Cat Takes Steps to Declaw Benefits Costs

September 3, 2002 ( - With healthcare costs once again spiraling out of control, another employer has taken steps to trim its exposure to the burgeoning costs of retiree healthcare.

The most recent to take action is Peoria, Illinois-based Caterpillar, which is trimming retirement healthcare benefits for its salaried workers, and bringing on a new pension plan for workers who join the company on or after January 1, according to Crain’s Chicago Business.  The changes at Caterpillar cover salaried employees and managers on the US payroll, a group that represents about 28% of Cat’s 72,000-strong worldwide workforce.

Cost Containments

Current retirees will be immune from most of the changes, but they’ll have to pick up some of the cost of future increases, according to the report.  While Caterpillar will continue to pay for Medicare premiums covering retirees’ doctor visits, it will freeze the payment level on January 1.  The machinery manufacturer will discontinue that benefit in its new plan.

Crain’s said that Caterpillar declined to quantify the impact of the changes on its future costs, but noted its benefits payouts to retirees, exclusive of pensions, have spiked in recent years: to $266 million last year, up 8% from 2000 and up 17% from 1999.  At December 31, Cat’s post-retirement benefit obligation was 17% higher than a year earlier – $4.51 billion.

“The modifications we’ve made address the company’s need to control rising retiree healthcare costs while adding features that current and future employees want most,” Richard P. Lavin, vice-president of Cat’s human services division, said in a statement reported by Crain’s.

Under its current plan, Caterpillar pays for premiums for as long as retirees live, before and after they qualify for Medicare. Currently, Cat shells out about 90% of the average premium cost for retiree medical coverage, including prescription-drug coverage, according to the report, citing a company memo to employees outlining the changes.

Premium Payments

For those who retire after December 31, the company will limit the amount it pays for each retiree – establishing accounts for retirees based on their age and tenure, and drawing the company’s share of the coverage premiums from that account.  When the account is depleted, the retiree will be responsible for all premium costs.  In the memo, Caterpillar says that for a long-time employee within five years of retirement, “the opening account balance is anticipated to last some 20 years or more (based on current actuarial assumptions).”

While it now provides retirees with life insurance equal to their pre-retirement annual salary for as long as they live, under the new plan, the benefit will extend for only three years.

New Pension, K Plan Options

Caterpillar is also implementing a new pension plan option for existing workers.  The current plan provides retirees with a lifelong annuity based on years of service, while the new plan which is based on the same criteria, will now offer a fixed payout that can be spread over a period of time or taken as a lump sum. Under the current plan, there is no lump-sum option.  Next year current employees will have a one-time chance to pick between the two plans.

In addition to the pension and healthcare changes, the company is adding some new benefits, including a 401(k) plan in which it will match a very generous dollar for dollar up to 6% of an employee’s pretax base pay.

However, the new plans are raising the anxiety level of Cat’s unionized workers. The United Auto Workers (UAW) is concerned that these moves involving salaried employees and managers signal that Cat will seek benefit concessions when the union contract comes up in early 2004, according to the report.