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Towers Watson risk transfer program aims to offload retiree health care risks


A program that applies aspects of the pension plan risk-reduction concept to employers' retiree health care exposures could provide financial relief to some employers, experts say.

But the significant upfront investment needed might be a deterrent, some say. The program, unveiled last week by Towers Watson & Co., would enable employers to eliminate unfunded retiree health care plan liabilities for Medicare-eligible retirees by shifting those liabilities to insurers through the purchase of group annuities.

“Retiree health care plan liabilities are a big, big issue for some employers,” said Michael Newman, a partner with the law firm Barger & Wolen L.L.P. in Los Angeles. “A lot of employers want to defuse those liabilities, but many will wait and see” for results before deciding, Mr. Newman said.

Under the program, employers would first have to adopt a defined contribution approach for health care coverage offered to Medicare-eligible retirees. Under that approach, employers agree to make a fixed contribution towards the premiums of health care plans available through Towers Watson's private exchange, with retirees picking up the difference between the credit provided by their employers and the cost of the plan they select.

In the risk transfer program, the employer would purchase, paying the full premium upfront, a group annuity from an insurer. The insurer then would provide retirees with a monthly tax-free check, which a retiree would put towards the premium of the plan he or she selects in the Towers Watson Exchange, known as OneExchange, through which dozens of insurers offer coverage.

Through the approach, which Towers Watson calls Longitude Solution, an employer would fully shift its retiree health care liabilities, including unknown factors of retiree longevity, to an insurer.


Retiree health care “benefits do not engage or attract new talent, yet they create balance sheet volatility and income statement expense, and divert management time,” Towers Watson said in a written analysis describing the program, claiming those factors would be eliminated through its risk transfer approach.

“This seems to be answering an employer need: to make retiree health care costs more predictable,” Mr. Newman said.

Towers Watson now is discussing the approach with clients “and there is considerable employer interest,” said Mitchell Cole, Stamford, Conn.-based managing director of Towers Watson Retiree Insurance Solutions. Towers Watson declined to identify the names of these employers.

“It is a risk management mechanism. It will be undoubtedly used more and more. Some employers will flock to it because it limits their risks,” said Brian Klepper, chief executive officer of the National Business Coalition on Health in Washington.

“It is an interesting option for companies to consider especially those that want to eliminate retiree health care obligations from their financial balance sheets,” said Michael Thompson, a principal with Pricewaterhouse-Coopers L.L.P. in New York.

Still, experts say, employers have to consider other issues. For example, unlike pension benefits, employers typically have not funded retiree health care benefits. That would mean employers would have to come up with the cash upfront to pay for the group annuity from the insurer they selected.

“Employers would have to write a pretty big check. Many companies would rather pay this cost annually than write such a big check right away,” said John Grosso, head of Aon Hewitt's retiree health care task force in Norwalk, Conn.


The approach is a tradeoff, said Bruce Richards, a partner and chief actuary for health care at Mercer L.L.C. in Richmond, Va.

On the one hand, employers could improve their balance sheets, which Mr. Richards said, is a good way for employers to improve their credit ratings.

“This will help in keeping your income and balance sheets clean,” Mr. Richards said.

On the other hand, purchasing the annuity means an employer will have less money for investments from which it could have earned income, Mr. Richards said.

Such risk transfers have been common in the pension arena. In 2012, for example, more than a dozen major employers, including Equifax Corp., Lockheed Martin Corp., NCR Corp. and the New York Times Co., offered employees who left but who were not yet receiving benefits, the opportunity to convert their future monthly annuity into a cash lump sum benefit, eliminating an unpredictable future cost and overhead expenses, such as payment of premiums to the Pension Benefit Guaranty Corp.

Also, General Motors Co. and Verizon Inc. bought group annuities from Prudential Insurance Co. of America, shifting to Prudential billions of dollars in pension benefits promised to current retirees.