PMI for pensioners is a growing corporate problem. Kim Strugnell examines the options.
The close of 2012 witnessed the initiation of a new set of rules for corporate pension costs, which may have far broader implications for other pensioner benefits and those in charge of ensuring their sustainability.
From 1 January, corporate sponsors have to disclose higher profit and loss costs for financing pension schemes and will lose the ability to smooth balance sheet deficits.
The timing could scarcely be worse, as the aggregate deficit across corporate pension schemes now tops £500bn (in terms of IAS19 accounting). Not surprisingly, finance directors are under pressure to manage the effects of their employee benefit programmes on corporate accounts.
Focus on management of employee benefit costs is increasingly high profile and, while pension contributions take the spotlight, provision of private medical insurance (PMI) for retirees is developing into another issue for corporate finance.
Coming home to roost
In times of healthy profits benevolent employers committed themselves to funding the healthcare costs of employees into retirement. Now, however, the consequences of these decisions are coming home to roost and many employers are alarmed at how seriously pensioners are affecting their annual increase requirements.
As we age, the need for clinical intervention grows and the incidence of serious medical conditions such as cancer increases, significantly post age 65. Where the cost of the treatment for retirees is being met from a corporate healthcare scheme, this has a knock-on effect to the overall employee scheme - resulting in a poor risk profile, an above average increase requirement, and employee P11d contributions becoming increasingly expensive.
The inflationary risks of pensioner populations have always been under-reported. Annual inflation for an average corporate healthcare scheme is often quoted at 5% - which is in itself a rosy view - but true pensioner liability is frequently much higher.
Lifetime liabilities
Xafinity Consulting recently conducted an analysis for a major high street bank and calculated the lifetime liabilities of 455 pensioners at about £29m, using an inflationary factor of 5%. When that inflationary factor is increased to 10%, however, the liability grows to about £67m, and at 15% we were looking at £182m.
Premium increases are driven by a combination of more people using their healthcare schemes, increasingly expensive treatments, and development of procedures for illnesses which were previously regarded as inoperable.
Given the increasing life expectancy, it is not surprising that the impact of all of the above to these members is disproportionately higher than their numbers would suggest.
