7 Ways To Reduce Your OPEB
Parker Elmore, ASA, MAAA, EA, FCA
Ways To Reduce Actual Cash Costs As Well As Disclosed Plan Liabilities
While Paul Simon offered “50 Ways to Leave Your Lover”, the purpose of this is to offer 7 ways to reduce your OPEB Plan liabilities (both actual cash costs & the liabilities reported on your financial statement).
So, how can you reduce your OPEB Plan liabilities, reduce your cash costs and improve your financial statements? The ultimate cost of your Plan is the benefits received by your retired participants and their dependents. Therefore, policies or actions that reduce those costs will have the largest impact. Additionally, you can adopt certain policies and modify actuarial assumptions to reduce disclosed liabilities, but have no impact on the ultimate cost of the Plan. Your ability to make any or all of these changes may be limited by collective bargaining or state law so we encourage you to consult with counsel prior to making any unilateral changes to existing contracts.
Ways To Cut Actual Cash Costs
(And Also Lower Disclosed Liabilities)
- Change Medicare Prescription Drug Benefit
As most OPEB Plans see 80%-90% of the total liability related to benefits paid after attainment of Medicare eligibility, this is the most impactful area to make changes. We’ve seen plan sponsors modify their drug formulary which can reduce retiree medical cash costs by 10%-15% and OPEB Plan liabilities by 15%-20%.
- Make your Plan secondary to Medicare
If you haven’t already done so, you should mandate that those retirees who are eligible for Medicare enroll in it and allow your Plan to become a secondary payor.
- Change Eligibility
You may wish to consider changing the eligibility to receive these benefits either by raising the age or service requirement or both. Also, we have seen plan sponsors reduce or eliminate coverage for surviving spouses (this can cut 4%-5% of liabilities depending on your demographics).
- Change Cost Sharing
Our clients charge retirees anywhere from 0% to 100% of stated premiums. As you charge retirees more, your cash costs & disclosed liabilities will decrease. Beyond that, we are seeing plan sponsors vary contributions by age, service, age+service, retirement date, etc. This reduces costs in two ways (lower net premiums for the plan sponsor and the likelihood that fewer people will elect to take benefits).
Assumptions & Policies That Reduce Disclosed Liabilities (But Not Cash Costs)
- Funding Policy
If you’ve been reading our GASB 75 white papers, you know that the choice of discount rate is dependent upon your level of funding (as well as your investment policy). As you fund more, you may use a higher discount rate and therefore see lower disclosed plan liabilities.
- Investment Policy
This represents your investment allocation decision (e.g., 60% equities, 30% fixed income & 10% cash). As your investment policy becomes more aggressive (AND assuming you have material funding), you may use a higher discount rate which will again reduce disclosed plan liabilities.
- Actuarial Assumptions
While the assumptions must represent the actuary’s best estimate of future behavior, there are a range of potential assumptions for medical trend, participation rate, spousal coverage rate, mortality, retirement age, etc. While changes in these assumptions can significantly impact disclosed plan liabilities, they do not change the actual cost of the Plan.Now, Paul Simon promised 50 ways to leave your lover, but if you listen he only gave you 5*. We promised 7 ways to reduce your OPEB (GASB 45/75) liability and we’ve delivered. And, if you’ve made it this far, we’re offering a special bonus way to cut your costs:
- Use Of ACA Exchanges For Early Retirees
We find most plan sponsors offer retirees a one-time choice upon retirement to enroll in the medical plan or lose that option going forward. However, for many retirees, the ACA exchanges would offer lower premiums for comparable coverage given the retiree’s income and premium subsidies. But, they are unlikely to choose the ACA Exchanges as they would then forfeit the Plan’s coverage upon Medicare eligibility. So, we encourage plan sponsors to consider a 2nd election period upon Medicare eligibility as well as educating their early retirees about the ACA exchanges. This would provide cash relief to the plan sponsor, a modest reduction in disclosed plan liabilities and lower costs for the retiree.
We continue to issue guidance at GASB75.com as well as our website so feel free to check those out to learn more.
* And, the five ways Paul Simon shared to leave your lover are as follows (perhaps the others were left for a sequel):
- Slip out the back, Jack
- Make a new plan, Stan
- You don’t need to be coy, Roy, just set yourself free
- Hop on the bus, Gus
- Drop off the key, Lee, and get yourself free