Public Employers Not Considering All GASB 45 Implications

August 15, 2007 (PLANSPONSOR.com) - The majority of public sector employers have started to address new accounting standards on non-pension retiree benefit liabilities, but few employers understand all the changes necessary to reduce their expense under the new rules, according to a survey by Aon Consulting.

In a press release, Aon said its survey of 118 public sector employers who offer non-pension retiree medical benefits found organizations are preparing for and addressing GASB 45 using Aon’s recommended three-step process, but decisions they are making will not help reduce the impact of the new accounting rule on their financial statements.

GASB 45 requires public sector employers to annually expense on their financial statements payments and services other than pensions provided for retirees beginning in 2008 (See GASB Issues New Standards for Post-Retirement Benefits ).

Aon found that 85% of employers have completed or are in the process of completing a baseline actuarial valuation and 67% are in the process of creating or have implemented a formal plan for the implementation and management of other post-employment benefit (OPEB) obligations, the press release said. In addition, 63% of employers have considered changes to their funding strategy, citing Voluntary Employee Benefits Association, a Health Reimbursement Account and/or a Section 115 Trust as the funding vehicles of choice.

“While there is no legal requirement for employers to set aside money in an investment vehicle, there are certain financial incentives to doing so,” said Phil Peterson, director of the survey and Aon Consulting’s Public Sector national practice leader, in the press¬†release. “Funding these obligations in advance, rather than applying a pay-as-you-go approach, can reduce the OPEB expense as much as 60%.”

Peterson said funding can also mean a generally higher discount rate for employers and can reduce the OPEB liability, but the survey found nearly 80% of employers do not know what their discount rate is or should be. Despite the benefits of funding OPEB obligations, 53% of respondents indicated they were not considering financing methods to procure the money needed for funding.

Two-thirds of survey participants said they are not planning to make any changes to their plan design to reduce OPEB costs. However, Peterson indicated in the news release that plan design changes that reduce the rate of future medical inflation by just 1% can reduce OPEB liabilities by more than 10%.

Plan design changes being considered by the remaining one-third of respondents included:

  • Revise eligibility requirements (50%),
  • Increase retiree cost sharing before age 65 (40%),
  • Eliminate coverage for future hires (38%), and
  • Change to a defined contribution plan (31%).

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