by Joe Tripalin, Senior Consultant, IZALE Financial Group
Concept: Credit unions today can choose to pre-fund all or part of their future employee benefit obligations by reallocating a portion of the credit union’s investment portfolio into an investment(s) that would normally be impermissible and use the earnings from this investment to offset their future employee benefit cost obligations. These types of investments are deemed appropriate because they are tied to future employee benefit costs. This concept does not impact where the employee benefits are purchased or the cost of the underlying benefits.
Background: Credit unions have been pre-funding certain employee benefits for many years. Examples include supplemental executive retirement programs (executive benefit plans), pre-funding of defined benefit pension plans, and post-retirement health care programs. In these programs, credit unions have used a variety of investment vehicles to serve as the funding source, most of which would not be available for credit union investments except for the fact they are tied to future employee benefit obligations.
In 2006, the NCUA was asked if other ERISA employee benefits could be pre-funded under NCUA Rule 701.19(c). NCUA answered in the affirmative that any ERISA based future employee benefit obligation could be pre-funded using what would normally be impermissible investments as long as the credit union exercised prudence regarding the safety and soundness of the investment along with the amount invested. The NCUA did not issue an Opinion Letter ruling on this concept, but indicated that previous NCUA Opinion Letters dealing with the use of impermissible investments tied to employee benefits including Opinion Letter 06-0817, gave guidance this issue.
Program Goals: There are a number of goals often associated with utilizing a pre- funding program:
Background: Credit unions have been pre-funding certain employee benefits for many years. Examples include supplemental executive retirement programs (executive benefit plans), pre-funding of defined benefit pension plans, and post-retirement health care programs. In these programs, credit unions have used a variety of investment vehicles to serve as the funding source, most of which would not be available for credit union investments except for the fact they are tied to future employee benefit obligations.
In 2006, the NCUA was asked if other ERISA employee benefits could be pre-funded under NCUA Rule 701.19(c). NCUA answered in the affirmative that any ERISA based future employee benefit obligation could be pre-funded using what would normally be impermissible investments as long as the credit union exercised prudence regarding the safety and soundness of the investment along with the amount invested. The NCUA did not issue an Opinion Letter ruling on this concept, but indicated that previous NCUA Opinion Letters dealing with the use of impermissible investments tied to employee benefits including Opinion Letter 06-0817, gave guidance this issue.
Program Goals: There are a number of goals often associated with utilizing a pre- funding program:
- Normally at the top of a credit union’s list of goals is the desire for investment yields higher than the credit union is experiencing in its standard investment portfolio.
- Credit unions desire to better manage the growing employee benefit expenses, which are often driven by health care cost increases. While pre-funding doesn’t impact the cost of the employee benefits, higher yields from pre-funding investments can help soften the financial impact of these cost increases.
- Closely tied to the second goal above, is the desire to either add additional employee benefits or lessen/hold steady the financial impact of benefit cost increases on employees of the credit union.
- Pre-funding helps fulfill a credit union goal to diversify their overall investment portfolio.
- Depending on the type of investment, credit unions may seek investment portfolio appreciation in addition to the increased yields mentioned in number one above.
- Credit union goals include limiting their risk exposure in these arrangements.
- Credit unions want a pre-funding program with open access to their invested
funds and have those funds held by an independent custodian.
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