How much reserve should be held in net assets?

In a recent Milliman report entitled “Status of collectively bargained benefits: Multiemployer health and welfare fund statistics,” my colleague Marcella Giorgou and I analyzed the 2016 financial disclosures of 705 multiemployer health and welfare funds. One of the more interesting statistics analyzed was net assets (shown as months of total expenses). This measures the number of months a plan would likely be able to continue providing members benefits if all income ceased.

Trustees, fund administrators, and bargainers should consider how many months of total expenses are held in assets when reviewing a fund’s financial health, as this can be thought of as a reserve or a cushion against adverse experience. If assets are too low or too high, bargainers and trustees may need to take action. Each fund is different and there are a number of contributing factors for trustees and bargainers to consider when reviewing how many months of total expenses are held in assets. They include:

When does the collective bargaining agreement expire?

Trustees and bargainers should consider holding more in net assets earlier in the contract period and spending down surplus (if necessary) later in the contract period, because a longer period of time results in more uncertainty.

How quickly can bargainers negotiate changes in benefits or contributions?

If the financial health of the plan changes, what can bargainers or trustees do to correct the situation and how quickly can it be accomplished? Some plans will add either a reopener clause or a provision that dictates what happens in the event that net assets fall below a predetermined level.

Is the plan self-insured or fully insured?

A self-insured plan will have more volatility on a month-to-month basis, while fully insured plans will face changes in premiums annually.

How many members and lives are enrolled in the plan, and what is the active/retiree ratio of the plan?

Larger plans tend to have more predictable cash flows due to reduced claims volatility. Plans with a larger percentage of retirees will generally need a larger percentage of employer contributions devoted to retiree benefits, because most plans generally only have employers contribute based on the active population.

In what type of industry do members of the plan work?

An industry with varying work patterns may need to hold a higher reserve to account for months where hours and/or membership (and, consequently, contributions) are lower than average.

When reviewing the financial health of your fund, it is important to consider each factor discussed above, or others unique to the fund, and discuss the implications with your Milliman consultant.

This article first appeared on LaborPress.org.

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