Benefit-Funding Clarity May Give FCUs More Leeway in Recruiting, Keeping Executives

ALEXANDRIA, Va. – Clarity on benefit-funding options from NCUA may give federally-chartered credit unions more ways to woo, hire and keep executive talent. A number of firms including Executive Compensation Solutions (ECS), an executive benefits design firm, asked NCUA if FCUs can invest in life insurance products to fund executive benefit obligations; use a pooled funding approach and hold these products to maturity as part of an safe and sound investment strategy; and recover the cost of the benefit, the funding itself, and opportunity costs. NCUA said FCUs may purchase life insurance products, use the pooled approach, and hold insurance products to maturity if it complies with Section 701.19 of NCUA’s rules regarding benefits for employees. FCUs must also demonstrate a direct relationship between the pooled investments held to maturity and the employee benefit obligations to be funded, NCUA said. FCUs may also structure their investments to recover the cost of the benefit and funding but not the opportunity costs. As an example, the NCUA provided the following scenario: A FCU that promises an employee a retirement benefit of $500,000 may invest $250,000 in a life insurance policy reasonably expected to yield $750,000 at the time the retirement obligation comes due to pay the obligation and recover its $250,000 investment. In this example, however, the FCU may not invest additional funds or otherwise structure the investment to return more than $750,000 for the purpose of recouping the opportunity costs associated with its $250,000 investment. Those opportunity costs equate to a return on investment the FCU could have realized on its $250,000 had it not invested it to fund its employee benefit obligation. That unrealized return would have been for the FCU’s own investment account. The relief granted by Section 701.19 from statutory and regulatory investment restrictions does not extend to investments made for a federal credit union’s own account. “Now credit unions can equally compete with banks in attracting and keeping executives within the industry,” said Alec Berkman, a principal of ECS. “The ability to hold pooled assets of different types than a credit union normally holds, and hold them to maturity in some cases, to fund ongoing benefit liabilities is a tremendous added advantage.” Berkman has been in a dialogue with the NCUA over the last three to get this information in the hands of the credit union movement and said he’s “pleased with the reception, cooperation and attitude of the NCUA as they pushed through these clarifications.” In February 2004, Berkman and other credit union advisors proposed to the NCUA benefit-funding changes that would help credit unions compete with banks regarding executive talent. In November 2004, the NCUA, in another letter to ECS, agreed with the company that cost of funds, as differentiated from opportunity cost, is a real cost of using money that should be recoverable under Section 701.19. The NCUA also agreed the amount a FCU must pay its members or others to borrow money reflect the cost of funds. In addition, it clarified that a FCU is permitted to recover its cost of funds under Section 701.19 but reiterates that it’s prohibited from recovering opportunity costs on the money it invests to fund an employee benefits. The November 2004 opinion letter also said that a credit union may recover a cost of money from the earnings on those assets, “(It) shows (the NCUA is) serious about credit unions having the ability to compete for folks who will be the future leaders of their institutions,” Berkman said. “It’s better for the credit union industry to be able to attract talented executives and keep them here.” [email protected]