Many companies that pay health benefits to retired employes are going to be in for a shock when planned regulations require them to account for such costs in reporting profits, according to a new study.
The stock market could be in for a shock, too, said Dallas Salisbury, president of the Employee Benefit Research Institute, the Employee Benefit Research Institute, the Washington think tank that released the study last week.
The regulations could push stock prices down, reduce corporate earnings, limit borrowing abilities, affect multibillion-dollar acquisition decisions and cause some companies to cease operations, it said.
The independent research group's study covers the impact of requirements expected early next year from the Financial Accounting Standards Board, a body that sets standards for the financial reporting of American corporations.
Salisbury and officials of the actuarial firm Milliman & Robertson outlined at a news briefing last week the consequences of the regulations, which are expected to require companies to report new liabilities averaging $2,000 or more per employe.
This would reduce the net reported income of companies at the top of the Fortune 500 list by an average of about 14 percent and wipe out net profits of some companies at the lower end of the list, the study said.
"It's a bit of a bombshell sitting there that could have a very significant impact on corporate values," Salisbury said in an interview.
"Very, very few companies that promise these benefits have really looked beyond the tips of their noses on liabilities inherent in the promise," Salisbury said.
The institute said estimates of the potential liability for all companies that provide retiree health benefits range from $100 billion to $2 trillion, but few companies realize the extent of their future expenses.
Early next year, the regulatory board is expected to require companies to project the health benefits they will have to pay to retired employes.
The impact on the financial community is expected to be much larger than that of the 1987 board requirement that companies take into account pension benefits, which usually are backed by a separate fund rather than paid out of corporate earnings the way health benefits are, said Salisbury.
The research conducted by Milliman & Robertson is compiled in a book called "Measuring and Funding Corporate Liabilities for Retiree Health Benefits."
Phyllis A. Doran of the actuarial firm said it found that an average corporation could show a reduction in net income of from 30 percent to 60 percent once health benefit liabilities are accounted for.
She said that range is based on a study of the Fortune 500 companies, which found that the median company made $4,200 per employe in profits. Projected health benefits of from $1,200 to $2,400 per employe would be subtracted from that.
William A. Reimert, a consulting actuary with Milliman & Robertson, said the regulations could lead companies to seek ways to cut retiree benefits.
But he said it would be better for a retired person to know in advance if a company is not going to pay the benefit than to have it cut off after retirement.
The cost of health benefits for early retirees can be particularly high, even more than that of pension benefits promised to the same workers, the study says. That raises questions for companies that have been using incentives for early retirement as a way of reducing work forces.endqua