Retiree Pension Risk Transfers in THIS Low Interest Rate Environment?

Although interest rates are at all-time historic lows, it doesn’t mean that a retiree pension risk transfer is a bad idea for your defined benefit pension plan. Below is a brief discussion on the pros and cons of considering a pension risk transfer for retirees at this time.

reasons to complete a pension risk transfer

Reasons to Complete a Pension Risk Transfer

PBGC Premium Savings: If your company’s pension plan is at the PBGC variable premium cap, the PBGC savings will be in excess of $644 per retiree in 2021. In a low interest rate environment, it is likely your plan is at or close to the variable premium cap. Focusing on retirees with small benefits will help manage the cost of the pension risk transfer while maximizing savings. For more on current and historical rate information, click to see PBGC Premium Rates.

Economic Savings: Plan sponsors tend to focus on the cost of the annuity premium versus the accounting liability. However, the accounting liability ignores on-going expenses related to running the plan. These expenses include PBGC premiums, administrative costs and investment costs. The “economic cost” of the plan’s liability is the accounting liability plus these additional costs. The annuity premium when compared to the economic cost typically results in overall savings for the plan sponsor even in a low interest rate environment. This is especially true when the plan is at the PBGC premium variable cap.

Competitive Market: There are currently about 10 to 15 insurers actively buying retiree liabilities from pension plans. Based on the size of a particular annuity premium, a plan sponsor can expect to receive quotes from about half of the insurers in the market. Insurance companies can be competitive with their retiree annuity premiums because they have a lot of experience predicting mortality for retirees. In addition, retiree annuities offer a good offset to life insurance risk.

Capacity: Insurance companies currently have capacity to buy retiree annuities. If interest rates rise significantly and many more pension plans start looking to sell annuities, will the insurance companies have capacity to take on a flood of new pension risk transfers? Additionally, with the basic laws of supply and demand, if there is a large supply of plan sponsors wanting to do pension risk transfers, will the annuity premium be as attractive when compared to the economic cost of the retiree liability? We believe a spike in current low interest rates could reduce capacity and pricing competitiveness.

US single premium buyout sales in low interest environment for pension risk transfer

Reasons Against Pension Risk Transfer (But Consider it Anyway)

Higher Minimum Required Contributions: A retiree pension risk transfer is likely to increase the minimum required contribution of a plan due to differences in assumptions used to determine minimum required contributions. Because minimum funding requirements are allowed to use more aggressive assumptions, the difference between the insurance premium paid and the liabilities released creates a loss to the plan. This loss is amortized and paid over the next seven plan years. However, the increased contributions are typically viewed as an acceleration of future contributions. As the minimum required interest rates drop, future contributions will increase if the retirees remain in the plan.

Settlement Accounting: A full retiree pension risk transfer is likely to trigger settlement accounting for a pension plan. This settlement accounting typically results in a one-time charge to the income statement. Depending on the sensitivity of one-time charges for a particular company, this could be an obstacle. However, a settlement is a “below-the-line” cost under ASU 2017-7. This makes settlements less of an issue for many companies. Additionally, even if settlements are an obstacle for your company, performing multiple smaller pension risk transfers with smaller premiums over a number of fiscal years can be a way to avoid settlement costs.

Plan Not 80% Funded: Annuities cannot be purchased for a plan that is not 80% funded on a PPA interest rate relief basis unless the plan sponsor makes some immediate funding to the plan. However, the 80% funded status threshold is determined based on a smoothed interest basis. As a result, the funded status of many plans is more than 80% even in this low interest rate environment.

Interest Rates Will Rise: For years, there has been talk that interest rates must go up. However, they continue to remain low. In a low interest rate environment, it makes sense to monitor interest rates. Plan sponsors should consider being ready to buy annuities by getting their data ready and setting a targeted annuity premium. They can then monitor the impact of changing interest rates. Once the target is met, they will be ready to move quickly with the pension risk transfer.

Pension Risk Transfer Takeaways

With the current market volatility and extreme swings in interest rates, we don’t expect many plan sponsors to move forward with a pension risk transfer for retirees in the near-term. However, if markets stabilize and interest rates begin to rise consistently, insurance companies will likely be eager to close some deals. This could result in attractive pricing.

It’s never too early to start planning for a pension risk transfer. As a first step, we suggest performing a financial analysis to determine the impact of a pension risk transfer for retirees. With this financial information, most plan sponsors can be positioned to move quickly and recognize the right time to buy annuities for retirees even in a low interest rate environment.

