Revisiting Retirement in the Post Health Care Reform World


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Towers Watson experts Mike Archer and Kevin Wagner discuss practical approaches to:

• Evaluating the future design of retirement programs and retiree health plans as part of your approach to HCR

• Working with account-based designs, such as cash balance and 401(k) plans

• Reaching out to your effected employees on strategies associated with tax-rate changes

• Communicating strategically to ensure your employees understand and are engaged in their own retirement planning

Published in: Business, Economy & Finance
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Revisiting Retirement in the Post Health Care Reform World

  1. 1. Revisiting Retirement in the Post Health Care Reform World A Towers Watson Webcast presented by: Michael Archer Alan Glickstein Kevin Wagner May 20, 2010 © 2010 Towers Watson. All rights reserved.
  2. 2. Today’s experts: Revisiting Retirement in the Post-HCR World Mike Archer Based in Towers Watson’s Parsippany office, Mike’s background is primarily in retirement and other benefit consulting including actuarial valuations, retirement financial management, asset/liability studies, retirement and benefit strategy, executive retirement benefits, retiree medical benefit design, acquisitions and divestitures, merger integration and union negotiations. He is a Fellow of the Society of Actuaries, a Member of the American Academy of Actuaries and an Enrolled Actuary. Alan Glickstein Based in the Dallas office of Towers Watson, Alan specializes in the strategic design and financing of total compensation packages, with a particular concentration in the retirement benefit area. His areas of focus include the retail industry, cash balance plans and the financial aspects of benefit plans. Alan’s client relationships are balanced between finance and human resource issues. Earlier in his career, he was responsible for developing several financial analysis tools and systems. Alan is an Enrolled Actuary with the IRS and an Associate of the Society of Actuaries. Kevin Wagner Based in Towers Watson’s Atlanta office, Kevin consults with major clients on design, implementation, administration, funding, and ongoing evaluation of all types of benefit programs. He has focused primarily on assisting clients with the alignment of corporate benefit philosophies with the organization’s strategic plans, and working with clients on the integration and due diligence activities associated with mergers and acquisitions. He is a Fellow of the Society of Actuaries and an Enrolled Actuary. 2
  3. 3. What we hope to accomplish today Discuss state of retirement income plans — pre health care reform Analyze implications of health care reform for design of retiree health and retirement income plans Address implications of likely rising taxes Provide a strategic framework for rethinking retirement 3
  4. 4. External pressures “squeezing” the retirement system Business Trends Pressures Shift from retirement income to wealth accumulation Greater emphasis on risk management Employee Pressures Elimination of early retirement subsidies Curtailment of traditional retiree medical plans Environmental General downward trend of Pressures size of plan 4
  5. 5. Declining employer-provided retirement plan benefit values The average employer provided retirement benefit has fallen significantly during the last decade Towers Watson data on 183 companies shows a 12% decline in retirement benefit value relative to payroll since 2002 5
  6. 6. Health Care Reform may further weaken employer commitment to retirement Disincentives to provide retiree health care programs Certain Improved Medicare reconsideration of prescription drug program employer role Guaranteed issue and underwriting restrictions for pre-Medicare retirees 6
  7. 7. Findings from Towers Watson’s Post-Health Care Reform Survey Percentage Responding Effect of health care reform on your ability to meet 30% 53% 17% early retirement objectives for some employees Positive None Negative Do you have plans to reexamine health 42% 19% 39% benefit strategy for retirees? 2010 2011 No plans Percentage Responding Affirmatively Will health care reform decrease the number of large employers offering employer-sponsored 85% retiree medical programs? Will your organization eliminate or reduce retiree 53% medical programs in response to health care reform? Will your organization change the level of retirement plan 8% benefits you offer in response to health care reform? 7
  8. 8. Defined Benefit (DB) and Defined Contribution (DC) Plans 8
  9. 9. Fortune 100 retirement plan prevalence (for newly hired employees) 89 83 80 76 70 72 67 66 60 49 51 40 33 34 30 28 24 20 17 11 1985 1998 2002 2004 2005 2006 2007 2008 2009 Today Traditional DB Plan Account-based plans (Hybrid and DC) 9
  10. 10. Choice between traditional DB and account-based plan is about allocating benefit dollars between career and more transient employees Account- based Plan Traditional DB Plan Life Event Funding Termination Funding Retirement Funding 10
