If you read the introduction to this series last month, you might recall that we are looking at a series of questions intended to assist in making decisions about funding Retiree Healthcare plan assets and OPEB plans. This week we consider the question:
What does it mean that a plan is 100% funded?
Because the “value” of future retiree healthcare benefits is being recognized in exchange for employee service, the liability against which plan assets are being measured for funding purposes represents only that portion of future benefits attributed to past service. In other words, as an active employee continues to work for the plan sponsor, she/he “earns” more liability – more of a portion of the value of the future, retiree healthcare benefit. This additional liability is called the “service cost” or sometimes, “normal cost”.
If a plan is 100% funded, it means assets are sufficient to cover benefits “earned” to date but doesn’t cover any portion of the value of future healthcare benefits that will be earned or credited to the employee with future service. Therefore, even a 100% funded plan can expect to have a recommended contribution equal to the “service cost” of the active employees.
Christian Veenstra, ASA, FCA, MAAA, EA
President, Watkins Ross
Watkins Ross is a 100% Employee-Owned Consulting, Actuarial & Administrative Firm Providing Retirement Plan Services
