Post retirement benefits
What Is Post retirement benefits?
Post retirement benefits are a form of employee benefits provided by an employer to employees after they have retired from the company. These benefits typically include non-pension offerings such as healthcare, life insurance, dental care, vision care, and other forms of financial support57, 58. As a component of broader employee benefits and a critical element of financial planning, post retirement benefits aim to provide retirees with continued security and support beyond their working years56. While often employer-paid, retirees may share costs through co-payments or deductibles.
History and Origin
Historically, many employers, particularly large corporations and public sector entities, offered comprehensive post retirement benefits as part of a robust compensation package designed to attract and retain talent55. Early forms of such benefits often operated on a pay-as-you-go basis, where employers funded benefits as they became due, rather than pre-funding them over an employee's service life54.
However, the landscape significantly shifted with the introduction of new accounting standards. For private companies, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1990 (now codified as ASC 715). This standard marked a significant change by requiring employers to accrue the estimated cost of these benefits over the employees' working careers, rather than simply expensing them when paid53. Similarly, for state and local governments, the Governmental Accounting Standards Board (GASB) introduced Statement No. 45 and later Statement No. 75, "Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (OPEB)," which mandates that the net liability for other postemployment benefits (OPEB) be reported on the face of the financial statements50, 51, 52. This shift highlighted the substantial, often unfunded, liabilities associated with these promises.
The rising healthcare costs in the U.S. have also played a significant role in the evolution of these benefits. A 2012 economic letter from the Federal Reserve Bank of San Francisco highlighted how increasing healthcare expenses created financial challenges for employers offering retiree health plans [https://www.frbsf.org/economic-research/publications/economic-letter/2012/march/retiree-health-care-costs/]. This trend has led many companies to scale back or eliminate these benefits, impacting the financial outlook for retirees.
Key Takeaways
- Post retirement benefits are non-pension benefits like healthcare and life insurance provided by employers after an employee retires.49
- Accounting for these benefits involves complex actuarial estimates of future costs, which are recognized as liabilities on an employer's financial statements.46, 47, 48
- Unlike many pension plans, post retirement benefit plans, particularly those for healthcare, are often unfunded or significantly underfunded, creating substantial liabilities for employers.44, 45
- The rising cost of healthcare and changes in accounting standards have led many employers to reduce or eliminate these benefits.42, 43
- For individuals, understanding available post retirement benefits is crucial for comprehensive retirement planning.
Formula and Calculation
The calculation of post retirement benefits, particularly for defined benefit plans, involves actuarial estimations to determine the Accumulated Postretirement Benefit Obligation (APBO) or Total OPEB Liability (TOL) for public entities41. The APBO represents the present value of all future post retirement benefit payments attributed to employee service rendered to date40.
The net periodic post retirement benefit cost recognized by an employer typically includes:
- Service Cost: The actuarial present value of benefits attributed to employee service during the current period.
- Interest Cost: The increase in the APBO due to the passage of time, calculated by multiplying the discount rate by the beginning APBO.
- Expected Return on Plan Assets: A reduction in cost if the plan is funded, based on the expected long-term rate of return on investments.
- Amortization of Prior Service Cost/Credit: The systematic recognition of the cost of plan amendments over the remaining service period of employees.
- Amortization of Actuarial Gains and Losses: The deferred recognition of changes in actuarial assumptions or actual experience different from assumptions.38, 39
While a single universal formula for the total expense can be complex due to these components and deferred items, the core objective is to measure the present value of the accrued liability for future benefits.
The funded status of a post retirement benefit obligation is determined by comparing the accumulated postretirement benefit obligation (APBO) to the fair market value of any plan assets37. If plan assets exceed the APBO, the plan is overfunded; if assets are less than the APBO, the plan is underfunded, resulting in a liability on the balance sheet36.
