Benefits January 31, 2018

Three Large Companies Take Employee Health Benefits Into Their Own Hands

The initiative could ultimately benefit all Americans, Jamie Dimon, chairman and CEO of JPMorgan Chase says.

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Amazon, Berkshire Hathaway and JPMorgan Chase & Co. announced they are partnering on ways to address health care for their U.S. employees, with the aim of improving employee satisfaction and reducing costs.

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The three companies will pursue this objective through an independent company that is free from profit-making incentives and constraints. The initial focus of the new company will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent health care at a reasonable cost.

“Our people want transparency, knowledge and control when it comes to managing their health care,” says Jamie Dimon, chairman and CEO of JPMorgan Chase. “The three of our companies have extraordinary resources, and our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans.”

The effort is in its early planning stages, with the initial formation of the company jointly spearheaded by Todd Combs, an investment officer of Berkshire Hathaway; Marvelle Sullivan Berchtold, a managing director of JPMorgan Chase; and Beth Galetti, a senior vice president at Amazon. The longer-term management team, headquarters location and key operational details will be communicated in due course.

John Greenbaum, national employee benefits practice leader at Risk Strategies Company, says the news is unsurprising to him. “For some time now, employers of all sizes have been struggling on behalf of their employees to deal with a system completely out of alignment with their needs. Costs rise, even as covered services fall, affecting wage growth, worker well-being and business productivity,” he says. “Employers are fed up with the misalignment and are actively looking to change how they sponsor employee health coverage.”

Greenbaum says his firm has seen a strong and growing trend of employers willing to pursue alternative methods for providing effective health and prescription drug coverage benefits to their employees—direct contracting, bundled payments, direct primary care, reference-based pricing, utilization of on-site clinics, improved pharmacy benefit arrangements, and more.

The National Business Group on Health (NBGH) also finds employers are pursuing ways to support changes in how health care is paid for and delivered to drive more effective, efficient and affordable care. Bundled payments with centers of excellence are becoming more prevalent and risk-based arrangements with high value networks and Accountable Care Organizations (ACOs) and self-insured health benefit plan models in which employers directly contract with medical providers, are on the rise in select markets.
Administration January 31, 2018

Tax Reform Makes Pension Pre-Funding More Compelling

Mercer offers its list of key priorities for defined benefit (DB) plan sponsors for 2018.

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According to Mercer’s list of top ten priority areas of focus for defined benefit (DB) plan sponsors as they manage their plans and seek to enable participant success, tax reform has important and time-sensitive implications for pension funding strategies.

 

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Approximately 75% of plan sponsors were already accelerating pension funding or considered doing so in 2017 with the prospect of lower taxes. Other key funding drivers include reducing Pension Benefit Guaranty Corporation (PBGC) variable rate premiums and funding over a shorter period to meet specific funding thresholds.

 

Tax reform includes a reduction in the headline corporate tax rate from 35% to 21%. This makes pension pre-funding for many tax-paying plan sponsors more compelling than ever before. It is estimated that many will take the opportunity to realize a higher deduction sooner, rather than later, and also realize the potential benefits of improved earnings, reduced PBGC premiums, neutralized impact on any deferred tax asset and acceleration of movement along an existing glide path.

 

Other points on Mercer’s list include:

  • Prepare for transition from quantitative easing to quantitative tightening: The levers of monetary and fiscal policy are now working against each other, as the Fed tightens monetary policy while the administration seeks to expand fiscal stimulus. DB plan sponsors face a perplexing conundrum: funded status is likely to fall or move sideways despite very strong markets and pension liabilities will be highly sensitive to movements in discount rates. As tax reform has passed, many DB plan sponsors will likely increase contributions to take advantage of higher tax deductions. 
  • Ensure bonds are fit for purpose:  Ensure fixed income bonds are poised for growth. The late stage of the credit cycle tends to be a more challenging period for investment returns. It is increasingly important to construct bond portfolios carefully and tailor them to a DB plan’s specific liabilities and investment strategy.
  • Create a strong defense: Equity and bond returns have been negatively correlated, providing a powerful diversification effect. However, moving forward, investors need to be prepared for lower equity returns due to declining optimism, the end of the economic cycle or economic/political shocks. Pension plans may also want to consider explicit hedges, implicit hedges, accelerated glide paths, defensive tilts and the additional flexibility provided by high-quality cash.
  • Drive performance of investment returns: Plan sponsors are increasingly applying performance attribution analysis to determine whether a portfolio’s returns are due to manager skill, luck or to persistent biases in a portfolio. Factor-based strategies can be deployed and replicated at relatively low cost; however, excessive reliance on continued outperformance of a factor can lead to significant style bias and potential for divergent performance from the broader market.
  • Manage private asset classes: Plan managers may be willing to accept the illiquidity of private assets for an expected long-term premium. But illiquidity can create challenges as plans de-risk or make substantial distributions. Investors should incorporate liquidity considerations into their plans for executing glide paths.
  • Develop an investment governance model: One approach that has grown rapidly is the outsourced chief investment officer (OCIO), or delegated, investment management model. Plan sponsors should review their governance model and determine any potential benefits to moving to a new one.
  • Identify the right risk transfer strategy: The business case for risk transfer has become increasingly compelling considering the dramatic increases in PBGC fees, existing financial risks and operational complexities. Market and plan dynamics will have an impact on pricing, and engaging the insurer marketplace early in the process will help bring clarity to the potential financial outcomes and sensitivities.
  • Check hibernation portfolio: A confluence of factors is driving plan sponsors to accelerate risk transfer actions. As more marketable obligations are transferred to insurers, residual DB plans will have unusual and idiosyncratic features that make them more difficult to manage. Plan sponsors need to understand which parts of the liability are difficult to market to insurers and develop a plan for the remainder of the liability that needs to be placed in hibernation.
  • Address data reliability and gaps: Data presents a much more significant risk to a transaction than may be appreciated. Before de-risking, plan sponsors should address data gaps and challenges. Be in a better position to monitor the market and make quick decisions.

 

“DB plan sponsors face a host of challenges and powerful, priority opportunities in a rapidly changing environment of corporate tax reform, Fed tightening and emerging inflationary pressures. All of these factors could have a significant impact on pension funding and risk transfer,” says Michael Schlachter, US Defined Benefit Leader, Mercer. “As a result, plan sponsors are looking to take bigger deductions from increased contributions, address shrinking investment returns during the late stage of the credit cycle, and prepare for accelerated risk transfer.”

Mercer’s list may be downloaded from here.

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