OPEB Investments – The Danger of Playing It Safe

CautionUnder GASB 43 and 45, public sector employers are required to account for retiree medical benefits under special rules for Other Post-Employment Benefits (OPEB).  Many have chosen to pre-fund these liabilities in a trust similar to a retirement plan trust.  At the recent Minnesota School Board Association convention, Van Iwaarden Associates teamed up with an investment advisor to emphasize how actuaries and investment advisors should work together to develop a prudent investment policy based on projected benefit payments.

Most policy makers at public sector employers are not investment experts nor are they experienced with pre-funding long term liabilities.  Too often, the decision is made to invest trust assets in “safe” investments just as they do with operating funds.  This is potentially a major mistake, especially now with short term interest rates near zero!

The best practice is to pre-fund retiree medical liabilities and to invest the trust assets in a way that is consistent with the projected cash flow.  Certainly, a substantial portion of the assets should be invested for the short term to meet short term cash flow.  However, the balance of the assets should be invested for the long term to meet projected cash flows twenty to thirty years away.

The recommended action plan for decision makers includes:

1.    Estimate the projected life of the OPEB Trust
2.    Review investment policy and its handling of OPEB
3.    Amend policy and investment strategy appropriately

A detailed actuarial report is the start of the process to manage OPEB liabilities and assets.  The actuarial report can and should be much more than just a perfunctory exercise to meet GASB accounting requirements.
The full presentation can be found through this link.

“Measure It Before You Promise It” for GASB 45 OPEB

Over the past several years, GASB 45 has required public employers to recognize the cost of Other Postemployment Benefits (OPEB: e.g., retiree health insurance, life insurance) while employees are accruing the benefits, not after they retire. For many public entities, the true cost of their healthcare promises has been an eye opener.

However, public employers (especially local entities) should remember that GASB-type calculations are valuable in the “off-season” too. This post discusses one of the biggest missed opportunities for cost-saving: Measuring the cost impact of changes to retiree OPEB before contracts are signed.

In the corporate world, it is almost unheard of for employers to adjust their retiree benefit promises without first measuring the cost impact. This is especially true of collectively-bargained pension and retiree health plans. Both sides hire an actuary to estimate the cost of these benefits and bring their numbers to the table.

However, many local public entities may not be used to this process yet. During the biennial GASB 45 valuation process, we still encounter contractual changes to retiree benefits that occurred after the prior actuarial study but were not reported to us in the interim. There are two main problems with this approach:

  1. It’s not prudent to make or change benefit promises without estimating the cost impact. Suppose an employer is renegotiating a contract and there is a proposal to change the retiree health benefit from “fully-paid single premiums until age 65” to “fully-paid family premiums for up to 5 years”. Is this a cost increase or decrease? There’s no way to know unless you measure the cost beforehand.
  1. GASB 45 requires a full actuarial valuation if there is a significant change in benefit promises.  As we discussed in a previous post, public employers shouldn’t wait until the next scheduled actuarial study (2 or 3 years, depending on plan size) to reflect significant plan changes in their financial statements.

As public employers get acquainted with valuing the actuarial cost of their OPEB benefits for GASB 45 financials, they should embrace the philosophy of “measure it before you promise it” for any changes to these benefits. Public sector OPEB are becoming front page news and administrators must proceed cautiously when adjusting benefits or making new promises.

Top Reasons to Change Your GASB 45 Valuation Schedule

GASB 45 requires a complete actuarial valuation of public retiree health plans to be completed every 2 to 3 years (depending on number of plan members), and sponsors usually don’t look forward to the administrative hassles of their next study. However, there are several situations where a new valuation could be advantageous and, likely, mandatory.

In addition to the standard 2 or 3-year cycle, GASB 45 rules also state that:

“A new valuation should be performed if, since the previous valuation, significant changes have occurred that affect the results of the valuation, including significant changes in benefit provisions, the size or composition of the population, … or other factors that impact long-term assumptions.”

