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Retiree Health Benefits

MEMO TO:     Faculty and Staff Community

FROM:          Phil Hanlon, Ora Pescovitz, Tim Slottow and Laurita Thomas

SUBJECT:      Future Retiree Health Benefit Changes Adopted

DATE:       Feb. 10, 2011


Faculty and Staff Colleagues,

As we announced in late 2009, we charged the Committee on Retiree Health Benefits (CORHB) to propose a means to maintain competitive retiree health benefits while helping to control the unsustainable cost growth. This work is part of our overall effort to spend responsibly and protect our ability to carry out our core missions in education, research, and patient care.

An analysis of 27 peer institutions found that U-M's retiree health benefit was among the most generous of the institutions in the study, significantly exceeding the market average. We asked the committee, which included members of our faculty, staff, and retiree communities, to propose specific short- and long-term cost-reduction actions, and to do so with the least amount of impact on those who are already retired or nearing retirement.

As the committee began their work, meetings and focus groups were held on all campuses to gather your feedback and advice. Hundreds of you participated in the focus groups and hundreds more shared comments and suggestions. The most frequently cited priorities we heard from campus were: (1) the importance of providing time for planning before changes take effect; (2) the need to continue to cover dependents after retirement; (3) the desire to minimize any financial burden on those already retired; and (4) the general support for offering a greater university contribution to employees with more years of service at the time of retirement. We want to thank you for your participation in the process because the committee developed its recommendations with these community priorities in mind, and each of these objectives was met.

After careful consideration, we have accepted all of the committee's recommended changes to retirement eligibility rules and university contribution amounts. We have, however, chosen to accelerate the long-term timeline for implementation. Projections indicate that the cumulative effect of the changes will yield a recurring annual savings of more than $9 million by the year 2020 and $165 million by 2040, helping to preserve vital funding for our core missions and creating greater opportunity for us to control the rate of future tuition increases.

Because we fully support the principle of advance notice, we will wait nearly two years before changes begin to take effect on Jan. 1, 2013. This will allow important planning time for faculty, staff and retirees.

Shown below is a summary of the changes and detail on how you may be affected based on the year in which you retire. Additionally, links to several important information resources are found at the end of this message.

SUMMARY OF CHANGES

Retirement eligibility: The university will institute a 76-point retirement eligibility system so that employees will be eligible to retire with benefits when the sum of an individual's age and years of service equals 76, with a 10-year minimum service requirement (effective Jan. 1, 2013). Beginning in 2015, one point will be added to the eligibility requirements every two years until 2021 when 80 points will be required to retire with benefits.

University contribution: The percentage contribution toward retiree health benefits being made by the university will be gradually reduced starting in 2013. The university will continue to pay a greater percentage toward the coverage of the U-M retiree than the percentage paid for coverage of the retiree's dependent(s).

Future increases: In order to share future cost increases equitably between the university and retirees, the university's contribution to retiree health benefits will remain a percentage of the total cost of coverage so that the dollar amount of the university contribution will grow as health insurance costs increase over time.

HOW CONTRIBUTION AMOUNTS WILL CHANGE

Since implementation will be gradual, the impact is affected by when you retire. Here's how university contributions will change based on retirement date:

Already retired?

*     There is no change to the percentage university contribution for those who retired before the year 2000.
*     Beginning on Jan. 1, 2013, those who retired after the start of the year 2000 will receive a university contribution of 90% of the premium (currently 93%) for the retiree and 70% for any covered dependents.

Planning to retire between now and the end of 2012?

*     There will be no change until Jan. 1, 2013, when you will receive a university contribution of 90% of the premium (currently 93%) for the retiree and 70% for any covered dependents.

Retiring on or after Jan. 1, 2013?

*     The university will begin reducing its percentage contribution toward premiums by 2.5% for the coverage of the U-M retiree and by 5% for dependents every two years. The percentage university contribution received throughout retirement will be set by the year in which retirement occurs (e.g., retire in 2013 or 2014 and receive 87.5% toward retiree coverage and 65% toward dependents; retire in 2015 or 2016 and receive 85% toward retiree coverage and 60% toward dependents; retire in 2017 or 2018 and receive 82.5% toward retiree coverage and 55% toward dependents, etc.)
*     This gradual reduction will continue until the university's contribution level reaches 80% for the retiree and 50% toward the premium cost for dependents. The leveling out will occur at the close of 2018.

Retiring in 2019 or later?

*     Faculty and staff who retire on or after Jan. 1, 2019 will receive the university contribution toward health care premiums of 80% for the retiree and 50% toward coverage of dependents.

ELIGIBILITY TO RETIRE WITH BENEFITS

Points required to retire with benefits: Starting on Jan. 1, 2013, the sum of age and years of service must equal 76. Beginning in 2015, one point will be added to the requirement every two years through 2021, when we will complete the transition to an 80-point eligibility requirement.

Newly hired employees: Faculty and staff hired on or after Jan. 1, 2013 will be eligible to retire with benefits once the required points are accumulated. The university contribution in retirement will be 68% of their health care premiums and 26% for any covered dependents.

Years of service: For employees retiring on or after Jan. 1, 2021, the university will implement changes to its contribution toward retiree health benefits on a sliding scale based on years of service. Fifty percent of the full university contribution will be provided for those who retire with 10 years of service, and the contribution will increase (10% for every additional two years of service) to 100% of the university contribution for those who retire with 20 or more years of service.

Part-time employees: Beginning on Jan. 1, 2013, benefits-eligible part-time employees (appointments of 50% - 79.9%) will accrue 0.8 years of credit toward retirement eligibility per full year worked. This accrual rate more accurately aligns the credit toward retirement with the percentage of effort. (Employees with appointments of 80% or greater will receive the same credit toward retirement as full-time employees.)

FOR MORE INFORMATION

1.    Visit the Benefits Stewardship website.
More details and Q&A are found at: www.benefitsstewardship.umich.edu.

2.    Use the new Retirement Health Benefit Estimator.
A new online tool will help you apply the new requirements to determine your earliest date of retirement eligibility and give you a summary of the changes that will be in effect at that time. Visit: http://benefits.umich.edu/events/retire/estimator/

3.    Attend a Benefits Information Forum.
Forums will be held on all campuses. A video of the forum presentation content also will be available for online viewing by Feb. 28, 2011. For forum dates and information about the video, please visit: www.benefitsstewardship.umich.edu.

Adjustments such as these are challenging, particularly during a turbulent economic climate, and we will monitor our progress with a thorough review in five years. We are grateful to the members of the committee for their individual and collective expertise, analysis and guidance in devising a thoughtful long-term approach that balances the imperative to manage costs with our long-standing commitment to meeting the needs of our community.

In partnership,

Philip J. Hanlon, Provost and Executive Vice President for Academic Affairs

Ora Pescovitz, Executive Vice President for Medical Affairs

Timothy P. Slottow, Executive Vice President and Chief Financial Officer

Laurita Thomas, Associate Vice President for Human Resources