunding of $389B.1

Similar to pensions, OPEB risks and challenges are driven primarily by rising longevity trends. And, generally speaking, the same population covered for a pension benefit may also be covered for retiree medical and/or life insurance. For retiree medical, future medical costs and drugs have been rising faster than inflation exacerbating the risks. Unlike pensions, OPEB's lack funding requirements, and reporting rules are different, based on smoothing and assumed rates of growth (e.g. future medical costs/longevity). Both pensions and OPEB obligations are perceived to be not well aligned with broader corporate benefits goals.

Companies seeking to preserve retiree benefits, whether pensions or OPEB, are balancing many factors and exploring new funding and de-risking options which can enable plan sponsors to lower their risk exposure while delivering on their promises to plan participants.  In fact, 23% of plan sponsors surveyed by Aon Hewitt are considering a retiree medical "buy-out" for all or a portion of their retirees.2

It's no surprise that derisking dialog with CFOs,Treasurers and their advisors has expanded to a holistic view of all their retiree benefits obligations. I (Alex) would be happy to discuss alternatives Prudential is bringing to market to address non-pension derisking.

Settlement strategies allow a plan sponsor to fully or partially terminate its retiree health care program and eliminate the ongoing program cost and administrative commitment by providing a type of retiree benefit “buy-out”, similar to a pension benefit settlement. If the market environment could support such a strategy on a cost-effective basis, would you consider a retiree health care settlement strategy for all or a portion of your retiree group?

 Pie chart: If the market environment could support such a strategy on a cost-effective basis, would you consider a retiree health care settlement strategy for all or a portion of your retiree group? 47% unsure, 23% yes, 30% no.

Pie Chart
47% Unsure
23% Yes (highlight color)
30% No

(n=229)

 

1 S&P Dow Jones Indices Research, June 2015 "S&P 500 Corporate Pensions and Other Post-Employment Benefits (OPEB): Heading into the Sunset, a Half-Trillion Dollars Short"

2 Source: 2016 Aon Hewitt Retiree Health Care Strategy Survey