[July 07, 2014]

Healthcare costs, pensions are top corporate priorities

An improving economy and stable financial markets have given financial executives confidence to explore a range of options to help their companies better manage the costs and risks of their healthcare, pension and other benefit programs, according to new research released today by Prudential Financial, Inc. [NYSE:PRU] and CFO Research Services.

The research report, "Managing Financial Risk in Retirement and Benefits Programs," found financial executives believe improvements in funding defined benefit plans will make it easier to reduce or completely eliminate risks associated with those plans.

The report also found financial executives continue to believe controlling the cost of healthcare benefits is their top priority in managing benefits. Companies are also looking to outsource some or all of their benefits administration and management of Family and Medical Leave Act tasks. Although employers are looking at private health insurance exchanges, few are likely to switch employees out of company-provided healthcare into the public insurance exchanges established under the Affordable Care Act.

"Everyone is looking at how to better control benefit costs and healthcare is still the No. 1 issue," said Jim Gemus, senior vice president of Product for Prudential Group Insurance. "But they are acutely aware of the need to retain employees and attract new ones. The improving economy and recovery of the financial markets is making it a bit easier to do this."

The survey targeted senior financial executives at companies with defined benefit retirement plans holding $250 million or more in assets. These are plans that pay out a specified benefit to retirees. The survey, conducted by CFO Research in February, complements studies done in 2009, 2010, 2012 and 2013. Most of the 182 companies included in the surey had revenues of more than $500 million and more than half had revenues of more than $5 billion.

The survey found 35 percent of the responding companies have already closed their pension plans to new entrants and another 25 percent have frozen them. These executives cited concerns about the impact of defined benefit plans on earnings, balance sheets and their companies' ability to invest in growth opportunities. Another concern is the possibility of new mortality standards, with 50 percent of responding executives saying they believe new standards are likely to affect their company's defined benefit liabilities. In addition, 53% of finance executives report that their companies either have transferred defined benefit liabilities to a third party insurer or are likely to within two years, an increase of 18% compared to the 2010 survey.

"The rebound in financial markets has not only restored the value of 401(k) plans but helped improve the funding levels of defined benefit plans as well, though market volatility and other risk factors remain a concern," said Phil Waldeck, senior vice president, Pensions and Structured Solutions, Prudential Retirement. "Now the focus can be placed on further reducing the risk of defined benefit plans and improving the offering and investment security of defined contribution plans like 401(k)s."

Other key findings included:

• More than half of the financial executives surveyed said they are likely to offer lump sum distributions to DB plan participants over the next two years
• More than half of the respondents believe a significant portion of their workforce will have to delay retirement because of inadequate savings. And, 59 percent say they have seen the average retirement age increase over the past five years and 61 percent believe it will continue to creep up. Finance executives are showing a growing interest in defined contribution plan options that enhance the security and stability of workers' retirement funds. These options include automatic enrollment and developing matching contribution formulas that encourage higher savings rates.
• More than half (53 percent) of the financial executives believe providing downside risk protection through a guaranteed income feature would help plan participants make better investment decisions. Half of the respondents are likely to add a guaranteed income feature to their defined contribution plan and another 5 percent already offer the feature.
• Nearly 50 percent of the financial executives said they are likely to outsource some or all of their benefits administration on top of the 27 percent that already do so. In addition, 20 percent outsource their absence management and Family and Medical Leave Act duties with another 45 percent considering it.
• Some 70 percent of the respondents believe offering voluntary benefits is a way to increase employee satisfaction and 58 percent are likely to expand voluntary benefit offerings.
• Companies are still shifting healthcare costs to employees, with 80 percent either transitioning more cost to employees or are likely to do so. Only 38 percent say they are willing to end employer-paid healthcare and direct employees to public health insurance exchanges, with 57 percent saying they wouldn't consider the idea. But, 41 percent would be willing to provide subsidies to employees for use on private health insurance exchanges.

Prudential Financial, Inc. (NYSE: PRU), a financial services leader, has operations in the United States, Asia, Europe, and Latin America. Prudential's diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. In the U.S., Prudential's iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit http://www.news.prudential.com/.

Prudential Retirement delivers retirement plan solutions for public, private, and non-profit organizations. Services include state-of-the-art record keeping, administrative services, investment management, comprehensive employee investment education and communications, and trustee services. With over 85 years of retirement experience, Prudential Retirement helps meet the needs of over 4.0 million participants and annuitants. Prudential Retirement has $327.8 billion in retirement account values as of March 31, 2014. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates.

The Prudential Insurance Company of America, Newark, NJ and its affiliates.

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