As employee benefit costs continue to escalate, many credit unions are forced to take unpopular steps to manage those costs, such as reducing benefits or increasing employee deductibles.
But when a credit union downgrades its benefit package, it can result in lower employee morale and productivity. It also becomes more difficult to recruit and retain key employees.
As a result, some credit unions are taking aim at rising benefit costs with a strategy that increases their investment-earning potential.
This approach is an option for federal credit unions because NCUA permits them to pre-fund their future employee benefit obligations by purchasing certain investments that would normally be impermissible. In most cases, state-chartered credit unions are afforded the same opportunity through parity or approval from state regulators.
A credit union using this approach can redirect some of its excess liquidity into investments that offer the potential for higher returns than typical credit union investments. It can then use any gains from the investments to help pay for its employee benefits and other expenses.
The gains on these investments can help a credit union ease the impact of skyrocketing benefit costs on the bottom line while addressing another problem—sluggish investment growth.
Credit unions can use this strategy to prefund a wide range of benefits, including group health insurance, group life and disability insurance, executive benefits, and 401(k) matching contributions. This approach doesn’t change who the credit unions buy the benefits from or how much is paid for the benefits. It simply offers credit unions an opportunity to invest in a way that could help defray their future costs.
Credit unions are often managing their excess liquidity with returns of around 1%, while their health-care premiums are rising at double-digit rates.
In an effort to help cover rising benefit costs, many credit unions are moving some of their excess liquidity into investments that might earn three or four times the yield typically generated by their average investments.
Credit unions can use extra earnings like that to offer more attractive benefit programs. When they do, they improve employee morale and gain a competitive advantage as they try to attract and retain talented employees.