First it was pensions and now it‘s health coverage! Are employees going to take it on the chin again?
Defined Benefit Pension Plans:
Years ago, Wall Street pressures forced many CFOs and HR professionals in public companies to switch from traditional defined benefit pension (“DB”) plans to 401(k) plans. Wall Street wanted to see companies cap their costs and liabilities and shift the investment risks, savings risks and longevity risks to their employees. In many cases, this was done without adequate resources (company match) or financial education. Now we know the result: older employees can’t afford to retire. It was great for the public companies from a financial perspective, but not so much for the employees.Employees are now realizing the downside and many have started clamoring for the security that DB pensions provide.
Private companies never had to worry as much about Wall Street pressures and have, by and large, retained their DB plans and are very happy with their results. They have been actively pursuing dynamic asset and liability de-risking solutions. Yes, they have to remain competitive with public companies but have kept a good balance between their financial requirements, company needs and their employees’ needs.
With dynamic asset and liability de-risking solutions, Wall Street can now get cost and liability stability and public companies can and should consider turning back to DB plans.
Employees may be facing similar struggles with health care choices. Currently most public and private employers pay a large percentage of health coverage (say 80%) and employees pay the rest (say 20%). So, if health coverage premiums increased $100 per month, the employer would pay an extra $80 per month and the employee would pay the remaining $20 per month.
Now Wall Street may be pushing HR professionals to cap health coverage costs for their active employees in public companies. The Wall Street Journal reported today that Sears Holdings and Darden Restaurants are planning a radical change in the way they provide health benefits to their workers. They will give employees a fixed sum of money and allow them to choose their medical coverage and insurer from an online marketplace. Now, the concept sounds nice: more freedom and choices! But what is the ulterior motive?
In the day of the DB plans, many employers that sponsored these plans also provided retirees with medical coverage (offset by Medicare). The first step Wall Street wanted to do with these plans to contain costs was to “cap” the company cost. So, if medical premiums increased, say, 9% in one year, retirees would pay for the full increase through their contributions. After a few years this wasn’t enough and many companies cancelled retiree medical coverage all together.
Will this cost shift that happened to past retirees also eventually happen to the employees at Sears Holdings and Darden Restaurants or other public companies that adopt this strategy? When employee costs are expressed in dollar amounts rather than a percentage of total costs, there will be a big temptation to shift much more dollars to the employees in the future.
I think Wall Street rules the roost with public companies and there is very little support now in the employees’ corner. When the next big premium increase comes, what incentive will employers in publicly-held companies have not to pass most or all of the increase onto their employees? How strong will publicly-held companies fight Wall Street to keep an 80%/20% balance in cost allocation?
Private companies will not easily fall for this “bait and switch” trap. They will retain a much better employee benefit package that will attract, retain and reward the best available employees. Maybe publicly-held companies should learn a lesson from private companies and take a stronger stance against Wall Street. The success of their companies may be at stake.