OPEB Cost Control Strategies May 15, 2008
OPEB Cost ControlStrategies
May 15, 2008
OPEB Cost Control Techniques
Zero liability (for small employers)
Plan “tweaks”
Funding
Defined contributionaccounts
Zero Liability for Small Groups
AgeActual Cost
Blended Cost
Implicit Subsidy
20 $200 $40030 300 40040 400 40050 500 40060 600 400 200
Most employers charge retirees the blended costSmall fully-insured employers (<50 employees)
can charge retirees the actual (not blended) costIf they do, there’s no implicit subsidy!
Plan tweaks: many optionsPrescription drugs – lower generic & OTC copays, higher name brandEligibility: service requirements for full benefitsDifferent benefits for new employeesDefined dollar benefit (DDB)Medicare integration method: COB, exclusion or carve-outMedicare Part D strategies
Medicare Part DDifferent strategies for public vs. private employersPDP subsidy often better than 28% direct subsidy, especially for public employers
Higher value for most plansBetter accounting treatmentDirect-subsidy tax advantage irrelevant for public employers
Funding
• Potential higher discount rate (lower liabilities)• Possible greater flexibility in investments• Smaller ARC and Net OPEB Obligation• Better credit rating
* Note that pre-funding is NOT required
OPEB Funding
GASB’s requirements for a funded plan• Employer contributions irrevocable• Assets dedicated to providing retiree benefits• Assets protected from creditors
Funding vehicles• 501(c)(9) trust, aka VEBA • Section 115 Trust
• Insurance Contract
Funding - with Higher Discount Rate
With pre-funding &
No pre- higherfunding discount
Present Value of OPEB Benefits $5,000,000 $4,000,000Actuarial Accrued Liability 3,000,000 2,400,000Plan Assets 0 1,000,000Unfunded Actuarial Accrued Liability 3,000,000 1,400,000Normal Cost 250,000 200,000
Annual Required Contribution – Year 1Normal Cost $250,000 $200,000Amortization of Unfunded Accrued Liability 173,490 80,962Total $423,490 $280,962
Defined Contribution Accounts
What they do
• Replace open-ended liabilities with known cost
• Potentially more secure benefits for employees
Defined Contribution Accounts
Transition from defined benefit: Anaheim• Preserve current benefits for those near retirement• Evaluate benefits for eligible employees• Set up an individual account for each with:
• a starting balance for past-service benefits• regular payroll contributions
• Invest in default or chosen funds• Web-based claim and premium payments
Cost Control Examples
City of Duluth – a little of everything
• Prescription drugs – new copay schedules
• Start to pre-fund existing OPEB liabilities
• Defined contribution accounts for new hires
Questions??
James A. Van Iwaarden, FSAwww.vaniwaarden.com612.596.5961, 888.596.5960