ARLINGTON, VA, March 18, 2015 — Amid growing concerns over the high cost of retiree health benefits, many large employers are considering plan alternatives that better align with their current workforce planning initiatives. These findings stem from the 2015 Survey on Retiree Health Care Strategies conducted by global professional services company Towers Watson (NASDAQ: TW).

The survey of 144 HR executives at large and midsize employers that sponsor retiree medical benefits found nearly nine out of 10 employers (89%) said retirement health care benefit security is somewhat to extremely important to their retirees. Most respondents (78%) provide health benefits to both pre-Medicare and Medicare-eligible retirees; 70% will offer health care benefits to the majority of their current full-time employees upon retirement. The number of employers offering retiree health care benefits to employees hired in 2014 or later drops to 57%. 

“Employers that plan to continue offering medical benefits to retirees often do so because they want to fulfill their commitment,” said Trevis Parson, chief health actuary at Towers Watson. “Yet the combination of several external factors is significantly changing the landscape, and employers are evaluating new strategies to deliver on their promise.”

Factors Driving Change

In addition to an overall concern about rising costs, the Patient Protection and Affordable Care Act’s 2018 excise tax on high-cost health plans — including retiree health benefits — is another issue facing employers. A considerable percentage (39%) cited the tax as a major reason to evaluate retiree medical strategy over the next few years.

An additional factor is the lack of alignment between current retiree medical programs and workforce management goals. Only 38% of respondents said their retiree medical benefit is effective in attracting and retaining workers. Just 26% said the benefit is integrated with broader workforce management and retirement strategies.

“Historically, employers have tried to reduce the cost and risk exposure of retiree medical benefits by changing plan design, capping subsidies, changing eligibility requirements and limiting or ending the benefits for new hires,” said Julie Stone, a Health and Group Benefits leader at Towers Watson. “However, many employers recognize that these traditional cost- and risk-control solutions have run their course and that other alternatives may better connect with business goals.”

Revisiting Existing Options; Seeking New Alternatives

Among existing options for Medicare-eligible retirees, 78% of employers are now using or considering using the services of a private Medicare exchange to assist retirees in selecting individual coverage. Four in 10 (41%) are funding or considering funding retiree medical benefits through a voluntary employee beneficiary association or 401(h) to reduce their risk profile. And 21% of employers are converting their subsidy to a retiree medical savings account, with another 18% considering this by 2017.

Among new options for pre-Medicare retirees are public and private health insurance exchanges. While only 8% of employers are very confident about public exchanges for 2015, confidence rises to 35% by 2017. More than half (52%) will reassess their current approach to providing pre-Medicare retiree health care benefits and consider public health insurance exchanges by 2017. In fact, 31% are considering these changes for 2016.

Also, as employers assess the future risk of retiree medical liabilities, some are considering new strategies, similar to approaches used to de-risk pensions, for transferring or settling the liability. One strategy involves employers purchasing group annuities for retirees. The annuities transfer the financial responsibility and liability for employer-provided subsidies to a highly rated insurer, which guarantees lifetime funding of health care benefits for retirees.

“Predictions that employer-sponsored retiree health care will totally disappear are exaggerated. New alternatives allow employers to design an approach that meets overall business and workforce management objectives in terms of attracting talent and helping workers plan for retirement,” concludes Parson. 

About the Survey

Towers Watson surveyed 144 companies representing 2.1 million employees and nearly one million retirees in September 2014 for its 2015 Survey on Retiree Health Care Strategies. The survey yields insights into how employers are thinking about retirement health benefits and the key actions they anticipate adopting in response to new options emerging in the changing health care landscape.

About Towers Watson

Towers Watson (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.