It has been 30 years since the Family and Medical Leave Act (FMLA) was passed at the federal level under former President Bill Clinton. FMLA grants eligible employees with unpaid, job-protected leave for qualifying family and medical reasons with continued employer-sponsored group health insurance coverage, if applicable. Since then, some adjustments to FMLA have been made, such as the inclusion of workers with a family member in the military and those in a legal, same-sex marriage. However, the evolution has been slow and limited; many believed or at least hoped that over time FMLA would evolve into a paid leave model, but over the last three decades, it is states that have taken initiative in establishing PFML programs for their workers.

Starting with California in 2004, 11 states and Washington, D.C. now have some type of established PFML program, with several other states including Maryland, Colorado, and, most recently, Minnesota, in the regulatory phase where a law has passed but benefits are not yet available. Plans vary by percentage of wage replacement, maximum weekly benefits, the contribution split between employer and employee, benefit duration, and other factors. The newest trend in PFML law, however, relates to PFML as an insured product.

PFML Insurance Rules

Recently, states including Virginia, Tennessee, Florida, and Alabama have passed legislation related to a voluntary PFML insurance product, as opposed to the more traditional, mandatory PFML programs that we had been seeing in previous years. With this new model, state laws create a new line of family leave insurance that may be written as an amendment or rider to a group disability income insurance policy, or as a separate group insurance policy purchased by an employer.1 Employers may offer the product for their employees without obligation to do so, in a setup similar to other voluntary benefits like short-term disability or vision insurance. In this way, it is purchased through an employer but at the individual’s expense and discretion and a third party insurance carrier is used to carry out the program.

As an example, under the Tennessee Paid Family Leave Insurance Act, a new line of insurance called paid family leave (PFL) insurance has been established. It can be offered as a rider or included in a policy for short-term disability, life insurance, or as a standalone PFL policy. Qualifying reasons for a leave of absence include the birth or adoption of a child, placement of a child for foster care, care for a family member with a serious health condition, and reasons related to a family member’s active military duty. The insurance is purchased through an employer arrangement, but unlike the voluntary program launched this year in New Hampshire, there are no tax incentives for employers who offer the PFL product.

Preliminary Results

PFML as an insurance product is a new concept that we expect to evolve over time.  

Take-up by employers will likely vary on their size, culture, geographic spread, and most importantly their current benefit offerings.  Some employers may appreciate the model law as a guide to providing a new benefit for employees, or a competitive benefit to what is offered in other states so that equity could be achieved across locations.  Others could feel it is too costly for them to offer, or they may already have equivalent benefits in place.  Whatever the case, employees are becoming increasingly aware of these laws, and employers need to be ready to explain why they are or are not supporting them.   

At the state level, it may be an intermediary step to the establishment of a mandatory PFML program, or it may be a way of offering some benefit without the budgetary and resource constraints required to build out a more traditional plan.

This new wave of PFML laws is just getting started, however, and our team will be closely monitoring utilization and legislative developments. In the meantime, check out our absence management services here or get in touch with our team if you have questions about the direction of PFML.

1 (2023). Absence Advisory June 2023. Aflac

Captive Review has reported that Spring has acquired TJ Scherer from NFP. TJ will be taking on the role of Vice President and working with clients on the P&C and captive consulting. You can access the full article here.

Captives Insurance Times has reported that TJ Scherer has joined Spring Consulting Group and will be taking on the role of vice president. You can check out the full piece here.

Captive International published an article on Spring’s latest addition, TJ Scherer. TJ will be joining Spring as Vice President and will be working in business development surrounding P&C and captive insurance. You can find the full article here.

Spring is excited to welcome T.J. Scherer to our team as of July 31st as Vice President. His focus is on supporting our existing clients and growing the business on the P&C and captive insurance space. He will work closely with our captive consultants and actuaries to bring additional insight and financial mindset to our client conversations around strategic risk management.

T.J. brings over 10 years of experience managing complex client relationships and engagement for risk management programs. T.J. has extensive experience in financial reporting including financial proformas and long-term planning strategy, audit coordination and preparedness, and compliance and regulatory matters.

