Fortune 1000 Companies Have a $285 Billion Liability for Retiree Medical
2014年11月17日 - 11:05PM
ビジネスワイヤ(英語)
Of companies with a liability, 67% have no assets backing it
up
Fortune 1000 companies reported an estimated $285 billion in
retiree medical obligations for 2013, according to calculations
based on required Securities and Exchange Commission financial
disclosures as of December 31, 2013. Total liability for 2013 was
down from total liability for 2012, which was $338 billion. The
decrease was mainly due to increases in discount rates.
Towers Watson (NYSE, NASDAQ:TW), a global professional services
company, performed the analysis, which showed that 501 Fortune 1000
companies have retiree medical liability, while 499 do not. Of the
501 companies that do, 67% had no assets backing the liability.
“While total liability for retiree medical is in the billions —
much of it unfunded — the undercurrent issue is that companies are
exposing themselves to the risk of a variety of unknown variables
with adverse consequences,” said Mitchell Cole, managing director
of Towers Watson Retiree Insurance Services.
Cole points to four such risks:
- Volatility of the discount rate
makes the obligation variable and unpredictable. Based on a
Towers Watson analysis, on average, a 1% decrease in the discount
rate will increase the balance sheet obligation by 12%. Changes in
the discount rate are especially problematic for companies with
unfunded or underfunded plans. As of October 16, 2014, discount
rates have decreased by about 80 basis points since year-end. If
this trend continues, or yields don’t recover, corporations can
expect significant losses due to market movements for their
December 31, 2014 disclosures for retiree medical obligations.
- Tax reform legislation could wipe
out billions in deferred taxes overnight. If Congress enacts
new tax laws eliminating or reducing the tax deductibility of
amortized retiree medical obligations, the result would be adverse
tax consequences for companies counting on those tax deductions.
The tax deduction for employer contributions to health plans is one
of the largest tax expenditures, and the Obama administration, key
Senate Republicans and independent budget commissions have all
suggested changes to it to raise revenue. (See below for
descriptions of tax reform proposals being considered.)
- Longer life expectancies could
increase the projected obligation. An independent analysis of
newly published mortality tables by the Society of Actuaries
suggests that future retiree medical liabilities could increase by
8% to 10% by the end of 2014 or in 2015.
- Boards and shareholders view
dedicating balance sheet capacity to a nonstrategic benefit as an
inefficient use of capital. Retiree medical is a liability that
doesn’t attract or engage talent, yet it creates balance sheet
volatility and income statement expense, has administrative costs
and diverts management time.
To eliminate these risks, Cole advises companies to end their
legal obligation to retiree medical, which is now possible with
Longitude Solution, a retiree medical exit solution introduced by
Towers Watson in March 2014.
“In today’s financial landscape, it’s prudent for plan sponsors
to consider taking this opportunity to exit retiree medical,” said
Cole. “It’s the first time they have the option to exit their
legal, accounting and regulatory responsibilities for retiree
medical benefits without adverse tax consequences. Plus, this
solution gives retirees security and peace of mind with a lifetime
annuity that guarantees tax-free funding for medical benefits from
a highly rated insurance company.”
Here is a breakdown of companies with retiree medical liability
and their funding levels based on the Towers Watson analysis:
Number ofcompanieswith
liabilities
% ofcompanieswith
liabilities
% of liabilities funded
334 67% Zero 68 13% More than zero but less than 33.33% 40
8% More than or equal to 33.33% but less than 66.67% 40 8% More
than or equal to 66.67% but less than 100%
19
4% More than 100%
501 — total companies in the Fortune 1000
with retiree medical liabilities as of December 31, 2013
“Longitude Solution creates economic value for both companies
and their retirees, eliminates a wasteful use of time and enables
companies to put shareholder money to better use,” said Cole.
Click here for more information about Longitude Solution.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global
professional services company that helps organizations improve
performance through effective people, risk and financial
management. With 15,000 associates around the world, the company
offers consulting, technology and solutions in the areas of
benefits, talent management, rewards, and risk and capital
management. Learn more at towerswatson.com
*Tax reform proposals that would affect employer retiree medical
plans include the following:
From President Obama’s budget proposal for fiscal year
2014. The Obama administration’s fiscal year 2014 budget
includes last year’s proposal to reduce the tax value of certain
other specified deductions and exclusions, including pretax
employee contributions to defined contribution retirement plans and
individual retirement accounts, and employer-provided health
insurance paid for by employers or by employees with pretax
dollars.
Hatch-Coburn bill. On January 27, 2014, Senate Finance
Ranking Member Orrin Hatch (R-UT), along with finance committee
members Senator Richard Burr (R-NC) and Senator Tom Coburn (R-OK),
unveiled specifications for the Patient Choice, Affordability,
Responsibility and Empowerment Act, legislation they plan to
introduce to repeal and replace the Patient Protection and
Affordable Care Act. Of particular note, the proposal calls for
capping the tax exclusion for health coverage at 65% of the average
plan’s costs (indexed for inflation in future years).
National Commission on Fiscal Responsibility and Reform.
The President established the National Commission on Fiscal
Responsibility and Reform, also known as the Simpson/Bowles
Commission, to look at the current budget situation and report back
with recommendations. One of the issues the commission focused on
was tax reform. It recommended that the current exclusion for
employer-provided health insurance be capped at 75% of the premium
levels in 2014, which would eliminate the unlimited exclusion under
current law. This would likely result in the elimination of most
cafeteria plans, flexible spending arrangements and health
reimbursement arrangements, since their favorable tax treatment is
dependent on the exclusion for employer-provided health
insurance.
Media:Towers WatsonRob Wyse,
212-920-1470rob@capital-content.com
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