The added costs to companies of the new health-care law could hurt the funding of retirement plans, but any effect won't be apparent until at least next year.
“It's all interrelated,” said Michael A. Moran, vice president-portfolio strategist at Goldman Sachs & Co. New York.
Alan Glickstein, Dallas-based senior consultant at Towers Watson & Co., agreed. “A large increase in health-care cost could crowd out how much companies will spend on other compensation and benefits,” including pensions, Mr. Glickstein said.
“It's definitely a balancing act,” he added. “I think we will see a pretty active period in retirement program redesign.”
The current impact of the Patient Protection and Affordable Care Act is on non-cash corporate expense accounting, Mr. Glickstein said. As a result, the new law isn't creating an immediate cash impact on companies' pension funding intentions, he added.
As companies evaluate the law, Mr. Glickstein believes executives will consider pension plan redesign and how much pension risk they can assume.
Pension plan changes might start occurring in 2011 or 2012, he said, but “the thinking and planning are going on right now.”
Redesign studies are not just related to rising health-care costs, but also to the financial market meltdown, he said.
Goldman's Mr. Moran said added health-care costs resulting from the new law “is something they (corporations) will have to consider in the intersection of all their benefits packages.”
“We haven't quantified or attempted to quantify (yet) the total health-care cost impact to corporations,” he said. “I can't say if it is raising costs and would cause them to cut defined benefit contributions and defined contribution matching contributions.”
“If (companies) determine their costs of benefits will rise, that could lead them to freezing defined benefit plans,” as a way to reduce overall benefits costs, Mr. Moran said.
Said Christopher McNickle, managing director, Greenwich Associates, Greenwich, Conn.: “To the degree companies suddenly find themselves facing unanticipated expenses (from the health-care law) that will reduce their cash flow.”
“It would not surprise us if more plans close,” continuing a trend by companies. “To the degree they experience expense pressure and profit pressure, it could accelerate the process” of closing plans.
But Mr. McNickle said he couldn't connect future pension plan closings with a rise in health-care costs.
“Companies that are going to have a disproportionate expense impact are the ones that are going to suffer the most pressure and look for ways to respond,” Mr. McNickle said.
Regarding a potential for rising health-care costs to cause companies to seek an offset by cutting matching contributions to 401(k) plans, Mr. McNickle said, “I think it's less likely,” although “possibly for a company that finds itself in distress,” he said. “Our sense is that (the DC match) is a high priority in terms of benefit allocation and is less likely to be impacted than DB (contributions).” The match is more visible to employees and has more of an impact on morale, he added.