Interpreting the Post retirement benefits
Interpreting post retirement benefits involves understanding both the employer's financial obligations and the employee's prospective security. From an employer's perspective, the magnitude of the accumulated post retirement benefit obligation and its funding status as reported on financial statements provides insight into long-term financial health34, 35. A large unfunded liability can indicate future financial strain and may affect a company's creditworthiness or ability to invest in other areas. For public entities, high unfunded OPEB liabilities can strain municipal budgets and impact the provision of public services.
For employees, the presence and generosity of post retirement benefits directly impact their ability to manage healthcare costs and other expenses in retirement33. These benefits can significantly reduce the need for personal savings to cover these expenses, thereby enhancing financial security. The terms of these benefits, including any required employee contributions or eligibility criteria, are vital for individuals to consider in their personal retirement planning.
Hypothetical Example
Consider "TechCorp," a fictional company that offers its employees post retirement healthcare benefits. Under the plan, TechCorp promises to cover 75% of eligible healthcare expenses for employees who retire after 20 years of service.
As of December 31, 2024, TechCorp has 1,000 active employees, with an average remaining service period of 15 years until retirement. Based on actuarial assumptions for factors like employee turnover, mortality rates, and future healthcare cost trends, TechCorp's actuaries estimate the Accumulated Postretirement Benefit Obligation (APBO) for current and past service to be $500 million.
During 2025, employees render additional service, increasing the APBO. TechCorp's calculated service cost for 2025 is $20 million. The interest cost on the beginning APBO (assuming a 5% discount rate) is $25 million. If TechCorp has $50 million in plan assets that earned an actual return of $3 million, the net periodic post retirement benefit cost recognized for 2025 would be calculated by combining these elements, alongside any amortization of prior service costs or actuarial gains/losses. The overall financial picture for TechCorp would show a significant long-term liability on its balance sheet, representing its commitment to future retiree healthcare.
Practical Applications
Post retirement benefits have several practical applications across different sectors:
- Corporate Financial Reporting: Companies providing these benefits must meticulously account for them in compliance with generally accepted accounting standards, such as FASB's ASC 715 (formerly SFAS 106)31, 32. This involves estimating future obligations and recognizing them on their financial statements, affecting their balance sheet and income statement29, 30.
- Governmental Accounting: State and local governments are subject to GASB Statement No. 75, which mandates comprehensive reporting of Other Postemployment Benefits (OPEB) liabilities. This has brought greater transparency to the significant, often unfunded, long-term obligations of public entities27, 28. For instance, a 2021 report by The Pew Charitable Trusts detailed the varied funding status of state retiree health care liabilities and the challenges many states face in pre-funding these promises [https://www.pewtrusts.org/en/research-and-analysis/articles/2021/08/17/states-progress-on-paying-for-retiree-health-care-benefits-slows].
- Mergers and Acquisitions: During due diligence for mergers or acquisitions, potential buyers carefully evaluate a target company's post retirement benefit obligations to understand the full scope of its long-term liabilities.
- Collective Bargaining: In unionized environments, post retirement benefits, particularly healthcare, are a significant component of collective bargaining agreements, influencing labor relations and compensation discussions.
- Individual Retirement Planning: For employees, understanding the nature and extent of their employer-provided post retirement benefits is crucial for effective personal retirement planning. These benefits can significantly reduce future healthcare costs and other expenses in retirement, complementing personal savings and government programs like Medicare.
Limitations and Criticisms
Despite their importance, post retirement benefits, especially those related to healthcare, face significant limitations and criticisms. A primary concern is their often-unfunded nature. Unlike many defined benefit plan pensions, which are typically pre-funded through dedicated trusts, many post retirement healthcare plans operate on a pay-as-you-go basis25, 26. This means current expenses are paid from current revenues, creating large, unfunded future liabilities that can strain organizational finances, particularly for public sector employers24. The Pew Charitable Trusts has consistently highlighted the substantial unfunded liabilities for state and local government OPEB, with many states having very low funded ratios [https://www.pewtrusts.org/en/research-and-analysis/articles/2021/08/17/states-progress-on-paying-for-retiree-health-care-benefits-slows].
