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Jul 24, 2008 |
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Transfer / Fund FAS 106 Retiree Healthcare Costs - New Risk Transfer Product National Seniors Coalition, in conjunction with select reinsurance markets, has developed a product to transfer an employer's FAS 106 liability for post retirement healthcare benefits for a fixed premium. The product provides coverage that assumes risks associated with interest rates, mortality-morbidity and medical cost inflation. Retiree healthcare benefits represent a significant liability for US employers and can be a serious impediment to a successful merger or acquisition. Financial Accounting Standard (FAS) 106 was introduced in 1990 requiring employers to accrue for these benefits. The explosion in healthcare costs and the FASB accrual requirements forced many companies to reevaluate the retirement benefits they offered. Many benefit plans were significantly altered to reduce costs, but the "legacy costs" of earlier period obligations still remain and represent a significant burden to ongoing operations. Hidden Costs - Many companies have opted to phase in the full accrual of these legacy costs over many years, leaving significant liabilities "off balance sheet". While the full actuarially determined cost of this liability will, under GAAP, be disclosed in financial statement footnotes, the actuarial valuation itself may be based on aggressive assumptions about investment returns and medical cost inflation. Significant under-funding is possible. Significant Risks - While a thorough due diligence process will bring the FAS 106 liabilities to light, they will remain a significant risk to the on-going entity because of the looming effects of potentially explosive healthcare cost inflation, volatile interest rates, and unknowable future mortality-morbidity rates. Complications - Managing retiree healthcare benefits through a merger or acquisition can be an intricate and complicated process. Multiple constituencies will be involved including, retirees, current employees, unions, and benefit administrators. Often disparate benefit plans must be consolidated and/or benefits must be altered. NSC is available to: Assess the present value of future retiree healthcare benefit payments associated with competing benefit plans and proposed benefit schedules. Assess the present value of future retiree healthcare benefit payments under varied inflation, interest rate and mortality/morbidity assumptions. Evaluate and manage benefit administrator service providers (TPA or insurer). Help design ongoing retiree benefit plan specifications. 
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