Print this article | Return to Article | Return to

Golden Years? Companies Target Retiree Benefits

Employers asking retired workers to pick up more of their health-care costs; some companies planning to phase out retiree medical plans entirely. Plus: Options expensing declining, Lay's foundation foundering.
Stephen Taub, | US
December 9, 2002

Increasingly, retiree benefits are under attack.

As more and more companies pare the benefits of their current employees, many businesses are also targeting the benefits of their former workers—workers who assumed they had a covenant for life.

According to a survey of large U.S. companies by the Kaiser Family Foundation and Hewitt Associates, nearly half (44 percent) of employers offering retiree health benefits have increased retiree contributions to premiums. More than a third (36 percent) have increased cost-sharing requirements.

Specifically, the average retiree contribution rose 19 percent for retirees under age 65 and 20 percent for retirees over 65 between 2001 and 2002, according to the survey.

The trend is expected to continue. Although 95 percent of the large companies participating in the survey said they would continue to provide health-care coverage to current retirees, 82 percent said they expect to increase the retirees' premiums. About 85 percent plan to raise prescription drug co-payments or co-insurance in the next three years.

More ominous for current workers: 22 percent of the respondents say they are likely to eliminate retiree coverage for future retirees (often new or recent hires) within the next three years, according to the survey.

In fact, 13 percent of the companies say they terminated benefits for future retirees in the past two years.

Interestingly, 78 percent say they are likely to continue offering prescription-drug coverage even if Congress enacts a comprehensive Medicare drug benefit.

"This study is the latest bad news for American workers on the health-care front," said Drew Altman, president and CEO of the Kaiser Family Foundation. "Current retirees are being asked to pay more for their health coverage, and current workers are less likely to get health benefits from their employer when they retire."

The study is based on a survey of 435 large private-sector companies (1,000-plus employees) that currently offer retiree health benefits, including 28 percent of all Fortune 500 companies.

Most of the surveyed private-sector businesses that offer retiree coverage (91 percent) cover both retirees under age 65 and those age 65 or over. In addition to retirees, large employers generally provide health benefits for the spouses of retirees (91 percent), other dependents (69 percent), and, to a lesser extent, part-time workers (35 percent).

Eligibility generally depends on meeting a minimum combination of age and length of service, with the most common requirements being age 55 with 6 to 10 years of service.

Most surveyed employers offer a choice of health plans, but retirees under age 65 typically have greater choice of plans (often the same plan choices as current employees); age 65-plus retirees' plans generally coordinate with Medicare.

The majority of employer plans have an annual limit on retirees' out-of-pocket costs for covered services, with the most common limits at $1,500 for single retiree coverage and $3,000 for retirees and spouses.

Virtually all employers that offer retiree health benefits (96 percent) cover prescription drugs. Among those, only 11 percent impose a separate limit on drug coverage.

Oneida to Restate Results
On Friday management at Oneida Ltd. said it would restate the company's earnings by a total of $3.44 million for the 2000 and 2001 fiscal years and the first three quarters of fiscal 2002, stemming from its accounting for costs and related tax effects associated with the August 2000 acquisition of Delco International Ltd.

The maker of flatware and fine china said the downward adjustment resulted from a review by the company's independent accountants, PricewaterhouseCoopers LLP.

This will result in adjustments of recorded entries under purchase price accounting rules related to the Delco acquisition, Oneida noted in a Securities and Exchange Commission filing.

Oneida management added it believes that when the restatements are finalized it will not be in compliance with its loan covenants for the 2001 fiscal year.

"This was not funny accounting, this was not anything that was hidden," Peter J. Kallet, Oneida's chairman and chief executive officer, told the Associated Press. "This was regular accounting as we and our accountants deemed appropriate when it was done."

Oneida paid $59.4 million for Delco. It created an $18 million reserve for costs associated with integrating the company, Kallet told the wire service.

He added that auditors questioned whether Oneida should have depreciated some integration costs over a period of years or expensed them immediately, according to the wire service's account.

Kallet reportedly told the AP the company immediately asked PwC to review the costs. As a result, Oneida decided not to depreciate some of the integration costs.

Back in November, the company indicated it would restate its earnings by between $2.5 million and $3.5 million.

Options Expensing: Mania Dies Down
So much for companies rushing to expense options.

This summer, giants like Coca-Cola, General Electric Co., and Citigroup Inc. said they would adopt this controversial practice. Those bellwethers were quickly followed by more than 100 other companies promising to expense options as well.

Still, that's hardly a groundswell of support for the practice, given that the number of companies volunteering to expense options is a very small percentage of the total number of public companies (17,000 or so).

Indeed, the technology industry opposes expensing options since tech companies have been aggressive users of options to lure talent and fuel growth. By expensing options, these companies would incur huge costs.

In addition, a recent Reuters article points out that many companies are not going to expense options unless required to do so. This may happen, however, since the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are discussing the issue.

But since the value and true cost of options remain unclear and uncertain, many finance executives are waiting for more-explicit guidance on how to go about expensing options.

"Until companies have to do it, they won't until FASB and IASB mandate it. I think you have seen the end of the trend," Alfred King, vice chairman of Valuation Research Corp., told Reuters. "The 100-plus companies who have said they are going to do it, it is more being politically correct, as opposed to a sudden conversion. The companies that announced the switch for the most part are those where the impact on earnings will be modest."

Short Takes

"Deloitte advised the company that it believed that the transaction, which was entered into on November 30, 2002, would impair its independence," noted in the filing.