SAN DIEGO — Pre-funding future benefit costs isn't as complex as it may seem; in fact, a credit union's balance sheet assets wouldn't even change, said John Moreno, director of Client Services and Marketing for CUNA's Members Capital Advisors. Moreno presented a breakout session regarding the new budgeting tool during CUNA's HR/TD Council Summit.
"Basically, all you're doing is earmarking assets for future benefit obligations, and investing them in otherwise impermissible managed accounts," Moreno said.
CUNA Mutual has been assisting credit unions in creating and managing pre-funding accounts for nearly six months. The service provides guidance for credit unions throughout the entire installation process, including illustrations regarding which benefit costs will be offset and for how long, board resolution language, suggested updates to credit union investment policies, investment advice, compliance documentation, and guidance for credit union accountants. CUNA will also provide CFOs with investment performance reviews, monthly balance sheet feeds, and an annual asset/liability matching report.
Although regulators can be expected to closely scrutinize pre-funding activities, the strategy can significantly decrease benefit costs by allowing the credit union to utilize the increased return to pay for assumed future increases in benefits costs, Moreno said.
"One of the issues HR professionals face is that executives say they think of HR as an investment in human capital; however, when it comes budget time, it's a line item expense. This will help generate income to offset that expense," Moreno said.
To begin the process, a credit union must first determine its current and projected future benefit costs. Eligible benefits include group health premiums, short and long-term disability premiums, group life premiums, 401k funding and matching, executive deferred compensation plans, defined benefit funding, and retiree health coverage.
Current investments are then evaluated to determine how much should be transferred to higher-risk vehicles in order to account for future increases.
Moreno used an example of $10 million invested in a conservative account earning a 4% APY. If $8 million was kept in the low-risk account, and $2 million was transferred to a higher-risk investment earning 7.5% APY, the credit union would gain $70,000 to use toward benefit costs.
"It's just a journal transaction; $2 million was moved from a normal investment to a managed account," Moreno said.
The funds retain liquidity, giving the credit union the option of using them elsewhere if they are needed. They are not tied up in a trust, which also increases ease of access.
Moreno said CUNA recommends credit unions adhere to a 10% capital ceiling, saying that although the NCUA didn't set a ceiling, "when the NCUA gives you a rope, you don't hang yourself with it."
Members Capital Advisors will be available to answer questions about the new service at CUNA's CFO Council Conference May 20-23 in Phoenix. The group also plans to produce Webcasts and podcasts on the topic. –[email protected]
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