  11. 11. Risk is often shifted rather than eliminated in plan design Mortality Risk Employees who Outlive their Account plans do not spread mortality risk Life Expectancy In a traditional DB plan, monies for By at least 1 year 66% employees who die earlier than expected By more than 10 years 29% go to pay benefits of those that die later than expected Investment Risk Average Median Returns From 1995 – 2007 25% DB plans outperformed DC Plans 20% Employees are less sophisticated 15% investors 10% 5% Employees don’t have ready 0% access to expert advice -5% -10% Employees need to diversify -15% along their life-cycle 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 DB DC DB: 10.13% DC: 9.21% 11
  12. 12. Design changes are deferring the age at which employees can retire with sufficient resources Before Programmatic Changes Net Present Value Retirement Income Adequacy (Today’s $) $4,000 $3,500 $3,000 $2,500 C urrent Plan $2,000 Needs (100%) $1,500 $1,000 $500 $0 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 Retirement Age After Programmatic Changes Net Present Value Retirement Income Adequacy (Today’s $) $2,500 $2,000 $1,500 C urrent Plan $1,000 Needs (100%) $500 $0 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 Retirement Age 12
  13. 13. Potential increased labor costs if older workers are unable to retire Working Later Career New Hire DB Pension Overall labor Savings from lower pay cost savings and reduced benefit Retiree Medical may outweigh cost of retiree costs Active Medical medical Active Medical Lower cost if Other (e.g., LTD) younger age Considerations Retiree Medical 401(k) Skill levels DB Pension Total FICA Labor Productivity Other (e.g., LTD) Lower cost if Cost Total pay PTO Replacement 401(k) lower pay Engagement FICA ADEA/age discrimination Total pay PTO Caution on “softness” of savings; highly variable and Lower pay difficult to predict Pay Benefits 13
  14. 14. Older employees who work solely for financial reasons are less engaged Percentage of Respondents Who are Disenchanted or Disengaged All respondents 31% Respondents who expect… To work throughout retirement 45% for financial reasons Their standard of living to 41% decline in retirement To retire at or after age 70 42% To not have sufficient resources for 46% a financially secure retirement To have sufficient resources for a 18% financially secure retirement Source: Towers Watson 2010 Global Workforce Study — U.S. 14
  15. 15. Rethinking DB design: Cash balance plans are back in play Pension Employee Pay Credits Account Interest Credits Balance Trust 15
  16. 16. Cash balance plans are designed to leverage advantages of DB and DC plans DB Plan Features DC Plan Features Employer retains tax advantages on Reduce cost volatility investment returns Valuable benefits for a mobile workforce Efficiency of DB funding Level accrual pattern rather than backloading towards end of career Accrued benefit cannot decrease Portable, account-based plans that are easy to understand 16
  17. 17. Managing Pension Risk 17
  18. 18. Two capital market crises in ten years have coincided with funding and accounting rules changes that offer much less short-term “forgiveness” Aggregate PBO Funding Status Percent by Year 130% 124% 120% 110% 106% 101% 99% 100% 89% 90% 91% 90% 82% 77% 83% 80% 70% 60% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Towers Watson, “Strong Market Returns Boost Funding Levels of Fortune 1000 DB Plans for 2009,” Insider, January 2010. 18
  19. 19. How can this volatility and risk be managed? Pension Liability Projected Pension Liability ($ in Millions) $600 $500 $400 Addressed through plan design $300 $200 Addressed through investment strategy $100 and/or exit strategy $0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Calendar Year Current Inactives Current Actives Future Pay Future Service Future Hires 19
  20. 20. Pension risk management framework Legacy Benefit/Exit Strategy Ongoing Benefit Strategy Objectives and Thresholds Funding Strategy Accounting Strategy Investment Strategy This framework allows for parallel assessment of multiple plan management options 20
  21. 21. Perspectives vary greatly by plan sponsor Many employers today are in a very different position than where they were six months ago with regard to… Balance sheet flexibility RISK ASSESSMENT AND OBJECTIVE-SETTING Access to cash MAINTAIN PLAN SPONSORSHIP EXIT PLAN SPONSORSHIP Sensitivity to P&L changes ONGOING MANAGEMENT EXIT STRATEGY RISK TRANSFER AND FINANCING STRATEGY Tolerance of PPA threshold issues FINANCING TRANSFER IMPROVED LESS FINANCIAL SMALLER VALUE MORE CONTROL; PARTIAL RISK TRADITIONAL Future economic FUNDING VOLATILITY AT RISK REGULATORY EXIT TRANSFER SETTLEMENT outlook Revised Liability- Deferred Captives and Custom Annuity Contribution Driven Participant Alternative Insurance Purchase Strategy Investing Cash-Outs Financing Solutions Long-term goals and objectives ONGOING MONITORING for plan Variety of views as to future pension risk management still call for a spectrum of solutions 21
