The Association of U S West Retirees



Retiree health plans could sink benefits structure
By Dave Beal, Business Columnist
St Paul Pioneer Press
Saturday, February 18, 2006

Keep your eyes peeled.  A vast convoy of icebergs, dubbed "OPEBs," is floating into view.

OPEBs are "Other Postretirement Employee Benefit plans," established mostly to provide retirees with health care benefits.

In the wake of the controversies about underfunded pension plans, the OPEBs often have slipped by unnoticed.

But three days ago, the investment bank Credit Suisse released a study "The Buck Stops Where?" warning that the growing gaps in the funding of these benefit plans could raise serious concerns for millions of Americans.

"The OPEB plans of the companies in the S&P 500 were $336 billion underfunded at the end of 2004, more than double the $165 billion in underfunding of the pension plans," the report found.  Health care costs, rising far faster than inflation, are causing much of the problem.

The plans' rising liabilities have implications for investors, taxpayers, employers and their workers and retirees, the study says.

Bill Carcache, one of the Credit Suisse researchers who did the report, says that's mostly because many corporations, which years ago agreed to provide these plans, are now concluding they can't afford them.  Thus, he says, they are trying to pass the costs on to others.

In several tables, the study suggested that in at least two areas, Maplewood-based 3M Co. has realized particularly large gains from passing on some of this burden.

While retiree health care plans are becoming less common, most midsized to large companies in Minnesota still have these plans, says Mike Rahn, an actuary in the Bloomington office of the Watson Wyatt consulting firm.

"People are focusing on the pension issue, but this retiree (health care) benefit issue is bigger," says Rahn.  He likens the situation to the focus on Social Security last year, when in fact the far greater issue was and still is funding for Medicare.

The Credit Suisse study looked at how much of the plans' costs retirees picked up.  The 331 plans studied at S&P 500 companies cost a total of $27 billion in 2004, of which retirees picked up $1.9 billion, or 7 percent.  3M retirees, however, paid 18 percent of the costs of their plan that year, $34 million, up from $22 million in 2003.  That was a 55 percent gain, tied for the 18th largest rate of increase among the companies studied.

3M spokesperson Jacqueline Berry said the 55 percent increase was due to rising health care costs and pointed out that 3M pays most of the costs of health care for retirees younger than 65.  The company also provides secondary coverage for Medicare-eligible retirees, she said.

The study also found 3M was a notably large beneficiary of the prescription drug benefit legislation, backed by President Bush, that became law in 2003.

The law doesn't just provide prescription drug benefit coverage to Medicare-eligible retirees, the study notes.  It also provides companies with a tax-free federal subsidy.

To qualify for this break, a company must provide prescription drug coverage to its Medicare-eligible retirees that is actuarially equivalent to Medicare Part D coverage, the study said.  The company then gets a tax-free federal subsidy of 28 cents on each dollar of prescription drug costs between $250 and $5,000 that it incurs per retiree per year.

This subsidy, which starts this month, "effectively allows companies to pass off a chunk of their retiree health care benefits to the U.S. government in other words, to you and me," the study says.

The Credit Suisse analysis says 134 of the 500 companies in the S&P index expect the Medicare Part D subsidy to reduce their OPEB obligations by more than 5 percent.  3M ranked 10th highest among them, at 17 percent.

Asked about the study's references to the 3M Medicare Part D subsidy, Berry said: "We have a strong prescription drug plan for retirees and that plan is 'credible' under Medicare Part D (provisions).  3M offers a plan that is equal to or better than Part D, so that's why we get a subsidy.  The subsidy will help us continue to provide quality healthcare benefits for our retirees."

The Credit Suisse study stresses that OPEB plans raise important cash-flow questions for investors.  For example, it says a key question is how much of the cash going to the retiree plans could instead go to grow the business, pay a dividend, buy back stock or pay down debt.

The study predicts investors will become more interested in the plans this year because of potential accounting changes, labor-management battles over retirement benefits, the ongoing cash burden of the plans and "large unfunded OPEB plans that many state and local governments will be revealing for the first time."

Dave Beal can be reached at or 651-228-5429.