Employee Benefits for an International Business

Transcription

1 Employee Benefits for an International Business Simon Gilliat Global Head of International Consulting Group, Towers Watson Teresa Hicks Director International Benefits & Global Benefits Strategy, ADM P. Bruce Wright, Esq. Partner, Sutherland Asbill & Brennan LLP

2 Objectives Explain why companies have adopted the TW Captive Annuity Program (CAP) Provide a snapshot of important nuts and bolts Give some insights into learnings from TW s CAP experience: $3 Billion of pension reinsurance as of 31 st December 13

3 Background Non-U.S. Pension Captives U.S. and Canadian Pension Captives Value proposition: Control over investment strategy and surplus Time to implement would likely take months Completed assignments in Canada, Denmark, France, Germany, Ireland, UK Value proposition: Control over surplus Time to implement would likely take months to implement DOL exemption IRS Private Letter Ruling No U.S. pension captives, as of 31 st December 13

4 100% Ownership Structure (as a buy-in or buy-out*) Sponsor Pension Trust Insurer Insurer Captive (U.S. situs**) Solvency Capital Reserves Reinsurance security Participant security Credit protection on SCR Accounting * A settlement under US GAAP would not be possible but should be under the PBGC and IRS ** Required by the Department of Labor; examples are VT, DE, South Carolina, etc.

5 Key considerations Individual Prohibited Transaction Exemption required in the U.S Tax treatment of the captive as a US life insurer Financial accounting of plan assets Fronting companies Contracting Fees Reinsurance security Investment strategy Economics CAP versus current situation, using EROA Stochastic analysis of current situation versus CAP

6 Internal players Supporting needs Accounting Finance Legal Tax External players Benefits counsel Tax counsel Auditor Fronting insurer

7 Supporting Needs Modelling Investments Financial value And lots of patience

8 Premier Player in Global Agribusiness Serving Vital Needs Throughout the World Key Facts CY12 net sales $90.6 B Employees 30,000 Facilities 700+ Country sales 140+ Market cap ~$27 B* NYSE: ADM CY12 Segment Operating Profit $2.77 Billion Oilseeds Processing Corn Processing Ag Services *As of Oct. 31, 2013 Other

9 Unmatched Assets and Global Scale Sourcing facilities Oilseeds Processing Sourcing distribution Processing distribution Corn Processing Cocoa and wheat processing

10 ADM s Proven Core Model Expand the Size and Global Reach of our Core Model Corn Oilseeds Wheat Cocoa Source Transport Process Transform Distribute Market & Sell Financial strength and industry acumen underpin the chain and drive value Food Feed Fuel Industrial Expand Volumes and Diversify Crops Expand Volumes and Diversify Product Portfolios

11 Agrinational Insurance Company ADM s first Captive formed in 1975 in the Cayman Islands Agrinational Insurance Company formed in Vermont in 1987

12 Agrinational Financial Highlights Assets $1,305,729,146 Stockholders' Equity $171,102,323 Rated by A.M. Best at A- Data valid as of Dec. 31, 2014

13 How ADM Uses Captive Insurance Property insurance (PD/BI) General liability and products liability Automobile liability Workers compensation Products recall Marine cargo Charterer s liability Brown water marine Blue water hull/p&i Directors and officers Employee benefits Crop insurance Credit insurance Miscellaneous coverage crime, EPLI, etc.

14 ADM s Early Adoption Reduce costs Centralize risk management Better coverage Help control volatility in the Captive s book of business (employee benefit risks tend to be less volatile than property and casualty risks) Potential tax benefit (Employee benefits are third party business. Rev. Ruling )

15 Our Considerations Group life insurance Supplementary life insurance Long-term disability insurance Retiree benefits Executive benefits

16 ADM s Initial Decision ADM decided to go with group life insurance in ,000 employees in the U.S. Used 75% loss ratio and 5% investment return for financial evaluation Reasons to proceed Flexibility to improve benefits Price Profit Use of Captive s capital Third-party risk

17 Outside Resources Legal work Independent fiduciary Other team members Captive managers Human Resources Investment manager

18 How HR Fits Into the Picture Information and governance issues Economies of scale Company needs are not market driven

19 Other Programs Added to Captive Implemented multinational pooling with captive reinsurance Received DOL approval for LTD in January 2009 Looking at supplemental life Considering global pensions

20 Long-Term Disability Covers long-term disability for U.S. only Have Department of Labor approval 100 percent reinsured

21 International Benefits Two companies used Better spread of countries with local insurer Help efficiency Total of 13 with one company Total of 7 with other company All possible lines Medical Life Accident Disability

22 Some Concluding Thoughts Captives can provide meaningful advantages in financing E.B. - aside from third party business The growth of benefit captives will mirror the growth of P&C captives - market inflections will spur growth Pension re-regulation and cost are driving changes in traditional pension financing - could well be a major driver in the growth of captives for benefits

23 What is a Welfare Benefit Plan Plan for benefits for employees maintained by employer, e.g., Accidental death and dismemberment Disability Group term life Medical

24 What is a Welfare Benefit Plan A totally voluntary program (employee only contributions) can avoid plan status if the employer involvement is limited to Allowing insurer to publicize Collecting premium via payroll deduction Remitting premium Receiving no consideration

25 What is a Welfare Benefit Plan But, if a captive is used, DOL considers potential employer involvement, compare DOL Advisory Opinion 83-3a (January 17, 1983) (no plan) with DOL Advisory Opinion 83-28a (June 9, 1983) (plan with inclusion of captive reinsurer)

26 If We Have a Plan... There is not permitted under ERISA a direct or indirect furnishing of services between a plan and a party in interest A party in interest includes an employer, as well as a subsidiary in which the employer has an interest of more than 50% in vote or value

27 If We Have a Plan... This is called a prohibited transaction for which remedies include Tax Reversal of transaction

28 To Avoid the Penalty... An employer can Rely on a class exemption Seek a private exemption

29 Class Exemption PTE requires Party in interest Insurer licensed to sell insurance in one of the states* or D.C. Certificate of compliance obtained from domiciliary state at earlier of 18 months prior to transaction or when certificates were last available No more than adequate consideration paid by plan No sales commissions Insurer has undergone a state exam within 5 years of the transaction or examined by a cpa in its last year Percentage of premiums test

30 Class Exemption But, PTE not generally applicable as it does not apply to reinsurance Reinsurance preferred to avoid state regulatory issues To demonstrate to employees that plan will remain undisturbed

31 Private Exemptions Break down into two varieties Captive has less than 50% unrelated business (in lieu of percentage of premium test) Independent fiduciary required Augmented benefits required Ex pro is suspended

32 Private Exemptions Break down into two varieties Captive has more than 50% unrelated business No independent fiduciary required No augmentation of benefits required Ex pro is available

33 Accelerated approval Ex Pro Substantially similar to the prior exemptions in all material respects dol decides this Theoretically 75 days from submission Practically a little longer

34 What If You Have a Foreign Captive You can still obtain an exemption Form a branch Process similar to captive application State law requirements Taxation of premium Sometimes a trust fund

35 Medical Stop Loss Generally not structured as an ERISA plan, see Advisory Opinion 92-02a