Funding Your Other Post-Employment Benefits Plan: The Good, The Bad and The Ugly

By: Alisa Bennett, CavMac

When considering funding for your Other Post-Employment Benefits plan, there is the Good, the Bad
and the Ugly. While funding an OPEB plan actuarially is not always possible, this article offers strategies
to get some money contributed and secured to pay OPEB benefits.

This is an excerpt from NCPERS Fall 2025 issue of PERSist.

Introduction
OPEB plans cover Other Post-Employment Benefits, other than pensions. This usually means retiree healthcare, but can include stand-alone life insurance, disability or long-term care plans. Here we will only consider retiree healthcare plans.

The basic retirement formula, Contributions + Investment Income = Benefits + Expenses, is applicable to OPEB plans just like pension plans. In other words, money in = money out.

Strategies for OPEB Funding

The Good

Actuarial Funding
Actuarially funding your OPEB plan is the preferred method, just like for a pension plan. The plan takes full advantage of prudently invested funds and keeps the money secured to pay benefits when due. Using actuarial funding, the actuary uses assumptions to project OPEB benefits expected to be paid to all members and helps the plan determine an actuarially determined employer contribution (ADEC) to fund the plan.

We note that full actuarial funding for an OPEB plan is not always possible, however, due to budget or legislative constraints. Therefore, we discuss some other methods as follows.

The Bad

Pay-As-You-Go Funding
Many retiree healthcare plans, especially smaller municipalities, are pay-as-you-go, meaning the benefits (either healthcare claims or premium payments) are paid as they come due with no money set aside in advance, beyond a small amount to manage liquidity, to pay these benefits. These payments are frequently paid out of general assets and no trust is established. For accounting purposes, the employer may still have to comply with GASB Statement No. 75, but they would not be subject to GASB 74 since there is no trust. 

The downside to this pay-as-you-go funding strategy is that no meaningful investment earnings are generated, so the contributions must be large enough to cover the benefits and expenses as they come due. Not only are future retiree healthcare costs hard to predict, but they are expected to increase faster than general inflation, necessitating higher-and-higher contributions to sustain the plan. Therefore, while pay-as-you-go may be cheaper than pre-funding in the near term, it is ultimately the costliest funding strategy. 

The Ugly

Partial Pre-Funding Strategies other than ADEC
The following list of non-actuarial strategies for securing OPEB funds is not exhaustive. Any money deposited into a trust and set aside for retiree healthcare benefits is a positive step toward securing these benefits for your retirees.

• For pension and OPEB plans administered by the same entity, using part of the employer contributions not needed for pension funding toward OPEB benefits. It is recommended to have benchmarks and triggers in place to avoid harming the pension plan under this option.
• Setting total active healthcare premiums high enough to use excess funds to cover retiree costs.
• Increasing retiree premiums.
• Seeding an OPEB trust to earn investment income, while paying healthcare costs from general funds and not dipping into the trust.
• Requiring active member contributions, noting that there are restrictions on these and employees that do not access the retiree healthcare plan do not get their contributions back.
• Requiring employers with many part-time and lower paid employees to pay additional contributions to offset the larger, as a percent of pay, relative benefit costs (since retiree healthcare benefits are usually not salary related). 

These strategies usually generate contributions that are less than the ADEC and may not sufficiently pre-fund the plan. This causes the costs to be higher in the long run than under actuarial funding and can lead to insolvency of the healthcare trust and the inability to pay benefits. This would necessitate either benefit cuts, or reversion to higher cost pay-as-you-go funding, which takes funds away from other governmental priorities.

Conclusion
The best and most efficient way to fund an OPEB plan is actuarially, paying the ADEC each year, just like a pension plan. However, this is not always possible. While the long-term costs of providing retiree healthcare benefits are only a fraction of the cost of providing pension benefits, these benefits are important to the retiree since paying for healthcare takes an increasing portion of their personal pension dollars. Often, retiree healthcare is not a guaranteed benefit, so the members are usually willing to work with the plan to keep the plan sustainable, even if it means taking on additional costs as an active employee or as a retiree. Any attempt to pre-fund retiree healthcare benefits and provide some sort of guarantee of plan continuation is commendable. With uncertainty around healthcare cost growth, Medicare funding, and other Federal legislation, it is important to analyze future costs and consider all funding options to provide secure healthcare benefits for retirees who have spent a career in public service.

Bios: Alisa Bennett is a President and Consulting Actuary at CavMac. She has over 30 years of public sector actuarial and consulting experience providing services to large public clients. Alisa serves as lead consulting actuary for our OPEB and healthcare clients as well as several State level pension systems.