Below are some factors which can compel a new valuation sooner than the standard 2 or 3- year cycle:

  • Establishing an OPEB trust.
    • If a revocable trust is established, then this won’t change the unfunded liability for accounting purposes, but it can affect the liability discount rate. See our previous post on the effect of OPEB trusts on GASB 45 discount rates.
    • If an irrevocable trust is established, the discount rate may be impacted and the assets will decrease the plan’s unfunded liability. This will likely reduce the GASB 45 annual accounting expense (Annual OPEB Cost).
  • Large change in retiree health benefits. This includes changes to plan coverage levels (e.g., deductibles and co-pays), premiums, or eligibility for benefits.

If employment contracts are amended to scale back (or increase) the amount of retiree health benefits paid by the employer, then this can have a big impact on plan liabilities as costs are shifted to retirees. See our previous post on the leveraging effect of OPEB liabilities.

Plan changes will affect the per-member costs and will likely affect future assumptions about retiree participation in the plan. A new valuation should be performed to capture this liability increase (or decrease) as soon as possible for the year of change.

  • Large change in number of employees or retirees. If there are significant employee layoffs/retirements or if many retirees drop coverage due to increasing costs, then a new valuation may be needed to accurately capture the effect on the plan’s GASB 45 liabilities.

There are likely many other scenarios which would require a new GASB 45 study. This is especially true in the case of a plan on the 3-year cycle where there is an increased likelihood of a significant change in the “off-cycle” periods.

It’s now or never for ERRP application

We all knew this day would come, and now it’s here.  New applications for the Early Retiree Reinsurance Program (ERRP) will be received only until 5 pm on Thursday, May 5th.

The last time we blogged about this, the ERRP money was going fast.  Now the urgency is clear.

So if you’ve been thinking about applying, it’s now or never.   Elvis says so.

ERRP funds are going fast, but employers still have time to act

billion of the original $5 billion has now been paid out under the Early Retiree Reinsurance Program (ERRP), according to an article this month in Business Insurance.

We’ve been watching the ERRP since its inception (posts 1, 2, 3, 4), and didn’t think the $5 billion allocation would last long. A July 2010 EBRI article estimated that it would last two years – and it might go even faster than that.   The EBRI article estimates the average reimbursement at about $2,000 per early retiree (Figure 4 on page 5: $2,544m / 1.3m = $1,957) – but there can be huge variations for  your own retiree group.

Many of our clients have applied for the ERRP and have been accepted. For employers that haven’t yet, there’s still time.  And the application process isn’t as onerous as it initially appeared.

Here’s what you need to do:

1. Check with your health insurer to see if you’re likely to have any individual early retiree claims above $15,000.  For midsize and large public-sector employers in Minnesota, Iowa, Indiana and Florida it’s almost a given – because subsidized early retiree coverage (the GASB 45 implicit rate subsidy) is mandated in those states.

2. Fill out and submit the ERRP application. Your health insurer can help with the trickiest parts of the application, i.e. cost control provisions and estimated reimbursements.

3.  Once your application is approved, follow the process on the ERRP website to obtain reimbursements. Your health insurer will have an important role in the reimbursement process, since you won’t usually know when you have an eligible claim.


