Economy, bad management imperil retiree benefits

September 15, 1991|By John H. Kennedy | John H. Kennedy,Boston Globe

BOSTON -- When Rod Poineau retired last year from the company that ran the Morse Tool Co. plant in New Bedford, Mass., he banked on a promise of paid health benefits for the rest of his life.

But earlier this year the 163 Pleasant Street Corp. -- named after the plant's address -- said it could no longer afford to pay the benefits. Last month it filed for voluntary liquidation under federal bankruptcy laws.

That has left Mr. Poineau and scores of his fellow retirees, many of them in failing health and with limited incomes, facing the prospect of having to buy their own insurance.

Blame it on the economy's forcing some companies to make choices, but also on poor management and spiraling health costs.

In addition, the graying of America has caused problems. Simple demographics show that the longer a company is in business, the more retired employees it bears responsibility for. In fact, many post-World War II companies may have more retired employees than they have on the payroll, analysts say.

"At the bottom line, for most companies, that liability is a very large number," says Jennifer Davis, a senior research analyst at the Employee Benefit Research Institute, a private, non-profit organization in Washington.

And, unlike employer set-asides for pensions, retiree health benefits bring few tax breaks to companies. So employers often don't squirrel that money away but merely use a pay-as-you go plan.

For companies that are unaware of their potential liability for retiree health benefits, a new accounting procedure, scheduled to take effect in 1993, will bring the issue home starkly.

The new rule, passed last year by the rule-making group for accountants and called the Financial Accounting Standard 106, is intended to force companies to estimate their health-care costs more accurately.

It requires them to start deducting from net income the cost of promised retirement benefits for current and retired employees. Currently, companies often charge against current profits only what they pay for medical care for retired former employees.

Large industrial corporations, particularly those in labor-intensive industries such as autos, tires and steel, will be hit hardest by the new rule, industry analysts say. USX Corp., for example, estimated early this year that the rule could cut its net profits by $100 million to $200 million annually, although the figures were preliminary.

Whatever the eventual impact, companies have taken notice. "A large number of them are saying, 'Wow!' and, in some cases, considering changes," Ms. Davis says.

Those changes include limiting such promises, whenever possible, and at least not agreeing to make them in the future. Start-up companies, particularly, don't make those promises, says Ms. Davis, because they are worried more about getting through the latest economic cycle than about paying retirees.

"It's a fairly common benefit of larger and older companies," she said. "It's very rare among smaller or newer companies."

Other companies, fallen on hard times, default on obligations to retirees, say labor lawyers and activists.

"There are many companies that are attempting to, I guess renege isn't too strong a word, on their commitment to people because of the rising cost of health insurance," said Warren H. Pyle, a veteran Boston labor lawyer.

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