Questions regarding recommendations

from the Retiree Benefits Task Force

(last updated 11/7/03 at 5:30 PM)

Note: the following questions from faculty were forwarded to Tom Samuel and Joey Payne of the Task Force, and their answers are reprinted below with their permission and without modification.

Q:  Specifically, what is the effect on current retirees?

A:  The effect on current (or past retirees) retirees is that actuarially in approximately 14 years from the date the proposed change is adopted the cap on University contributions will be met.  At that point any increase in premium will be born exclusively by the retiree.  Thus if the monthly premiums increase by $50.00 the entire cost will be the retiree’s.  While I could refer individuals to specific charts and tables I am simply attempting to capture the change for the retiree without actuarial estimates.

Q: What will be the effect (new costs, liabilities) on future retirees?

A:  Retirees that retire after the implementation date will receive a set amount of dollars in a notionally account (means funding available to purchase retiree health benefits from a University sponsored plan and not to spend in any other way).  The recommendation is that in year one that amount will be $50,000.  The balance in the notional account will earn 4% per year after deducting the amount necessary to pay that years University contribution and that new balance will be available in the next benefit year to purchase retiree health benefits from the University sponsored plan.  Actuarially these dollars will be used up in approximately 14 years.  After that point the employee will not only have to pay for the increased cost that year, but also the entire premium that had been paid in the prior year.  As an example if the premium increased by $50.00 per month the retiree would have to pay that amount, plus if in the prior year the monthly premium was $500.00 then the retiree would be paying $550 per month in health benefit premium.

Q: What are the differences between the current plan and the proposed one?

A:  The difference is about $20,000 in present value funding between the current plan with a cap on the University funding and the proposed defined contribution plan.  The difference is the funding provided by the University to fund the retiree health benefit.  Those that retiree prior to the cut off date will have a defined benefit for which the University will pay for the life of the employee.  This amount is capped, but below the cap payment the University will continue to pay the premium for the life of the retiree.  Those that retiree after the cut off date will receive a defined contribution and they may draw from that notional account until it is exhausted.

Q: Would it make sense for those eligible to retire to do so before the new rules take effect?

A:  It depends on a number of factors.  If the only factor is the cost of health benefits in retirement then the individual should retire.  But there are other issues, job satisfaction, the probability of securing alternative employment if you leave the University, your personal financial position, the type of retiree health benefit available to your spouse, etc.

Q: Once you have reached the lifetime benefits cap, which of the following happens: a) you keep the medical insurance as long as you pay all the premiums, or b) you lose the medical insurance?

A:  The retiree would keep the insurance if the retiree portion of the premium is paid. Remember for those retired prior to the cut off date (proposed January 2005) the retiree will only have to pay the amount above the capped University contribution per month. For the employee that retires after the cut off date the retiree will be required to pay the entire premium.

Q: Was any thought given to scrapping the "75" rule? The Task Force recommendations as written equally penalize the employee who retired after working only 5 years as well as the dedicated employee of over 25 years.
(link to AR discussing Rule of 75 – scroll to page 17)

A:  The first thought of those considering this issue was that the rule of 75 should be extended. Our actuaries informed us that there would be little if any change in the unfunded liability over the next 30 years since the bulk of the liability was to people who were already retired or had already met the rule of 75 and could thus retire prior to a cut off, assuming reasonable notice by the University.

Q:  Is there any way to apply differential premiums and benefits to employees with 10 children vs 2 children?

A:  This is an issue that does not relate directly to the retiree benefit, but rather impacts the cost of the active plan. That impact is minimal and I do not believe any of our benchmarks distinguish at the level of cost per child. Also, remember that children consume very limited amounts of health care after the first year.

Q: For employees and retirees who have (or are eligible for) sources of health insurance other than the University plans, could the University offer to make up the difference plus a little “sweetener”, up to some percentage of its costs, to people who are willing to switch?

A: We do not have a cafeteria plan currently, but it is something that could be explored. Retirees are another issue, but one that could be explored at a later date as well.