$1 billion has now been paid out under the Early Retiree Reinsurance Program (ERRP), according to an article this month in Business Insurance http://www.businessinsurance.com/article/20110105/BENEFITS06/110109965.
We’ve been watching the ERRP since its inception (link to previous posts), and didn’t think the $5 billion allocation would last long.  A July 2010 EBRI article http://www.ebri.org/pdf/notespdf/EBRI_Notes_07-July10.Reins-Early.pdf estimated that it would last about two years – but it might go faster than that.
Many of our clients have applied for the ERRP and have been accepted.  For employers that haven’t yet, there’s still time.  And the application process isn’t as onerous as it initially appeared.
Here’s what you need to do:
1.  Check with your health insurer to see if you’re likely to have any individual early retiree claims above $15,000.  For midsize and large government employers in Minnesota, Iowa, Indiana and Florida it’s almost a given – because subsidized early retiree coverage (the GASB 45 implicit rate subsidy) is mandated in those states.
2.  Fill out the ERRP application www.errp.gov/download/ERRP_Application.pdf.  Your health insurer can help with the trickiest parts of the application, i.e. cost control provisions and estimated reimbursements.  The EBRI article http://www.ebri.org/pdf/notespdf/EBRI_Notes_07-July10.Reins-Early.pdf estimates this at about $2000 per early retiree (Figure 4 on page 5:  $2,544m / 1.3m = $1,957) – but there can be huge variations depending on your own retiree group.
3.  Once your application is approved, follow the process on the ERRP website www.errp.gov/index.shtml to obtain reimbursements.  Your health insurer will have an important role in the reimbursement process, since you won’t usually know when you have an eligible claim.


OPEB Trust Investment Return

Many municipalities, school districts, and other governmental entities have established OPEB trusts as a way of starting to prefund their postretirement benefit promises to employees. In addition to the perceived fiscal responsibility of prefunding OPEB benefits, setting aside assets can also help the plan sponsor’s GASB 45 accounting.

This post deals with certain situations where the anticipated accounting relief from establishing an OPEB trust isn’t as great as expected. This generally occurs when trust assets are invested in very conservative investments and/or a revocable trust is established instead of an irrevocable trust.

Recall the following two important items that affect GASB 45 accounting:

– The Unfunded Actuarial Accrued Liability (UAAL). This is the portion of accrued liability for which dedicated assets have not yet been set aside. The UAAL is a significant determinant of the annual GASB 45 accounting expense.

– The discount rate is the basis for determining the present value in today’s dollars of expected future OPEB payments. It is based on the long-term expected return on assets that will be used to pay OPEB benefits. The higher the discount rate, the lower the present value of liabilities.

Read more…

PPACA Starting to Impact Retiree Health Plans

In the retiree benefits world, there is a general consensus that several provisions in the Patient Protection and Access to Care Act (PPACA) may cause employer sponsors of retiree health plans to rethink those programs. These changes include:

– Filling of the Part D “doughnut hole” (2010-2020)

– Guarantee issue insurance with no pre-existing condition exclusions (2014)

– Health insurance exchanges (2014)

These reforms, along with others, will potentially make it less expensive for a retiree to get coverage on the “open market” rather than through their employer-sponsored program. This could be especially true if the retiree only has access to the employer plan and is paying the full premium for coverage.

As reported in the Minneapolis StarTribune recently, 3M is one of the first large employers to disclose that they plan to end their retiree health plan because they feel retirees will likely be able to get better coverage for a lower price under the PPACA reforms. Whether this is a bellwether remains to be seen.

However, the decision to end a retiree health program in anticipation of the full effect of health care reform raises some important issues:

– For retirees who have been on the employer plan for many years, how are they being prepared to “go into the market” and select health insurance?

– If the PPACA provisions are modified or repealed before they fully go into effect, how will this change the insurance options (and costs) for retirees whose employers have decided to eliminate their retiree health plans?

– Would an employer consider reinstating their retiree health plan if PPACA is repealed?

ERRP Reimbursement and Website Update

A quick update on the Early Retiree Reinsurance Program (ERRP):  Over the past few months, the Department of Health and Human Services (HHS) has been busy gearing up for the implementation of the ERRP. As you may recall from our earlier posts (1, 2, 3), this is a program that’s part of the larger healthcare reform bill and is intended to help employer-sponsored retiree health plans by providing government reimbursement for certain large claim amounts.

Here’s a quick update on HHS’ progress to-date.

1. The HHS posted a new version of the final application to participate in the ERRP. It also clarified that priority status for claims reimbursement is not directly tied to the order your application is received, but rather the order that your claims reimbursement filing is received. Of course, you can’t file a claim reimbursement until your program participation application has been approved so that is still the first step.

