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The idea of using a captive for pension financing brings to mind Dana Carvey's Church Lady skits from Saturday Night Live--specifically, the moment when the camera would frame Church Lady's face and she would scrunch it up and say to her guest in her most saccharine voice, "Well, isn't that special?"

It isn't that captives couldn't revolutionize how companies finance their defined-benefit pension plan. The setup might afford greater control and cost-saving efficiency on what, for most companies, is a massive liability. According to a nifty bubble graph put together by Towers Perrin, the advantages of financing pensions through captives--in higher expected outcomes and lower downside risk--are superior versus other solutions.

"Everything else pales by comparison," said Kenneth W. Porter, E.I. du Pont de Nemours and Co.'s director of corporate insurance and global benefits financial planning. Porter and DuPont are "investigating the possibility" of using a captive for pension financing and spoke?or tried to speak?at a recent industry tradeshow about the topic.

Porter did not mince words about the potential upside of such an arrangement. A captive could allow a company to pay the real costs of its pension plan--not more, not less--while making the program more secure than law requires.

But when it comes to the details of how, Porter couldn't say. It quickly became clear that DuPont's legal department had finely chopped, digested, regurgitated and put through the food processor his presentation.

"He wasn't allowed to talk enough about what he was doing to even get an idea," says Ed Aiello, vice president, global insurance, at food giant H.J. Heinz Co., who sat on that panel with Porter. "It was redacted by their law department to the point where he didn't have much to say," he adds chuckling.

"He talked about it at such a level of abstraction that I'm not sure anybody could get anything out of it," agrees Mitchell Cole, a principal at Towers Perrin, who also participated in the captive educational session with Porter.

Cole was not surprised by Porter's tight lips. In fact, as an architect of pension captives, Cole's lips are sealed as well. At the moment he is helping five clients in "doing things" with captives and international pensions. Two clients are in the execution phase. Some clients, he admits, are also talking with Towers Perrin about setting up domestic pension programs. His firm has designed a captive annuity program, or PensionCAP. In the arrangement, a fronting carrier provides an employer with an annuity policy for its pension, which it then reinsures back with the employer's captive.

But that's where Cole draws the line on providing details, if you can call those details.

"Publicizing this is not in our interest," he says. "And the reason is that this is very bespoke, very customized. We have a patent pending on it."

That, and all parties involved are also required to sign nondisclosure agreements, says Cole.

Besides, companies don't normally tend to talk shop unless forced to by regulatory agencies. Why share a "better mousetrap" with competitors, says Alan Port, president and principal with Burlington, Vt.-based Paul Frank + Collins PC.

And employers can't afford loose lips in their midst because of employee relations issues.

"There are a few benefits that employees get concerned about. Retiree medical and pension are the two benefits that have a lot of visibility from the employee perspective. So employers, generally, until they determine what they want to do ... they don't like to broadcast it," says Karin Landry, founder and managing partner of Boston-based Spring Consulting Group.

Points taken. But something so secret must be even more special than they're letting on, right?

At the moment, the answer might be that Church Lady sneer. It's difficult to tell how successful something could be when so few employers are out there "executing" on this, as Cole would put it, and those that are refuse to share.

Aiello's attitude toward using a captive for domestic pension is telling of how other risk managers might look at them. And Aiello is no novice in sophisticated captive applications. He uses Heinz' captive for all his international benefits, and is working toward funding all U.S. benefits there too. Heinz also does pension financing for international workers in countries where insurance products are permissible, such as in the Netherlands.

"The goal is to have one focal point in the world for people to go when they have an insurance issue, whether it's property/casualty or benefits," he says.

But for domestic pension financing--"We really haven't looked at U.S. pensions," he says.

One reason is that those currently working on it keep everyone else in the dark. "If it ever gets to the point where it becomes public knowledge, then we'll take a look and see what they did," he reveals, even if only half in jest.

Another reason is because Aiello is devoting energy and resources to other ERISA benefits. "Let's get the low-hanging fruit," he puts it.

Landry, who has nearly two decades' experience in the area, says many companies don't pursue captives as a solution to pensions because they are very complicated.

That's on top of the resource-consuming commitments that using captives for ERISA benefits in general can entail. Employers must inquire if the move would be considered a "prohibited transaction" with the U.S. Department of Labor. If so, they would need to seek a DOL exemption, whether class, fast-track or--the most arduous--individual.

Throughout this DOL process, explains Aiello, employers must also rely on consultants and actuaries--"a lot of mouths to feed along the way," as he said at the tradeshow event.

Complications from within an organization can gum up the works too. Human resources, pension specialists and risk management might find cooperation challenging from behind the ramparts of their corporate fiefdoms.

Cole, the number cruncher, also sees another reason why pension captives aren't taking off.

He sees companies "sitting on the sidelines," without a "pressing need" to change because the method of accounting for their pension benefits hasn't changed, not yet at least.

The Financial Accounting Standards Board and the International Accounting Standards Board, the U.S. and the global organizations charged with improving financial reporting, are both reviewing how companies account for pensions.

The IASB plans to have a discussion paper on the issue out by the end of this year, with the final work done by 2010, implementation by 2012. The FASB announced its intention to build off the IASB's work.

Yet some would contend many employers can't wait until next decade to revise their pension setups.

While agreeing domestic defined-benefit pensions are a "bucket" that really hasn't been tapped yet with captives, Landry says, "Using a captive to fund pensions really is the up-and-coming area."

She cites a recent survey her firm did that showed about half of employers with defined-benefit pension plans were thinking about ending those plans.

Landry suggests that the new constraints and demands of the 2006 Pension Protection Act, increasing Pension Benefit Guaranty Corp. premiums after the Deficit Reduction Act of 2005 and pressures of global competition have employers re-examining the pension issue.

"Many of them are going through and again once more re-evaluating whether they really want to be in the DB business," Landry says.

When and if companies decide to "get out of the DB business," then the captive lightbulb pops on.

"If the employers really want to maintain some control over the assets, if they want something that's competitively priced, if they're going to want to wind the plan down and take it off their balance sheets and income statements and so forth, or cost-effectively fund a closed plan, the marketplace really doesn't have a lot of good solutions for them currently," she says.

On the other hand, captives offer investment freedom that could reap dividends. The reason is flexibility. Cole says that captives allow employers to change investment strategies on a dime. Landry estimates possible savings at 200 to 300 basis points over annuities alone.

"A captive makes a huge amount of sense," Landry says.

To everyone, adds Cole.

"It has a lot of advantages to plan participants. It has a lot of advantages to the plan sponsor and to the trustees of plans where they exist. We've tried to create a win-win-win situation, where everybody is well protected, and that everybody, including the pension regulators, comes out on the winning side of the ledger," he says.

Well, isn't that special?

MATTHEW BRODSKY is Web editor/senior editor of Risk & Insurance®.

October 15, 2007

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