What is Pre-Funding?
Pre-funding of future employee benefit cost obligations is an investment strategy that allows the utilization of investment options that wouldn't normally be permissible. In 2007, Regulation 701.19 was enacted which allows credit unions to make these investment choices because they are tied to the future employee benefit costs.
Regulation 701.19 allows credit unions to take advantage of investment options that were previously impermissible to try and achieve a higher rate of return to fund rising employee health care costs and other benefits. The ability to use the additional investment vehicles also helps to diversify the credit union's investment portfolio.
- The credit union determines the present value of their future employee benefit cost obligations
- They consider their liquidity situation and alternative investment options available
- Then they are able to choose an alternative investment option to utilize, make an investment deposit, and tie that investment to their future employee benefit costs