Fortune 1000 Firms Under-Fund Retiree Medical Obligations by $285B

Fortune 1000 companies have unfunded retiree medical obligations totaling an estimated $285 billion, according to a new report.

The report, by the professional services company Towers Watson, based its calculations on Dec. 2013 financial disclosures filed with the Securities and Exchange Commission.

Only about half of the companies — 501 – had retiree medical liabilities. Of those, two-thirds had zero assets backing their liabilities, Towers Watson said.

In a press release, Mitchell Cole, managing director for Towers Watson’s Retiree Insurance Services, said the real takeaway is bigger than the numbers.

“While totally liability for retiree medical is in the billions — much of it unfunded – the undercurrent issue is that companies are exposing themselves to the risk of a variety of unknown variables with adverse consequences,” Cole said.

Among those variables, Cole said volatility in the discount rate makes the obligation unpredictable. For instance, Towers Watson calculated that an average 1% decrease in the discount rate would increase a firm’s balance sheet obligation by 12%.

Cole also noted that tax deductions for employer contributions to health plans are one of the federal government’s largest tax expenditures, making it a target when and if Congress and the President decide to raise revenue by making tax-law changes. Any tax-reform legislation that eliminates or reduces the tax deductibility of amortized retiree medical obligations could have significant adverse tax consequences.

Furthermore, Cole said longer life expectancies are likely to increase future liabilities. All this for an employee benefit that Cole said doesn’t attract talent and comes with significant administrative costs.

Cole said the “prudent solution” is for employers to look for a way out of their retiree medical obligations. Earlier this year, Towers Watson created a product designed to do just that.

“It’s the first time they have the option to exit their legal, accounting, and regulatory responsibilities for retiree medical benefits without adverse tax consequences,” he said.

Cole said Towers Watson’s plan provides retirees with a lifetime annuity that guarantees tax-free funding for medical benefits.