T.J. is a Certified Public Accountant (CPA) in California, holds an Associate in Captive Insurance (ACI), and is a RIMS-Certified Risk Management Professional. He received a master’s degree in accounting and financial management from the Keller School of Management and a bachelor’s degree in business administration from the University of Iowa.

We are delighted to have TJ join the ever-growing network of bright minds within Spring and Alera Group. 

Title:

Chief Property & Casualty Actuary

Joined Spring:

I joined Spring in 2017.

Hometown:

I’m from rural Wisconsin, about 30 miles south of Green Bay.

At-Work Responsibilities:

As Chief P&C Actuary, I lead our property & casualty team at Spring. This consists of performing actuarial feasibility studies, captive consulting for new and existing captive insurance companies and risk retention groups, reviewing captive applications and actuarial reserving studies for regulators, working with Alera brokers on collateral analysis and reserve studies and other actuarial analyses, developing new business and maintaining existing client relationships.

Outside of Work Hobbies/Interests:

I enjoy being outdoors, outside of the office I like fishing, boating and traveling.

Fun Fact:

In my early 20s, I took 2 years of a method acting class.

Describe Spring in 3 Words:

Collaborative intelligent team.

Favorite Movie:

Avatar

Do You Have Any Children?:

Yes, I have 3 kids ages 24, 20, and 16.

If You Were a Superhero, Who Would You Be?

Thor

Captive Review has released a shortlist for their 2023 US Awards. Spring has been nominated and listed under the Top Actuarial Firm and Captive Consultant categories. You can access the full list here.

Current State

Costs, risk, regulations, and complexity have all contributed to a decrease in these employer-sponsored retiree benefits over the last few decades. When we combine today’s rising healthcare and benefits costs, economic instability, and an aging population, the result is a quandary for employers with retiree liabilities. 

Organizations are looking for solutions to lessen and manage these liabilities. A 2022 MetLife study found that 85% of plan sponsors say their company’s post-retirement benefits received significant attention in 2022 from their corporate management because of the financial effects that their volatility and related risks place on their corporate balance sheet and income statement. In fact, the same study estimates that pension risk transfers represented between $50 and $52 billion in 2022. The study surveyed plan sponsors with one or more post-retirement medical and/or post-retirement life insurance plans for current or former employees. 78% of the survey’s plan sponsor respondents work for companies with $100 million or more in retiree medical and/or retiree life insurance plan obligations, putting serious strain on fiscal matters and causing a shift in priorities.

Solutions Available

Insurance companies like taking on pension risk for retirees, because payment amounts are known, as is the form of payment. In addition, the risk is somewhat short-term, related mostly to mortality. Accordingly, insurance companies quote on retiree liabilities with competitive prices, and several plan sponsors have settled some or all of their retiree liability.

Contrast this with terminated vested participants, who may have several decades until retirement. In this case, the benefit amount is dependent on several factors like age at retirement and form of payment elected. There is also substantial investment risk for plan sponsors. While these uncertainties are commonplace in pension plans, insurers build in substantial margin to compensate them for taking on these risks. This can be especially problematic for plan sponsors who have already settled much of their retiree liability, leaving only the less attractive liability to insurers on the books.

U.S. GAAP sets out stringent employer requirements when it comes to accounting for the accrual of estimated total retiree medical and other benefits; however, it does not force employers to fund these obligations. Employers are merely required to recognize them. Recognition nonetheless creates a liability without an offsetting asset.

The good news is that innovative funding mechanisms are available to assist with plan termination. One example is the SECURE Act 2.0, signed into law on December 29, 2022, which paves the way for overfunded pension plans – now defined as those that are at least 110% funded – to transfer up to 1.75% of plan assets to a program used to pay for retiree health and retiree life insurance benefits through 2032. Derisking and buy-out solutions continue to be prevalent as well, although they often come with a substantial margin for insurers. A retiree medical buyout leverages a customized group annuity issued by a highly rated insurance company to transfer the retiree benefit obligation from the corporate sponsor to the insurer. MetLife reports that 84% of surveyed planed sponsors are considering such a buyout for their retiree life insurance liabilities.

