The Fortune 1000 has reported an estimated $285 billion in retiree medical obligations for 2013 — but that’s better than a year ago, according to a recent report.
Towers Watson reports that, according to calculations based on required Securities and Exchange Commission financial disclosures as of Dec. 31, 2013, total liability for 2013 was down from total liability for 2012, which was $338 billion. However, the decrease was mainly due to increases in discount rates.
The report notes that only about half (501) of the Fortune 1000 companies have retiree medical liability, but two-thirds of those companies had no assets backing the liability, and another 13% have less than a third of those liabilities funded. That exposes those firms to the risk of a variety of unknown variables with adverse consequences, according to Mitchell Cole, managing director of Towers Watson Retiree Insurance Services.
For example: Volatility of the discount rate makes the obligation variable and unpredictable. Based on a Towers Watson analysis, on average, a 1% decrease in the discount rate will increase the balance sheet obligation by 12%. Changes in the discount rate are especially problematic for companies with unfunded or underfunded plans.
Tax reform legislation could wipe out billions in deferred taxes overnight. Towers Watson notes that if Congress enacts new tax laws eliminating or reducing the tax deductibility of amortized retiree medical obligations, the result would be adverse tax consequences for companies counting on those tax deductions. The tax deduction for employer contributions to health plans is one of the largest tax expenditures, and the Obama administration, key Senate Republicans and independent budget commissions have all suggested changes to it to raise revenue.
Longer life expectancies could increase the projected obligation. An independent analysis of newly published mortality tables by the Society of Actuaries suggests that future retiree medical liabilities could increase by 8% to 10% by the end of 2014 or in 2015.
Boards and shareholders view dedicating balance sheet capacity to a nonstrategic benefit as an inefficient use of capital. Towers Watson observes that retiree medical liability doesn’t attract or engage talent, yet it creates balance sheet volatility and income statement expense, has administrative costs and diverts management time.
Towers Watson reports that, according to calculations based on required Securities and Exchange Commission financial disclosures as of Dec. 31, 2013, total liability for 2013 was down from total liability for 2012, which was $338 billion. However, the decrease was mainly due to increases in discount rates.
The report notes that only about half (501) of the Fortune 1000 companies have retiree medical liability, but two-thirds of those companies had no assets backing the liability, and another 13% have less than a third of those liabilities funded. That exposes those firms to the risk of a variety of unknown variables with adverse consequences, according to Mitchell Cole, managing director of Towers Watson Retiree Insurance Services.
For example: Volatility of the discount rate makes the obligation variable and unpredictable. Based on a Towers Watson analysis, on average, a 1% decrease in the discount rate will increase the balance sheet obligation by 12%. Changes in the discount rate are especially problematic for companies with unfunded or underfunded plans.
Tax reform legislation could wipe out billions in deferred taxes overnight. Towers Watson notes that if Congress enacts new tax laws eliminating or reducing the tax deductibility of amortized retiree medical obligations, the result would be adverse tax consequences for companies counting on those tax deductions. The tax deduction for employer contributions to health plans is one of the largest tax expenditures, and the Obama administration, key Senate Republicans and independent budget commissions have all suggested changes to it to raise revenue.
Longer life expectancies could increase the projected obligation. An independent analysis of newly published mortality tables by the Society of Actuaries suggests that future retiree medical liabilities could increase by 8% to 10% by the end of 2014 or in 2015.
Boards and shareholders view dedicating balance sheet capacity to a nonstrategic benefit as an inefficient use of capital. Towers Watson observes that retiree medical liability doesn’t attract or engage talent, yet it creates balance sheet volatility and income statement expense, has administrative costs and diverts management time.
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