2. The ERRP has its own website that does a good job of explaining the whole reimbursement process and contains links to all of the required forms. The application page also has links to several FAQ documents and detailed application instructions.

3. The “News” section of the ERRP website is likely going to be a busy place over the next few weeks and months as plan sponsors anticipate receiving the final details on how to submit their claims filings. Question C1 on the ERRP FAQ page states that HHS is still working on the infrastructure to begin accepting claims filings. The first step, completed on August 30, 2010, was to launch the secure webpage where plan sponsor’s can set up an account to submit claims (when that function is finally available).

4. There’s a neat page on the larger healthcare reform website which lets you see which retiree medical plans in your state have had their ERRP participation application approved already (use the drop-down menu on the bottom of the page to select your state).

GASB 45 Demographic Assumption Review

GASB 45 requires the measurement of public employers’ retiree health liabilities and many plan sponsors are now entering their second cycle of GASB 45 actuarial valuations.  These calculations are highly dependent upon the actuarial assumptions selected by the plan sponsor. Therefore, it’s a good idea to review these assumptions at each valuation cycle.

Many times, the assumptions used in the first GASB 45 valuation are rough estimates of a plan’s expectations for certain demographic events such as future retirees’ expected retirement age and the likelihood that a retiree will elect to enroll in the employer’s health plan. Once the initial GASB 45 actuarial valuation is complete, however, public employers should start monitoring their plan’s experience to ensure that their assumptions are consistent with what is actually happening. This post discusses some of the important demographic assumptions that should be monitored.

1. Retiree participation rates. This is the likelihood that a retiree will actually enroll in the employer’s health plan. If the plan only provides coverage and the retiree pays the entire premium, then it is likely that the participation rate is less than 100%. Plan sponsors should monitor their retirees each year and note how many actually elect coverage. This assumption is particularly powerful: if you decrease your participation assumption by 50% then your liabilities (at least for active employees) will decrease by 50% also. Read more…

Preparing to Apply for the ERRP Subsidy

We’ve had a couple of initial posts on the new Early Retiree Reinsurance Program (ERRP): the first one gave a quick overview of the amount of funds available, while the second post described options for spending the reimbursement. In this post, I’d like to give a quick overview of some actions plan sponsors can take now in order to speed up their initial application to participate in the ERRP.

The ERRP was designed with $5 billion in funding that will be available from June 21, 2010 until January 1, 2014, unless the money runs out first (very likely). So, it’s essentially first-come, first-served for employers who want to claim their share of the funds. In order to participate, however, a plan sponsor must first submit an application for approval by the Secretary of the Department of Health and Human Services.

As the regulations published on May 5, 2010 note, it is of “paramount importance to applicants that they submit complete applications upon their first submission.” Rejected applications will go to the “end of the line” for resubmission, and the regs hint these applications might not get reviewed again until it is too late (i.e., the ERRP funds are all gone). Fortunately, once a sponsor has the application accepted, they do not have to reapply in future years.

The HHS hasn’t released the actual application forms yet, but there are a few important actions that plan sponsors can take now so that they are able to submit their applications as quickly as possible. Plan sponsors should:

  • Figure out who their authorized representative will be. This person will sign the application and certify that it is true and accurate.
  • Draft a summary of how you will use the reimbursement money to reduce plan participant or sponsor costs.
  • Draft a summary of how you will implement programs and procedures to generate savings for plan participants with chronic and high-cost conditions. (This is one of the requirements of the ERRP program, but you should check whether your current plan already satisfies this condition so that you don’t unnecessarily change your plan provisions.)
  • Estimate your projected reimbursement amounts for the first two years of the ERRP. These projected amounts will be required on the application.
  • Identify all benefit options in your plan that are available to early retirees. The HHS will use this information to track where funds are being spent.
  • Make sure you can attest that there are fraud, waste, and abuse policies and procedures in place.

These are just a few of the items that plan sponsors are required to include in their ERRP application, but they are ones that you can proactively address. By preparing ahead of time, you can get an edge on your competitors in applying to receive ERRP funds.