More and more plan sponsors are transferring or allocating excess pension assets from overfunded defined benefit pension plans to fund other retiree benefit obligations, such as retiree medical and life insurance. According to MetLife’s 2023 Post Retirement Benefits Poll report, 55% of plan sponsors surveyed have already transferred assets in this way.

Another tactic gaining traction as a viable funding solution for retiree benefits is captive insurance. Companies can rely on IRS Revenue Ruling 2014-15 to set up a captive that exclusively writes noncancellable accident and health insurance to cover retiree health benefits. With the coverage being life insurance, the captive’s reserves will receive life insurance tax treatment which thus allows the reserves to grow tax free. More importantly, the company is able to fund the retiree health benefits in a new captive without DOL approval since they do not fall under ERISA. This is the type of status-quo-challenging strategy that may prove critical for organizations grappling with defined benefit plan promises, given today’s difficult market conditions.

Case Study: Utilizing a Captive Insurance Arrangement to Manage Defined Benefit Pension Risk

Spring has worked closely with the pension risk transfer groups at insurance companies, who consistently price liabilities for settlement at 20% or higher than the US GAAP liability that plan sponsors recognize on their books for vested terminated participants. This is significantly higher than retirees, who can sometimes be priced at or even below the US GAAP liability.

Spring has developed solutions for clients to settle plan liabilities at very close to what plan sponsors currently recognize. This is a substantial savings to plan sponsors, and it allows the plan to be terminated sooner. Below we are bringing some of these concepts to life with a case study.

The Challenge:

A plan sponsor with a billion-dollar pension plan wanted to review risk management options for their plan, including how best to manage a large bulk annuity transaction. The organization had previously completed smaller transactions, including retiree annuity buy-outs as well as vested term lump sums. They were now looking to complete a much larger annuity transaction, but they wanted to better understand the full spectrum of options. A traditional annuity transaction would have been quite expensive given the conservative nature of how commercial carriers price deferred liabilities. While many factors impact the price of a transaction, the low interest rate environment, mortality risk charge, as well as conservative long-term investment options all contributed to a much higher transaction cost under a standard plan termination than the sponsor felt was reasonable.

The Process

Spring assessed various risk management options for the organization to consider, including an additional vested term lump sum window with a robust communication program to increase the take rate as well as a much larger bulk annuity transaction for the entire plan. The organization was interested in exploring an additional lump sum window, but ­first wanted to focus on how best to move forward with a cost-effective bulk annuity transaction. Rather than exploring these options with their plan actuary, the plan sponsor was also looking to work with an organization that could provide for a more objective and independent analysis without any conflicts of interest.

We reviewed options for a possible bulk annuity transaction with the organization which included both buy-in and buy-out strategies. We recommended exploring the use of a captive to improve the overall cost and participant security of the bulk annuity transaction. Using a captive can substantially lower the cost of the overall transaction, particularly for plans looking to transfer obligations for more than existing retirees only. A captive provided several benefi­ts including:

The Results

This strategy yielded the following positive impacts:

  1. Over a 10% reduction in the one-time premium outlay for the transaction
  2. Participant security is enhanced because the captive provide an additional commitment to pay the bene­fits in addition to the fronting carrier.

Conclusion

Innovative tactics are available for organizations facing financial stress related to defined benefit plan liabilities, combined with the volatile market circumstances we’re seeing today. If your organization has pension plan liabilities and is looking for a strategy to mitigate this burden, you may want to evaluate the different options available to ultimately help you realize savings and enhance your risk management strength.

A Q&A from our Managing Partner, Karin Landry, our SVP, Prabal Lakhanpal, and Chief P&C Actuary, Peter Johnson was featured in Financier Worldwide Magazine’s August 2023 edition. It reviews current trends in captive insurance across benefits and Property and Casualty (P&C), and what we can expect in the industry moving forward. You can access the full Q&A here.