Q: Could the University take a broader view of an employee's willingness to save the University money during his/her employment and apply any of those "savings" to future retirement benefits? Examples of "demonstrated savings" might include carpooling and the like.

A: We have considered doing exactly that as it relates to not incurring health care cost. We have decided at this time that "unspent health benefit contribution" is not a particularly effective method of funding the retiree benefit. This is something that needs to be explored further however. As to "demonstrated savings" other than health benefit contributions, I do not feel comfortable commenting for the Administration, but have been responsible for employee reward programs for costs savings, they are very difficult to measure and administer fairly.

Q: Does the university consider retiree health benefits as a legal obligation or a voluntary contribution to the retiree?

A: No, there is no legal obligation to maintain the current level of retiree health benefits.  Further, there is no legal obligation to give an employee or retiree any health benefit.  The University has the right to amend or abolish any of the employee benefits at any time (see below: Human Resources Policy & Procedure 90).  It is the University’s position that there is no entitlement to any of the benefits programs, including health coverage.   

90.1.3 The University reserves the absolute right to seek quotations or competitive bids, to modify or change, and to abolish or consolidate any of these programs and plans, or any portion thereof, as deemed appropriate and in the best interests of the University and its employees. Any financial commitment made by the University to the benefits programs must be in accordance with availability of supporting resources.

Q: Where can one find the accounting standard that says retiree health benefit are to be treated the way UK says they should be?

A:  Here is a link to the "plain language" version of the full exposure draft

Q: Are there any other public universities that have interpreted the accounting standards similar to the way UK has and is there any documentation to support that?

A: Since organizations under GASB accounting standards have until June 15, 2006 to comply, most other public universities are just beginning to discuss the issue and make proposals.  We have had conversations with some of these institutions.  But we do not have specific written materials indicating the institution’s interpretation of GASB.  Many of the benchmark universities participate with the state retirement system in their state.  This is where most of the activity is taking place at this time.  Cities and state retirement systems are requesting additional funds to cover the funding required under GASB and many are making benefit changes to reduce the liability, similar to what the private sector has done in the past under the FASB 106 standard.  I will keep this question in mind and as I learn of specific institutions that are making similar interpretation to UK’s, I will forward that information to you. 

Q: The recommendation states that the University will deduct the health credit from the notional account (and) the initial amount is $50K, which is indexed by 4% each year for new retirees. There are 2 possible interpretations of this statement:

 1. For retirees in 2005 the amount will be 50,000.  For retirees in 2006 the amount will be (50,000 * 1.04) or 52,000. In 2007 the amount will be 54,080, and so on.  OR

 2.  if Professor A retires in 2007 and gets 50,000 in his notional account, spends 5,000 on his insurance, that the professor will have remaining in the notional account: ((50,000 minus 5,000) * 1.04), or 46,800 for 2008. And so on.

 So, is the indexing on the initial amount for everybody in a cohort or is each individual account indexed?

A: The answer here is both 1 and 2 are correct.  For new and future retirees, the health credit account will be indexed each year to help keep pace with inflation.  For retirees who retire and begin utilizing the health credit account, the unused balance in the account will earn 4% interest each year. 

Q:   The task force says the difference in the present value between the two group of employees (those who retire before and those after the implementation date) is $20,000. But as we know even the benefits of those who are already retired is being reduced. So I would like to ask how much is the benefits of those who are already retired decreasing in present dollars? In fact I bet this value depends on the age of the person.

A:  If the health credit is not capped for current retirees, the present value of the retiree portion of the premium over the 20-year illustration is approximately $5,500. This assumes the $21 current retiree portion of the premium increases each year with medical inflation. The proposed change for current retirees and employees who retire prior to the implementation date increases the present value of the retiree portion of the premium to approximately $10K.

Q:  An employee (not retired yet) of age X. The proposal passes. How much in benefits does this person lose in present dollars? Please answer this for say X = 35, 40, 45, 50, 55.

A:  There are too many scenarios to calculate. The University offers various plans to early retirees. I think there are too many variables to consider.

This page was updated on 11/7/03 by Jeff Dembo for the University of Kentucky University Senate.