The shift from defined benefit (DB) to defined contribution (DC) retirement plans took root years ago, with Australia, the US, the UK, and Canada leading the way in the global economy. A similar transformation is underway with health care benefits. But when you compare the retirement and health care sides, the differences are fairly sizeable.
One factor driving this trend on the retirement side has been the growing financial impact of long-term pension liabilities in the face of longer life expectancies and declining interest rates. In some cases, pension liabilities are larger than the actual size of a company, which leads to additional business risks. General Motors in the US is a good example.
With health care benefits, even though costs have been increasing faster than inflation, these financial liabilities aren’t recorded on balance sheets as is the case with pensions. For both the employer and employees, planning is done on a shorter-term basis. If an employee underfunds or mismanages a DC retirement account, the consequences at retirement can be serious and hard to correct. On the health care side, employees can choose to enroll in another plan at open enrollment if they miscalculated their health care needs in a given year. So the transition from DB to DC could be a little easier on the health benefits side because there’s an ability to self-correct as employers move forward, and the stakes for the employer aren’t quite as high.
But the thinking is essentially the same, which is that the cost of a DB approach is no longer sustainable for either retirement or health care benefits.
This shift places more accountability for outcomes on individuals, though that also can be seen as an opportunity to empower employee populations to make better decisions. An example for health care is wellness programs that offer premium discounts and other incentives for those who take action to improve their health. Matching contributions is an example on the retirement side.
There’s a very strong need for education and guidance as employees shoulder more financial responsibility for both their retirement and health care benefits. Plan participants across the board aren’t well equipped to make some tough decisions about their benefits, and employers will need to step up their efforts in this area.
Mercer has assembled a panel of experts to reflect on key health care reform developments and share their expectations for the future. Jacques Goulet is Senior Partner and the President of Retirement, Health and Benefits at Mercer, where he has held various consulting and leadership positions over the past 26 years in Canada, Europe, and the US.