Administration September 15, 2021

How Pandemic-Related Increase in Retirements Affects DB Plans

A sharp jump in the number of workers who decide to retire early does not bode well actuarially for DB plans, but experts say the pandemic-related exodus is not a long-term trend.

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The coronavirus has changed a lot of people’s outlooks. For some, all that death and anxiety have produced a carpe diem spirit that makes retiring seem much more enticing. If that’s the case, a rush of employees filing for pension benefits could have major reverberations for plan sponsors. But how much?

Counterbalancing all that pandemic angst is that things are looking up this summer. More than a year after the pandemic cloistered people indoors, nearly half of Americans are fully vaccinated—although they’ve fallen short of the Biden administration’s goal for 70% of American adults to get at least one dose by July 4 weekend. Many are enthusiastically resuming “normal” life in long off-limits public spaces: restaurants, bars, movie theaters. The grim uncertainty of March 2020 has given way to better clarity and optimism for the future.

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Still, how the pandemic has affected workers in defined benefit (DB) plans during the pandemic is less clear. Early anecdotal evidence suggests a mixed bag. Some plan sponsors are experiencing little to no change in their pool of employees. Others have already reported sharp rises in the number of retirements they’ve seen this past year, even though precise figures on how many have taken earlier-than-scheduled exits are mostly unknown.

Plan sponsors for teachers and public safety workers are reporting the most changes. In Chicago, for example, police officer retirements reportedly were up 15% in 2020 from the year before. In Minneapolis, a reported one-fifth of the city’s police officers have either retired or taken leaves of absence. Leaders of the police department are concerned that many of those departures may wind up being permanent.

During normal times, a sharp jump in the number of workers who decide to retire early does not bode well actuarially for DB plans. Employees who work less than they were expected to will pay less into the system, while also collecting retirement benefits over a longer period, presumably. (This effect might be partly offset by the fact that they’re getting a smaller payout than if they’d stayed longer.)

But the pandemic was not a normal occurrence, and it might be that other mitigating factors like the mortality rate may dampen any effect early retirements have on the system. In any case, experts say a single event like the pandemic is not likely to have an impact on the long-term funding of any plan, much like a year of excessively poor returns may mean little over a 10-year period.

“Presumably, the pandemic is a one-time event that is going to go away. And that means that early retirements through the pandemic is not necessarily a long-term trend,” said Keith Brainard, research director for the National Association of State Retirement Administrators (NASRA).

Effect on Retirement Timing

“It’s not necessarily something that’s going to change the assumption for the retirement rate, but rather those are really sort of one-time retirements that are going to pull forward retirement rates for a limited period,” Brainard added.

Take the California State Teachers’ Retirement System (CalSTRS), which in February reported that it had its second-highest year for retirements in 2020, behind the fallout from the Great Recession. The pension fund reported a steep 26% jump in the second half of 2020 from the same time a year before.

When the pension fund for educators surveyed roughly 500 of these retirees, about 62% said they retired earlier than they planned. More than half said the challenges of teaching during the pandemic pushed them to seek an early out. Still, a CalSTRS spokesperson said this week that the fund does not expect the retirements to have a “material impact” on the funding levels.

Broadly speaking, any damage from early retirements is going to be “fairly muted,” according to Kevin McLaughlin, head of liability risk management for North America at Insight Investment.

There are several possible reasons for this. While early retirements might be on the rise, so, too, is the aforementioned mortality rate from some 600,000 Americans who have died thus far because of the coronavirus, which has the morbid effect of offloading liabilities for the pension fund.

Not to mention, investment returns have been staggeringly high this past year for many allocators, who quickly recovered early 2020 losses from the downturn as the capital markets made a wild swing upward.

Looking Forward

Of course, experts say it’s too early to tell what impact the pandemic has had on DB plans. It takes about five to six months for pension plans to draw up their annual financial reports. Since many public pension funds close out their fiscal year on June 30, as in yesterday, plan sponsors are likely to have a better idea in November or December how retirements from this past year affected their funds.

What may be even more important for pension fund leaders and economists to watch from here onward is the continued possibility that some people will drop out of the economy altogether, according to Brainard. If the overall size of the labor pool shrinks, and fails to return to what it was before the pandemic, that will affect state and local governments. Government employers will have to pay more into the pension funds to make up for the low level of worker contributions.

For plan sponsors, what happens to the labor participation rate for government workers will be a key development to watch.

This article was originally reported by CIO, PLANSPONSOR’s sister publication.
Benefits September 15, 2021

How Employers Plan to Tame the Health Cost Rebound

Their top strategies are to educate employees about taking care of their health; offer high-quality, low-cost care options; and improve employee access to and cost of care.

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The deferral of non-essential health care by Americans during the COVID-19 pandemic lowered costs for employers, but the rate of people accessing health care and the costs that come with that are expected to pick back up.

According to the Business Group on Health’s “2022 Large Employers’ Health Care Strategy and Plan Design Survey,” top concerns for employers include expanding access to mental health care, monitoring trends in health care delivery and preparing for an uptick in health care spending.

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As a result of the pandemic, patients delayed or missed doctor visits and preventive screenings, and depression, anxiety and substance use disorders surged. With that in mind, employers anticipate seeing an increase in medical services, late-stage cancer diagnoses and greater numbers of people with long-term mental health and substance use issues for years to come. For instance, 94% of employers anticipate an increase in medical services due to delayed care, while 91% remain concerned about long-term mental health issues stemming from the pandemic.