To learn more, contact Larry Scherer at 216.875.1920 or

Published March 25, 2020

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Taking Public Sector Retiree Medical To The Next Level

Faced with the sobering reality of more than $1 trillion in unfunded retiree healthcare liabilities, public sector employers across the country are seeking a sustainable retiree health benefit solution. Their shift to relying on retiree health insurance exchanges will not be without challenges or concerns. One solution that is just starting to be used is to work with state legislatures and make benefit changes that allow public sector employees to convert unused sick leave into retiree health insurance credits.

Numerous plan sponsors for public sector organizations may already be using – or contemplating the use of — retiree healthcare insurance exchanges to facilitate purchase of pre-65 individual policies or Medicare supplemental benefits. As public sector employers review this option, they should consider issues that may arise if future cuts are made to retiree medical stipends. What will be the exchange-based solution?

Earlier this year, the Ohio Public Employees Retirement System (OPERS) announced that serious financial pressure will result in significant reductions in stipends for retiree health benefits. The cuts for pre-65 retirees may be as much as $400 per month and will affect retirees including police and fire department pensioners. Although the mandatory retirement age for a public safety officer may be 65, many police officers and firefighters retire well ahead of Medicare entitlement, because of health status and long service.

According to a January 16, 2020 article, the changes will reduce OPERS unfunded healthcare liabilities from $6.2 billion to $27 million. Officials from OPERS said the $11 billion healthcare fund was set to run out of money in 11 years, but with the changes that will be implemented beginning in 2022, the fund will be solvent for 18 years.

In addition to cutting premium subsidies for retirees in 2022, healthcare coverage will no longer be provided through OPERS. Retirees will receive an OPERS subsidy to be used toward the purchase of healthcare coverage through the healthcare marketplace.

public sector employers across the country are seeking a sustainable retiree health benefit solution

Look beyond HSAs

It is evident that there is an acute need for public sector employers to accumulate funds for retiree medical benefits while the plan participant is actively employed. While Health Savings Accounts (HSAs) provide an opportunity for employees to create a nest egg, implementing a qualified high deductible health plan for collectively bargained public sector groups remains a challenge. In addition, these high deductible plans are not immune to problematic healthcare trends, including how high cost specialty drugs can ravage an employer’s (and employee’s) health benefits budget.

An alternative to an HSA, Health Reimbursement Accounts (HRAs) do not need to be paired with a high deductible plan, but the employer contributions are typically modest and easily consumed by out-of-pocket medical, prescription drug, dental and vision expenses. For instance, according to Mercer’s 2018 National Survey of Employer Sponsored Health Plans, the median HRA annual contribution for those with single coverage was just $625.

A better mechanism is needed to establish funds for public sector retiree medical benefits – and the states of New York and Wisconsin may be on the right track. New York’s policy allows eligible state employees to cover some retiree health insurance costs with unused sick leave, while in Wisconsin, the Accumulated Sick Leave Credit Conversion Program allows state employees covered by the State Group Health Insurance Program to convert unused sick leave into credits to pay for health insurance when they retire. The credits cannot earn interest or be used to pay for insurance that is not part of the State Group Health Insurance Program.

Since most employers, public sector and private, are interested in reducing health care liabilities and not subsidizing retirees under their active employee health benefits plan, the Wisconsin approach – with some important tweaks — is an intriguing solution that should be considered in other states.

Retiree medical’s future: Sick leave conversion, HRAs and marketplace options?

First, the decision to convert unused sick leave into health insurance credits should be left to each retiring employee without triggering a taxable event. In 2005, the Internal Revenue Service (IRS) issued Revenue Ruling 2005-24 that allowed employers to use sick leave and vacation conversion programs to fund an HRA, as long as the employees did not have the option to take these converted amounts in cash. Then, in 2007, the IRS issued a Private Letter Ruling (PLR 200708006) indicating the sick leave and vacation conversion arrangement did not result in taxable income if the employer mandates what unused amounts would be converted to cash, contributed to the HRA, or used to pay other benefits.

In other words, the employee has no say in any of these important decisions.

Second, the retiree should not be forced into remaining in their former employer’s group health plan. They should have the ability to shop the insurance marketplace for a plan and medical provider network that meets their needs.

Third, the retiree should be able to decide how to spend the HRA funds. Even the new Excepted Benefit HRA unveiled last year by the Trump administration (where up to $1,800/year may be contributed by the employer) does not allow the HRA to be used to pay premiums for Medicare Parts B or D; individual health insurance (except for short-term limited duration insurance); group insurance coverage (except COBRA); or Medicare supplements or Advantage plans.

