)). By yearend the Financial Accounting Standards Board is likely to require companies to put this liability on their balance sheets, a step that could shrink shareholder equity by as much as 9%.
Many companies have been trimming those costs by dumping retiree health care entirely. In 1993, 40% of large employers offered such benefits to those over 65. By 2005 just 21% did, says Mercer Human Resources Consulting.
But rather than drop benefits altogether, "a lot of clients are saying: 'Let's re-engineer our retiree (health) plans,"' says Edward Kaplan, national health practice leader at consultants Segal Co. A small but growing number of companies are trying one new approach: transforming retiree insurance into a 401(k)-type perk. Instead of promising to pay, say, half of a retiree's premiums, no matter how costly, these companies are setting aside a fixed amount for each pensioner's medical care. After that, retirees are on their own, even if costs top what's in their account.
About 5% of employers who offer benefits have switched to such defined-contribution accounts, including DaimlerChrysler (DCX
), which will move managers and other nonunion workers into one in 2007. An additional 13% have simply capped yearly retiree health spending. Another 25% are considering such changes, Mercer found.INTEREST ACCUMULATES
Embarq Corp. (EQ
), a $6 billion telecom firm spun off during the 2005 merger of Sprint and Nextel Communications Inc., is weighed down with more retirees than workers, and its medical obligations may be underfunded by up to $600 million. To address the problem, the Overland Park (Kan.) company is setting aside $1,300 for every year an employee works past age 50. The money accumulates with interest but doesn't legally belong to workers the way a 401(k) does, though they can use it to buy health coverage upon retirement.
Companies such as Embarq are sticking with retiree coverage because they fear losing an aging but skilled workforce. Embarq's average employee is in his or her late 40s, has 24 years of service, and highly values retiree benefits. Embarq switched with the backing of its unions. Says Randy Parker, director of benefits: "We made a conscious decision to continue coverage because of our demographics."
One of the first Embarq retirees to use such an account, Alice Alfano, 67, retired last year after 17 years at the local phone company in the Orlando area. Because she was older than 50 when the plan began, Embarq credited her with about $32,000 at retirement. That was enough, Embarq figures, for a Medicare supplement policy for the rest of her life.
On her own, Alfano would be paying $79 a month for a group policy Embarq offers from CIGNA Corp. (CI
). But her husband, Fred, 63, is also on her plan. So the couple will pay $489 a month until he is eligible for Medicare at 65. That will eat into a good chunk of the funds in her Embarq account, but she figures it's better than no benefit at all. "Who knows if I'll live to 80 or 85? I'll use the money...until it's gone," she says. For Alfano, at least, that flexibility is worth the long-run risk. By Howard Gleckman