  22. 22. A coordinated “journey” plan can help a company take advantage of opportunities as they arise Legacy Benefit Strategies Settle/transfer Offer Bulk Lump Settle/transfer Remaining Keep all obligations Sums to TV’s Retiree Obligations Obligations Current allocation Current Asset Option A Allocation Strategies Reduce interest rate risk Option B Reduce equity risk Goal 22
  23. 23. Retiree Medical Programs 23
  24. 24. Key elements of health care reform with direct implications for retiree plans Tax-Related Employer Plan Related Market Related High-cost plan excise tax Early retiree reinsurance Medicare Part D doughnut hole and drug discount Elimination of RDS tax Elimination of lifetime Medicare Advantage advantage maximums payments reduced — benchmarking program Tax increases for high wage Dependent children Higher Part D premiums for employees coverage (age 26) higher income seniors Guaranteed issue Underwriting restrictions Federal subsidies 24
  25. 25. The loss of the tax-free nature of the Part D subsidy makes participation in government funded plans more efficient Federal Value Comparison Per Member Per Year (2010 Cost Terms) Retiree Drug Subsidy Part D Plan Today Today Reform Standard No doughnut hole Reform $1,500 Reinsurance $1,100 Reinsurance $750 $700 Direct payment $400 Current Tax benefit $250 $500 Direct payment New benefit $700 Direct payment enhancements RDS RDS $700 $500 $500 25
  26. 26. Post-Medicare retirees: “Filling” the Part D “Doughnut Hole” may ease employer hesitation to exit program sponsorship while focusing on continued financial support 95% catastrophic Current Doughnut Hole coverage 75% initial $250 rebate in 2010 Full Percentage coverage 75% 50% brand discount starting 2011 benefit e in 2020 a nc sur c oin ing reas Enhanced coinsurance nc Deductible phased in 2011 to 2020 I Generic Brand Dollars 26
  27. 27. Pre-Medicare retirees: New insurance market opportunity Pre-65 retirees may be better off under the insurance exchange coverage than participating in an employer plan Retiree with $60,000 Family Income (Including Investment Earnings) Exchange underwriting $5,000 restrictions may require lower premiums for individuals age 55 – 64 $5,000 $12,500 Employee cost sharing $5,400 Employee premium contributions Federal subsidy Employer premium contributions $12,500 $12,600 This presents tremendous opportunities for rewards Employer Insurance redeployment for employers Plan Exchange 27
  28. 28. HCR may result in accelerated movement to account- based and exit strategies Exit Strategy Employee No Access Access Only FAS 106 Impact Employee Funded Acct Health Care Account Capped Employer Strategies Responsibility Funded Acct Capped Account-based strategies Plan Defined Dollar Plan Managed Competition Uniform Contribution Employer Contribution/design strategies Employer Employee Risk 28
  29. 29. Rethinking retiree medical: Viewing wellness as an economic asset Employee Age 45, Retiring at Age 62 Healthy Lifestyle Average Health Poor Health Retiree’s health care accumulated $300,000 $425,000 $600,000 need HSAs can help fund this need $200,000 $375,000 $580,000 $100,000 $50,000 $20,000 Employer provided account $100,000 $275,000 $480,000 may also help $100,000 $50,000 $100,000 $20,000 $100,000 $100,000 Key message: Average health may force delayed/inadequate retirement 29
  30. 30. Benefit Implications of Higher Tax Rates 30
  31. 31. Expected increases in tax rates Looming tax increases due to … $1.8 trillion FY09 $11.4 trillion in total $58 trillion in Bush tax cuts to expire federal deficit U.S. debt unfunded in 2011 entitlements Potential tax rate increases on … Personal Capital gains Corporate FICA Social Security Other (estate, income taxable wage AMT, VAT, etc.) base Considerations for compensation and benefits environment include… Trauma of market drop DB plans facing funding Increased scrutiny of continues to affect 401(k) challenges executive compensation environment vehicles and employee behavior 31
  32. 32. Benefit implications of higher tax rates — short term Potential Opportunities Nonqualified deferred compensation plan Incentive pay plans and long-term incentive programs DC SERPs and elective deferred compensation plans 401(k) plan does not currently permit Roth Contributions 401(k) plan does not allow in-service distributions DB SERPs 32
  33. 33. Rethinking Retirement — Strategic Framework 33
  34. 34. Regardless of approach, effective retirement programs will likely seek to achieve six key objectives Financially sustainable for the sponsoring organization Create a framework for employees to reach a level of benefits adequacy that will allow for a reasonable retirement age Meet workforce management goals Competitive in the talent marketplace Improve employee financial literacy Leverage market opportunities 34
  35. 35. What might rethinking retirement yield? A potential new retirement framework — involving benefit design and employee engagement Defined Benefit Defined Retiree Medical Company provided Primary Subsidy to Contribution annuity Retirement enhancement Access + limited subsidy to account or none to Retirement income Medical Savings Active Medical Awareness Sickness treatment to Behaviors Health promotion orientation Education 35
  36. 36. Contact details 36