Health Care and Pension Costs Are Top CFO Concerns

Businesses looking at expenses, risks and attractiveness of benefit offerings

By Stephen Miller, CEBS Jul 31, 2013

The rising price of health care and the risks and costs associated with funding pension plans weigh heavily on corporate finances, according to Balancing Costs, Risks, and Rewards: The Retirement and Employee Benefits Landscape in 2013, a survey report published by benefits provider Prudential Financial Inc. in collaboration with CFO Research Services.

The survey was conducted in February 2013 among financial executives at 181 U.S. companies, of which more than 80 percent had revenues of more than $1 billion. Health care was the top concern for employers, with funding pensions not far behind.

More than a quarter of financial executives said their companies have already shifted a large portion of the costs for health care coverage to employees, and another 34 percent said their companies are very likely to do so within the next two years.

Regarding retirement benefits, nearly 60 percent of the companies had either frozen pension accruals for all participants or closed their defined benefit plans to new entrants. More are likely to do so within two years, and many are looking at transferring pension risk and enhancing 401(k)-type defined contribution plans to improve operating flexibility.

Despite cost concerns, nearly all respondents agreed that employee benefits remain critical for attracting and retaining employees and that providing a balanced mix of health insurance, retirement and other benefits is important to their companies’ success.

Transferring Pension Risk

In particular, “financial executives are worried about management attention being diverted from running the business to dealing with pension liabilities,” said Margaret McDonald, a senior vice president at Prudential Retirement. While only 6 percent of those surveyed said their companies have already transferred their defined benefit plan risk to a third-party insurer (generally by purchasing an annuity to cover the plan’s liability for benefit payments), approximately 40 percent said they will consider doing so within the next two years.

As defined benefit pensions become less commonplace, defined contribution plans need to be enhanced to ensure employees have enough mony to sustain a comfortable retirement, McDonald said. “Most executives think a significant portion of their employees will have to work longer because they don’t have enough money to retire.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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