Another major challenge is the volatility and unpredictability of future healthcare costs. Unlike pension benefits, which often have a more predictable formula, healthcare expenses can escalate rapidly due to medical inflation, new technologies, and increasing life expectancies22, 23. This makes accurate actuarial assumptions difficult and can lead to significant revisions in estimated liabilities over time.
Furthermore, the tax treatment of contributions to post retirement healthcare plans in the U.S. has historically offered less incentive for pre-funding compared to pension plans, exacerbating the funding gap21. This lack of immediate tax deductibility for contributions to OPEB trusts, unlike pension trusts, disincentivizes employers from setting aside funds in advance.
As a result of these challenges, many employers, especially in the private sector, have either curtailed or eliminated post retirement healthcare benefits for new hires, shifting more of the burden onto individuals19, 20. This trend, documented by organizations like the Kaiser Family Foundation, indicates a significant decline in employer-sponsored retiree health coverage over the past few decades [https://www.kff.org/report-section/employer-health-benefits-2016-annual-survey-section-10-retiree-health-benefits/].
Post retirement benefits vs. Pension plan
While both fall under the umbrella of long-term employee benefits designed to support individuals after their working careers, post retirement benefits and a pension plan differ significantly in their nature and typical funding.
| Feature | Post retirement benefits | Pension Plan |
|---|---|---|
| Primary Type | Non-pension benefits, most commonly healthcare (Other Postemployment Benefits - OPEB), life insurance, dental, vision.18 | Primarily income stream payments (annuities) based on years of service and salary.17 |
| Predictability | Less predictable, especially healthcare costs, which lack a natural upper bound.16 | Generally more predictable, based on defined formulas (for defined benefit plans) or accumulated contributions (for defined contribution plans).15 |
| Funding | Often unfunded or on a pay-as-you-go basis, leading to large accrued liability.13, 14 | Typically pre-funded through dedicated trusts or accounts; can be defined benefit plan or defined contribution.11, 12 |
| Regulation | Less subject to ERISA for private entities; primary regulation is accounting standards (FASB, GASB).9, 10 | Heavily regulated by ERISA (Employee Retirement Income Security Act) for private entities; also subject to IRS and DOL rules. |
| Service Linkage | Often "all or nothing" based on meeting certain service thresholds (e.g., 10 years for full benefits).8 | Benefits typically increase with each year of service.6, 7 |
The distinction is crucial for both employers managing their long-term financial obligations and employees planning their financial future. The challenges of predicting and funding post retirement healthcare costs are often more complex than for a traditional pension.
FAQs
Q: What is the most common type of post retirement benefit?
A: The most common type of post retirement benefit is employer-provided healthcare coverage, often referred to as Other Postemployment Benefits (OPEB).5
Q: Why are post retirement benefits a concern for employers?
A: Post retirement benefits can represent significant long-term financial obligations for employers, especially healthcare benefits, due to rising costs and the often-unfunded nature of these promises.3, 4 Accounting standards require these liabilities to be recognized on financial statements, impacting financial health.
Q: Are post retirement benefits guaranteed?
A: No, post retirement benefits are generally not guaranteed in the same way that many pension benefits might be. Employers often retain the right to modify or terminate these benefits, particularly in the private sector, given the unpredictable nature of future costs.
Q: How do post retirement benefits affect my personal financial planning?
A: Understanding your employer's post retirement benefits is vital for your retirement planning. These benefits, especially healthcare coverage, can significantly reduce your out-of-pocket expenses in retirement and influence how much you need to save personally for future medical costs, particularly before Medicare eligibility.
Q: What is OPEB?
A: OPEB stands for Other Postemployment Benefits. It is a term widely used in governmental accounting to refer to post retirement benefits other than pensions, predominantly retiree healthcare. Governmental entities are required by GASB Statement No. 75 to report their OPEB liabilities.1, 2