How are other post-employment benefits (OPEB) accounted for, and why are they often larger than pension obligations?

Other post-employment benefits (OPEB) cover healthcare, dental, vision, life insurance, and other non-pension benefits promised to retirees. The accounting parallels DB pension accounting but with critical differences that often make OPEB obligations significantly larger and more volatile.\n\nWhy OPEB Can Dwarf Pensions:\n\n1. Healthcare cost inflation runs well above general inflation (historically 6-8% vs 2-3%)\n2. Most OPEB plans are unfunded — no dedicated plan assets offset the obligation\n3. Longevity risk is amplified because healthcare costs accelerate with age\n4. No ERISA funding requirements for OPEB (unlike pensions)\n\nAccounting Framework:\n\nOPEB uses the same projected unit credit method as DB pensions. The key components are:\n\n- Accumulated Post-retirement Benefit Obligation (APBO) — analogous to PBO\n- Service cost, interest cost, and amortization of prior service cost\n- Healthcare cost trend rate replaces salary growth assumption\n\nWorked Example:\n\nCrestview Health Systems reports the following OPEB data:\n\n| Item | Amount |\n|---|---|\n| APBO at year start | $62.8M |\n| Service cost | $4.1M |\n| Interest cost (3.8% discount rate) | $2.39M |\n| Benefits paid to retirees | -$3.5M |\n| Actuarial loss from assumption change | $5.2M |\n| APBO at year end | $71.0M |\n| Fair value of plan assets | $0 (unfunded) |\n\nBalance sheet liability: $71.0 million (entire APBO appears as a liability since the plan is unfunded).\n\nNet OPEB cost on income statement: $4.1M + $2.39M = $6.49M (before amortization adjustments).\n\nHealthcare Cost Trend Rate Sensitivity:\n\nThis is the single most influential assumption. A 1% increase in the healthcare trend rate might increase the APBO by 8-12% and the service-plus-interest cost by 10-15%. Companies are required to disclose sensitivity analyses for this assumption.\n\nAnalyst Considerations:\n- Companies reducing retiree healthcare benefits can immediately reduce the APBO, boosting equity\n- Unfunded OPEB creates real future cash outflows with no asset cushion\n- Compare OPEB obligations as a percentage of total equity across peers\n- Watch for assumption changes — lowering the trend rate reduces reported obligations\n\nDive deeper into post-employment benefit analysis in our CFA FRA modules.