In 2020, the overall health care cost trend was 0%, though some employers experienced a negative trend, dropping to as low as -12%. In 2021, the health care trend is predicted to increase to 6% both before and after plan design changes. In 2022, the cost trend is expected to decline slightly, dropping from 6% to 5.8% after plan design changes. Pharmacy costs are 20% of overall health care spend.

Returning to Care

Ellen Kelsay, president and CEO, Business Group on Health, says employers are acting to better inform and educate their workforces to encourage employees to take care of their health.

“They are making sure individuals go back to routine screenings, immunizations and physicals that might have gotten put on the back burner,” she says. “Because if employees don’t, there is a concern there will be bigger health conditions down the road, so prevention is key.”

The survey found 57% of employers say implementing more virtual health opportunities (e.g., emotional well-being, physical therapy, digital coaching, condition management, medical decision support, sleep therapy) is a top priority for 2022. Forty-three percent cite expanding access to mental health services as a top priority, and 31% are aiming to implement a more focused strategy on high-cost claims.

Ian Stark, lead actuary, Pacific Northwest, at Aon, says there’s not only a concern about health cost trends rebounding, but there is a real war for talent right now. “Employers are caught between cutting benefit costs but not creating a barrier that would impact recruiting,” he says, adding that there is more interest now in pushing for newer ideas than in the past.

As a result, employers are increasingly interested in expanding telemedicine and virtual care. Stark notes that in past years, telemedicine was less frequently used and, when it was, it was often used for lower acuity conditions. Now, employers and employees are engaging with virtual care vendors with an expanded list of services and ways to connect people with them.

Kelsay says efforts to make sure employees who have chronic health conditions see their doctors regularly, take medications and manage their conditions are similar to the efforts to encourage preventive care for all employees.

“There are also travel concerns about employees reaching centers of excellence [COE],” she adds. “Employers are taking steps to make sure employees can go to high-quality centers of care for treatment of more significant conditions.”

Employers are also concerned that, post-COVID-19, there will be significant long-term mental health and substance abuse issues for employees and maybe for a larger percentage of the population, according to Kelsay. So they are making sure there are no barriers to access services, deploying virtual health solutions to make it easier to get help and reducing the stigma so employees are comfortable getting care.

Offering High-Quality, Low-Cost Care Options

According to the Business Group on Health survey, many employers in post-pandemic environment are partnering with new COEs or expanding COEs to include more conditions. A center of excellence is an area of health care specialization in a medical center that is recognized by the medical community as providing the most expert and highest level of care. Eighteen percent of employers said expanding COEs to include additional conditions is a top priority for 2022. Employers also said they will continue using high-performance networks—networks of high-quality, cost-effective medical service providers that agree to provide care for a specific population at lower cost.

Kelsay says employers plan to negotiate on costs for delivery systems. “More employers are using value-based payment models and moving away from fee-for-service payment models,” she says. “Those using fee-for-service models are negotiating with plans or directly with providers for better prices.”

As employees return to care, employers are making an effort to get quality/cost data into their hands so they can get high-quality care but not at the highest cost, says Stark.

“This is tied to more conversations about using health care TPAs [third-party administrators] because having a health care navigation vendor also be the organization in charge of contracts could create a conflict of interest,” he says. “To have the best-in-class discounts and the best-in-class navigation services, employers are looking to TPAs—any claims payer outside of major carriers—whose primary focus is the payment of claims rather than the creation of networks.”

Stark says employers are also having conversations about direct contracting for employees in particular geographic locations.

“They are considering creating relationship with a major hospital system or health systems in regions where employees live to see if they can get a preferred deal,” he explains. “They then steer employees to that system or systems for care.”

With the goal of driving employees to high-value, low-cost care, Stark says there’s also a big move to encourage the use of high-deductible health plans (HDHPs) and, for some populations, saving in health savings accounts (HSAs).

“But employees have to have a certain level of income for that to be truly an option,” he adds. “Employers are introducing copays for employees who have primary care physicians so they have that first dollar to pay for high-value, low-cost care. They are still able to use HSAs for high-cost items but not for low-cost items. HSAs are not the silver bullet for all populations as employers hoped they would be.”

Improving Employee Access to and Cost of Care

Stark notes that the pandemic has highlighted instances of employees avoiding care for perceived or actual lack of access.

One way to address this is with specialty medication coupon programs that major pharmacy benefit managers (PBMs) are offering. “This is when a specialty medication manufacturer has a coupon so the insured individual pays a reduced amount but the insurance company pays the PBM the full amount,” Stark explains. “Manufacturers have found a way for the coupon to apply before insurance pays. People were reluctant about these coupons in the past because they were new and required individuals to go through steps to activate the coupon, but now the savings available is more enticing than the fear of interrupting the employee experience.”

Employers are more aware of equity and inclusion in benefits, Stark says. They are having conversations about salary-based benefit payments or employer contributions to make sure the cost of benefits is not a barrier to seeking care for lower-wage workers. He says this is particularly true for tech companies and others that have a smaller proportion of low-wage employees.

“Cost sharing with employees, moving to HDHPs, increasing deductibles and decreasing subsidies were very common during the recession time frame, but employers are much more reluctant now to pass along cost increase to employees,” Stark says. “Employers are finding ways to keep employee contributions for benefits flat or keep plan designs as stable as possible. There is more awareness now than before the pandemic of making benefits less of a distraction for employees.” He adds that he hasn’t seen employers raise employee cost sharing of health benefits in anticipation of the expected spike in costs.

More information about the Business Group on Health’s “2022 Large Employers’ Health Care Strategy and Plan Design Survey” is available here.

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