PreFunded Benefits Investment Opportunities

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Pre-Funded Benefits Investment Opportunities

• Joe Tripalin
• Director of Employee Benefits Market Development
• and
• Gene Zumwalt
• Director of Executive Benefits Marketing

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Agenda

• Business Challenges
• What is Benefits Pre-Funding?
• Concept and Practice
• Benefits to Your Credit Union
• Core Elements
• Positive Impact on ROA
• Decision Process and Requirements
• QA

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Business Challenges
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Business Challenges

• Escalating employee benefits costs
• Limited predictability
• Benefit costs
• Return on assets (ROA)
• Risk level management
• ROA potential

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What is Pre-Funding?
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Concept and Practice

• Assets earmarked for future benefit obligations
  invested in otherwise impermissible investments
• Per NCUA regulations
• Future liability is estimated
• Rate of return above short-term rates

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CUNA Mutual Group Pre-Funding Program
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Investment Earnings Offset Some Costs of
Underlying Benefits
Earnings
Year 10
Year 0
Contributions Earnings Less Withdrawals
Pre-Fund Initial Contribution
Group Health Premiums
Short/Long Term Disability Premiums
Group Life Premiums
401(k)/PS Match
Executive Deferred Compensation
Defined Benefit Funding
Retiree Health Coverage



Allowable Benefits
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Eligibility

• Practice with credit unions is new
• NCUA regulation 701.19 amendment (April 24,
  2003)
• Clarification letter (November 2004)
• Federal and state-chartered credit unions that
  follow NCUA rules

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Example
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Example

• Total credit union balance sheet assets do not
  change
• 1M of assets moved from treasury bills to
  corporate bonds to fund employee benefits
• Higher rate of return in corporate bonds results
  in greater investment return

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Benefits of Pre-Funding
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Benefits to Your Credit Union

• Higher rate of return on assets (ROA)
• Addresses NCUA safety and soundness issues
• Better cost control for ongoing and increasing
  employee benefit obligations
• Expanded scope of permissible investments
• Flexibility to move assets
• Increased predictability
• Benefit costs
• ROA

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Pre-Funding Core Elements
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Core Elements

• NCUA Compliance Record
• Benefits Liability Determination
• Investment Strategy
• Investment Considerations
• Investment Options
• Service

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NCUA Compliance Record

• Documentation demonstrating compliance
• Documentation of intent
• In-scope benefits and time-horizon rationale
• Investment safety and soundness
• Reporting
• Examiner compliant

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Benefits Liability Determination

• net worth
• Starting point
• 10 to 15 net worth
• In-scope benefits
• Benefits included in calculation of future
  obligation
• 401(k) Match
• Defined Benefit Plan
• Group Life
• Group Disability
• Executive Benefits
• Post Retirement Health
• Group Health
• Administrative fees
• Time horizon

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Investment Decisions
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Investment Strategy

• Safety and soundness
• Directly related to benefits obligation
• Management process (i.e., matching, risk
  tolerance and rebalancing)
• Distribution strategy
• Earnings
• Earning and principal
• No distributions

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Investment Considerations

• Investment vehicle
• Risk tolerance
• Guarantee of principal/rate of return
• Accounting treatment
• Ability to match obligations
• Other

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Investment Option

• Managed Assets Concept
• Access to multiple asset managers
• Broad array of funds
• Customized asset allocation
• Individualized portfolio management
• Investment return back-testing
• Cash-flow testing

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Managed Assets Concept
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Managed Assets Concept - Benefits

• Cost control
• Better cost predictability
• Reduced risk
• Higher earnings opportunity on assets

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Managed Assets Concept - Features

• Asset allocation based on Modern Portfolio Theory
• Current market/economic outlook
• Credit union parameters and objectives
• Quarterly reporting

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Positive Impact on ROA

• ABC Credit Union, 150 FTEs
• Benefits costs per employee per year
  7,000
• Total costs over a 10-year period 19,000,000
• Present value of benefits expenses 14,000,000
• Assumptions
• Increase number of FTEs to 175 by 2016
• Aging demographics of employees causes increases
  in benefit costs
• Assumes no significant changes to benefits package

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The Decision Process
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Decision Process and Requirements

• Program concept meeting
• Liability determination
• Scenario modeling and investment decisions
• Resolution
• Installation
• Ongoing maintenance

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Questions?

• Contact us 800.356.2644
• Joe Tripalin, ext. 7711
• Gene Zumwalt, ext. 7342

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Thank You for Attending!
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