Although a traditional HRA or Retirement HRA may allow payment of premiums for Medicare or long-term care insurance; and if using a trust, accept employee/retiree after-tax contributions and accrue interest tax-free, there is still the issue that conversions of unused sick leave must be made on a mandatory basis by the employer. The employee cannot make such an election before retirement.

As state legislatures consider strategies to deal with the ever growing costs of providing retiree healthcare, the option of new legislation that would permit state and local governments to create sick leave conversion programs that would enable their retirees to use those funds to help pay for health insurance purchases on or off an insurance exchange. To give employees more control over the conversion to credits, there would have to be some changes to the employer’s  IRC 125 cafeteria plan.  The approach could provide a more sustainable bridge to Medicare for those public sector employees who retire before age 65.

We are interested in your thoughts about this topic. Please contact Bruce Davis with your comments and questions at or 419.327.4133

Published March 24, 2020

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Could You Be Supporting a Hidden Retiree Health Plan?

A retiree health plan is when ex-employees are provided for or allowed to purchase health care through their former employer. 

Sponsoring a hidden retiree health plan happens more often than you might think. Having even an informal policy of extending active health benefits to retirees and charging the “full” active premium or supplementing retiree health benefit coverage for some time are two examples of creating a retiree health benefit plan and incurring the accompanying plan liability for health benefits promised in the future.

Could You Be Supporting a Hidden Retiree Health Plan?


1) ABC Company has a fully insured medical plan for its active employees. ABC pays 60% of the premium. The employees pay the rest. The employee handbook has a paragraph that reads, “If you retire from active service after age 60 with 15 years of service, you may remain in the health insurance plan until age 65. You will pay the employer and employee portion of the premium.”

2) Ten years ago, XYZ Company had an executive retire at age 60. He had been with the company for 17 years. He was allowed to stay on the active medical plan until age 65. He had to pay the employer and employee portion of the premium. All staff received an email at the time stating that this was now available to all employees who retire after age 60 with 15 years of service. The language in the email never made it in the employee handbook, but it was a well-known policy.

3) MNO Corporation has a collective bargaining agreement with its union that provides $150 per month for medical coverage for anyone who retires before age 65. Coverage ends at age 65, and the participants must purchase the coverage from MNO.

ABC, XYZ, and MNO have retiree medical plans and might need to recognize a liability on their balance sheets and annual expense on their income statements for the promised benefits.

Why is There a Liability?

The question often asked in regards to ABC and XYZ is, “The retiree pays the full cost of the premium. It costs the company nothing. Why is there a liability?”

There are two parts to the answer. The first part is in the way the premium is calculated for the active health plan. The insurance company calculates the premium rates for the entire population, including retirees. Since these retirees are older, their premium amounts are higher than for younger employees in the plan. Without the retirees in the plan, the total premium would be lower, and thus, the employer portion would be lower.

Looked at another way, if you could calculate a hypothetical premium rate for just the retiree group, it would be much higher due to their ages. The difference between the hypothetical premium level and the “full” active premium charged for medical coverage is called a “hidden subsidy.”

The second part is from the accounting standard ASC 715-60-05-2 which states, “a postretirement benefit plan is an arrangement that is mutually understood by an employer and its employees whereby an employer undertakes to provide its current and former employees with benefits after they retire in exchange for the employees’ services over a specific period of time.”

This second part of the above answer also applies to the MNO Corporation example. Their annual cost for the retirees may seem minimal and recorded as an annual payroll and benefits cost along with the active medical plan. However, for all three companies, the retirees are not receiving benefits as a part of their compensation while working. The retiree benefits accrue while working but are paid after retirement.

This promise of future benefits can trigger a liability to recognize on the balance sheet and an annual expense that runs through the income statement.

How Does an Employer Know if They Need to Recognize a Liability?

The employer should discuss it with their auditors. Depending on the circumstances, an auditor could consider it de minimus or may request that an actuary measure the liability before providing an opinion about the impact on the company financials.


If the auditor does not consider it de minimus, in arrangements like ABC’s or XYZ’s, a company could charge the retiree more than the active premium –something more like the above hypothetical premium. (An actuary or healthcare consultant can help you set a hypothetical rate.) The hypothetical rate would remove the “hidden subsidy” and reduce the costs to a de minimus level. Additionally, the increased cost of coverage may cause retirees to look elsewhere for more affordable coverage.

Alternatively, if the employer wants to keep an arrangement that is not de minimus, then it will need to engage an actuary to perform annual valuations for financial reporting purposes.

If you have questions or would like to discuss any formal or informal arrangements you have in place for your retirees, contact David Davala at 216.875.1923 or

Published July 12, 2019

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