Report Describes How CU Mergers May Affect Supplemental Executive Benefits

One of the pandemic’s aftermaths is that it is expected to accelerate the pace of credit union mergers in 2021. CEOs are more open to discuss merger options than in past years, and COVID-19 is a main driver for several reasons including declines in capital, according to David Ritter of ALM First, a managing director of the Dallas-based financial advisory services firm.

But what may not be on the radar of credit union executives is how their deferred compensation arrangements, executive bonus plans and split dollar retirement benefit agreements may be impacted by a consolidation, according to a report by Triscend, which provides executive benefit, compensation and succession planning services for credit unions.

The report was coauthored by David Wright, Triscend’s chief strategy officer, and Kristie Hartmann, an executive benefits consultant for the Dallas-based organization.

Their report described how credit union mergers can pose risks for executive retirement benefits, but they also offered insights into how these risks can be mitigated or even eliminated.

For example, under a deferred compensation arrangement, sometimes referred to a 457(f), is a promise made by the credit union to pay an amount of money in the future to an executive based on certain conditions.

“Because these plans are only an unsecured promise, the leadership of the surviving credit union can renege on the unvested/unpaid portion of that promise at any time,” according to Triscend’s report. “As a result, credit unions and executives must be diligent in documenting the arrangement such that, if desired, an executive is protected if there is a change in control.”

From the perspective of the surviving credit union, changes in control provisions can have an impact on its ability to retain essential leadership from the target credit union.

To address these issues, Triscend recommends that provisions be included in a plan agreement to accommodate for voluntary terminations of “good reason” and a change of control event. These provisions can be structured to provide for a full or partial vesting.

Credit unions also should consider implementing shorter-term vesting events. For deferred compensation arrangements, the tradeoff is that taxation will occur at each vesting event, but this approach would also mitigate the executive’s risk of complete benefit loss, according to Triscend.

For split-dollar agreements, a method used by credit unions and executives to purchase and share the benefits of life insurance policies, fully funding those policies at the time of implementation lowers change in control risk and provides additional benefits for credit unions and executives.

It is also important, Triscend noted in its report, to ensure each agreement requires both the credit union and the executive the mutual option to either terminate or amend the agreement.