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Companies' Retiree Health Liabilities Large,
Advance Funding Costly

Differing Values for

Variables Affect
Estimates

would have been less than $7 billion if funding had been initiated in 1988.

Tax losses would be larger in future years because contributions would grow to over $41 billion and interest earned on the accumulating fund would not be taxed. For example, net tax losses from deducting both interest and contributions from taxable income would reach about $19 billion in 2008 (in 1988 dollars) when annual contributions are projected to grow to about $39 billion.

Dollar estimates of companies' liabilities are sensitive to the values of the variables used in the analysis. Because a range of reasonable values is plausible, we performed a sensitivity analysis on several variables to identify how the liability estimate would change if higher or lower values were used.

The values we selected to analyze fell into a "high" or a "low" expense category. (See app. IV for more detail on this analysis.) Under a "high" expense scenario, we chose values of the variables that increased our baseline liabilities. Under the "low" expense scenario, values that decrease our baseline estimate were chosen. For example, we changed our model to reflect varying numbers of current workers and retirees expected to receive retiree health benefits, their life expectancy, and companies' benefit payments for medical services provided in the future.

Medical inflation was the variable to which the estimate was most sensi-
tive. When other variables were changed, they caused smaller (less than
5 percent) changes. When we combined all variables in our model into a
high- and low-expense estimate, companies' estimated total retiree
health liabilities in 1988 range from as low as $328 billion to as high as
$521 billion. The amount of money companies would have had on hand
in 1988 had they been fully funding their accrued liabilities under our
assumptions and methods ranges from $187 billion to $290 billion (see
fig. 1.2).

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Appendix II

Proposed FASB Requirement to Change
Accounting Standards for Postretirement
Health Benefits

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NORWALK, CT, Feb. 14--A proposal issued today by the Financial Accounting Standards Board would change the way companies account for postretirement benefits other than pensions that have been promised to retirees.

Companies often provide their employees with a variety of benefits that will be available during their retirement, the most familiar being the monthly pension payment. Many companies also provide their retirees with other benefits, the most common of which are health care and life insurance benefits. Currently, most companies account for these other benefits on a "pay as you go" basis, meaning that the cost is recognized when it is paid, not when the employee provides service to the company in exchange for the benefits. Consequently, the obligation to provide benefits to the employee. in the future is not included on the company's balance sheet with its other liabilities. "For some companies," said FASB Project Manager Diana Scott, "the obligation to provide postretirement benefits may be an employer's greatest single liability."

The basis for the Board's proposal, Ms. Scott said, "is that, like pensions, other postretirement benefits are a form of deferred compensation.

(continued next page)

Proposed FASB Requirement to Change
Accounting Standards for Postretirement
Health Benefits

-2

Like other forms of deferred compensation," she continued, "the Board believes that postretirement benefits should be recognized in a company's financial statements when they are earned by the employee."

The exposure draft would require companies to accrue the expected cost of postretirement benefits during the years the employee provides service to the company, based on the terms of the plan. "Unquestionably," Ms. Scott said, "measuring the expected benefit requires estimates of uncertain future events because the dollar amounts of those benefits are not fixed at the time they are earned. However, the Board believes that the company's best estimate of the cost of those benefits is better than implying, by a failure to accrue anything, that there is no obligation and no cost."

The proposal calls for measurement of a transition obligation that is the unrecognized and unfunded obligation for benefits earned prior to adoption of a final Statement on this project. That amount would be disclosed in footnotes and would be recognized as expense and as a liability over the average remaining working life of current plan participants (or fifteen years if longer). Immediately recognizing the entire transition amount would not be permitted. Ms. Scott noted, however, that beginning in 1997, companies would have to recognize on their balance sheets a liability that at a minimum would include the unfunded obligation for retirees and other plan participants fully eligible for benefits.

Certain footnote disclosures also would be required by the exposure draft. The disclosures would be similar to those required for pensions, but some additional information would be required. "The most notable addition to the disclosures," according to Ms. Scott, "would be the assumed health (continued next page)

Proposed FASB Requirement to Change
Accounting Standards for Postretirement
Health Benefits

-3

care cost trend rate and the effect on the accumulated obligation and annual cost for health care plans of a one-percentage-point increase (or decrease) in the trend rate. Variations in the estimate of the health care cost trend rate can produce significant changes in the measure of postretirement benefit cost," she said. "The Board believes that this disclosure is critical for comparing employers' estimated costs."

If adopted as a final Statement, most provisions of the proposal would become effective in calendar year 1992. The proposal would become effective in 1994 for nonpublic companies that sponsor no plan with more than 100 participants and for non-U.S. plans. The minimum liability provisions would become effective for all companies beginning in 1997.

The deadline for receiving comments on the proposal, "Employers' Accounting for Postretirement Benefits Other Than Pensions," is August 14, 1989. The Board will hold public hearings on the proposed accounting standard in New York City on October 10-12, and in Washington, D.C. on November 2-3.

2/14/89

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