McDONNELL DOUGLAS ANNOUNCES CHANGES IN ITS HEALTH CARE AND PENSION PLANS FOR NON-UNION RETIREES
McDONNELL DOUGLAS ANNOUNCES CHANGES IN ITS HEALTH CARE
AND PENSION PLANS FOR NON-UNION RETIREES
ST. LOUIS, Oct. 8 /PRNewswire/ -- McDonnell Douglas (NYSE: MD) today announced changes in its health care and pension plans for non- union retirees that will strengthen the corporation's financial position and maintain access to quality health care coverage for retirees.
The changes were prompted by new accounting rules -- mandated for most U.S. companies -- that require companies to show estimated costs of providing future health care on their financial statements beginning in 1993. The changes implemented by McDonnell Douglas will significantly reduce a one-time potential accumulated charge to earnings next year when McDonnell Douglas adopts the postretirement standards called SFAS No. 106.
Effective Jan. 1, 1993, McDonnell Douglas will replace its company-funded health care coverage for its non-union retirees with retiree-funded coverage. Retirees who elect to enroll in this plan will receive a special one-time pension supplement they may use to pay for it. The coverage will be identical to the coverage retirees would have received under the company-funded plan.
Under the new accounting rules, McDonnell Douglas had estimated last year that its after-tax transition obligation could range between $1.2 billion and $1.8 billion. A charge of this magnitude would represent nearly half of the corporation's shareholders' equity at the end of 1991.
As a result of these changes, McDonnell Douglas estimates this charge will now range between $600 million and $700 million.
Corporation Chairman and Chief Executive Officer John F. McDonnell said, "With these changes we have effectively dealt with what could have been a heavy blow to our bottom line."
While explaining to retired and active employees how these steps will protect the company's financial position, McDonnell also emphasized that the measures were designed with an eye to addressing the rising health care costs retirees face.
"For years teammates have counted on McDonnell Douglas to provide high-quality, affordable health care in their retirement years. That's why we have been seeking an innovative solution to a difficult problem -- how to continue to maintain excellent health care benefits without denting the pocketbooks of our retirees," McDonnell said in a letter to active and retired teammates.
The amount of the pension supplement -- after taxes -- is equal to almost all of the cost of the premium. Therefore, most retirees will have little, if any, new costs that are not covered by the supplemental pension benefit.
The supplemental pension benefit will be paid at the retirees' direction into a trust created by McDonnell Douglas. Money in the trust cannot be used for any purpose other than retiree health care coverage. The pension benefit will be paid out of a surplus in the corporation's pension fund. As of the end of 1991, that surplus stood at $2.2 billion.
"This solution may seem complicated at first glance, but, when all is said and done, retirees will have the same coverage under the new plan as they would have had under the current one, for about the same cost," McDonnell said.
In addition to reducing the charge created by the new accounting rules, termination of the company-funded health care plan also allows McDonnell Douglas to reduce its cash expenditures for retiree health care.
The corporation's retiree health care costs have more than quadrupled in the last decade, growing at a compounded average of nearly 15 percent per year. In 1991, the corporation spent $122 million on retiree health care alone, a cost that represented more than 11 percent of McDonnell Douglas' general and administrative expenses in the same year.
The health care coverage arranged by McDonnell Douglas extends through the end of 1996. Employees who retire between now and then also will have the opportunity to purchase coverage under the new plan and receive the special one-time pension increase.
"Resisting a longer term or "indefinite" commitment to health care keeps open the freedom to change the approach after 1996 if we find a more cost-effective method. For example, there may be new legislative funding methods available or there may be national health care in place. However, we are committed to making sure our retirees have access to quality health care at an affordable cost," McDonnell said.
The new program affects about 20,000 non-union retirees and 50,000 current non-union employees when they retire.
Letters outlining the new health care plan and the pension supplement in more detail were mailed to non-union employees and retirees. McDonnell Douglas has opened a toll-free hotline to answer retirees' questions.
Fact Sheet On SFAS 106
McDonnell Douglas is subject to a new accounting standard, Standard Financial Accounting Statement No. 106 (SFAS No. 106), like most companies in the United States.
SFAS No. 106 changes the way in which companies must show expenses for health care for retired employees: from "pay as you go" to "as earned." This means that financial statements must show what companies are committed to pay out to retirees, not just what they are paying in any given year.
Although compensation consultants estimate that the new rule could cause reductions in net worth of an average of 13 percent, only 41 percent of U.S. companies have even determined their liabilities.
The most common changes made by companies in the last two years were "take-aways": raising retiree premium contributions (30 percent) and increasing cost-sharing (26 percent), according to research from Foster Higgins, consultants on employee benefits.
McDonnell Douglas will offer the same benefits to retirees, at essentially the same out-of-pocket cost. In fact, retired employees who itemize tax deductions may end up ahead of the game.
McDonnell Douglas has calculated the impact of the new standard, and devised an innovative way to continue to reduce the impact of SFAS No. 106 on its balance sheet and to provide retirees access to quality health care. A stronger balance sheet is good for all employees.
/CONTACT: Barbara Anderson of McDonnell Douglas Corp., 314-233-2865/
(MD) CO: McDonnell Douglas Corp. ST: California IN: ARO SU:
EH -- LA016 -- 0269 10/08/92 08:57 EDT