FEATURE: Healthcare Costs Remain Key Priority for Financial Executives

Controlling the cost for company-provided healthcare benefits remains the top priority for financial executives, according to research released by Prudential Financial, Inc. and CFO Research Services.

The report, “Managing Financial Risk in Retirement and Benefits Programs,” found that finance executives believe improvements in funding benefit plans will make it easier to reduce and eventually eliminate risks associated with such plans.

The study found that most employers don’t plan to drop health coverage and switch employees to the public health insurance exchanges established under the Affordable Care Act. Instead, employers are looking at private health insurance exchanges where the employer continues to fund benefits but employees have the option to choose from any health plan they like.

“Everyone is looking at how to better control benefit costs and healthcare is still the No. 1 issue,” said Jim Gemus, senior vice president of Product for Prudential Group Insurance. “But they are acutely aware of the need to retain employees and attract new ones. The improving economy and recovery of the financial markets is making it a bit easier to do this.”

Companies are still shifting healthcare costs to employees, with 80 percent either transitioning more costs to employees or likely to do so, the study found. Only 38 percent are willing to end employer-paid healthcare and direct employees to public health insurance exchanges. Fifty-seven percent say they wouldn’t consider the idea, but 41 percent would be willing to provide subsidies to employees for use on private health insurance exchanges.

The report found that an improving economy and stable financial markets have given financial executives the confidence to explore a range of options to help their companies better manage the costs and risks of their healthcare, pension and benefits programs.

“Overall, finance executives feel that their companies are in a better financial position to consider a range of options for managing pension risk; many companies have experienced an improvement in funded status as a result of equity market improvements combined with increasing discount rates,” the study noted. “Executives are now able to weigh the relative advantages and disadvantages of plan restructuring alternatives that can lead to the ultimate disposition of their pension liabilities.”

The survey targeted senior financial executives at companies with defined benefit retirement plans holding $250 million or more in assets – plans that pay out a specified benefit to retirees. Most of the 182 companies included in the survey had revenue of more than $500 million and more than half had revenue of more than $5 billion.

“Many finance executives in this year’s survey perceive a trend toward employees extending their careers beyond historical retirement ages. In the face of this, companies are also considering expanding offerings in defined contribution plans to enhance security and reduce volatility in their employees’ retirement investment strategies. Automatic enrollments, stable value funds, and guaranteed income products are receiving more attention, and executives continue to consider ways to enhance target-date funds to reduce risk and provide retirement income,” the survey stated.

Thirty-five percent of responding companies have already closed their pension plans to new entrants and another 25 have frozen them, the survey found. Executives cited concerns about the impact of defined benefits plans on earnings, balance sheets and their companies’ ability to invest in growth opportunities. The survey found that companies continue to prefer defined contribution plans such as 401(k) where employees contribute their own money to their retirement plan, usually with matching dollars from the company.

“The rebound in financial markets has not only restored the value of 401(k) plans but helped improve the funding levels of defined benefit plans as well, though market volatility and other risk factors remain a concern,” said Phil Waldeck, senior vice president, Pensions and Structured Solutions, Prudential Retirement. “Now the focus can be placed on further reducing the risk of defined benefit plans and improving the offering and investment security of defined contribution plans like 401(k)s.”

Additional key findings included that more than half of the executives surveyed said they are likely to offer lump sum distributions to defined benefits pension plan participants over the next two years, and more than half of the respondents believe a significant portion of the workforce will have to delay retirement because of inadequate savings.

Nearly 50 percent of financial executives said they are likely to outsource some or all of their benefits administration on top of the 27 percent that already do so. Additionally, some 70 percent of the respondents believe offering voluntary benefits is a way to increase employee satisfaction and 58 percent are likely to expand voluntary benefit offerings.

In summary, the survey found that finance executives are examining a variety of solutions that can help them enhance benefit offerings while still allowing them to manage the financial risk of the programs.

“For their definitive benefits plans, more finance executives, as well as the boards they report to, are examining the feasibility and benefits of liability transfer – that is, purchasing annuities at some point in the future to transfer some or all of their companies’ definitive benefits plan liabilities to a third party insurer,” noted the survey. “Many see the adoption or expansion of liability-driven investment strategies as a means of dampening the volatility of definitive benefits investments, either as an initial step toward the ultimate transfer of liabilities, or as a sound risk-management strategy in itself.”

With the advent of both private and public health insurance exchanges, finance executives are given another resource to evaluate in their efforts to optimally balance corporate expense and employee benefits.