4000 - Advisory Opinions
Insurance Coverage of Overfunded Public Pension Funds Held at FSLIC-Insured Institutions
August 10, 1988
John L. Douglas, General Counsel
I have been asked to respond to your inquiry concerning the insurance afforded by the FDIC to deposits of the Kansas Public Employees Retirement System (KPERS) and other public pension plans.
I have reviewed the letter from Chairman Wall of the Federal Home Loan Bank Board to *** of the *** dated July 21, 1988, wherein Chairman Wall states "I intend to permit protection for [KPERS] overfunded accounts held at FSLIC insured institutions. Until March 1, 1989, the overfunded portions will be insured by the FSLIC." It is my opinion that the FDIC does not have any legal basis for providing you with a similar letter of assurance and, in fact, if we were to provide such a letter it would be in direct conflict with our regulations.
Under FDIC regulations, the determinable ownership interests of pension plan participants in the deposits of a pension plan are treated as trust interests and insured according to the rules governing the insurance of trust accounts. Section 330.1(c)(4) of our regulations provides, in relevant part, that "any allocable interest created pursuant to an employee benefit plan . . . shall be deemed to be a trust interest." 12 C.F.R. § 330.1(c)(4). Section 330.1(c)(1) provides, in pertinent part, that "trust interests in the same trust deposited in the same account will be separately insured if the value of the trust interest is capable of determination, without evaluation of contingencies, except for those covered by the present worth tables and rules of calculation for their use" set out in the Federal Estate Tax Regulations. 12 C.F.R. § 330.1(c)(1). Under this provision, the determinable interest of each pension plan participant in the deposit account of a pension plan is insured, up to $100,000, provided that his/her interest is determinable without evaluation of contingencies except for those covered by the present worth tables in the Federal Estate Tax Regulations. To the extent that a percentage of the deposit account is not attributable to participants' determinable interests, that portion of the deposit account is deemed to be the overfunded portion of the deposit. The FDIC treats the overfunded portion as a separate trust estate and, as such, it is insured up to $100,000.
In your letter to Mr. Louis Wright of the FDIC, dated July 20, 1988, you suggest that the FDIC should treat accounts maintained by corporate (private) pension plans differently from those maintained by governmental (public) pension plans primarily because of the different accounting standards which have been established by FASB (for private plans) and GASB (for public plans). GASB Statement No. 5 apparently provides that one should take into account future estimated salary increases in computing the accrued benefits of participants in public pension plans. FASB apparently does not call for the consideration of such projected salary increases in calculating benefits for participants in private pension plans. Therefore, it is your position (as I understand it) that the FDIC has a basis for treating private pension plan deposits differently than public pension plan deposits and that public pension plans should be permitted to calculate accrued benefits using the method provided in GASB Statement No. 5 (which takes into account projected salary increases) for deposit insurance purposes. If permitted to use this method, you contend that the KPERS plan would not be considered overfunded and thus 100% of KPERS deposits would be attributable to the plan participants. Unfortunately, recognizing the GASB standard would present a conflict with FDIC regulations since GASB Statement No. 5 introduces a contingency (i.e. projected salary increases) which is not contained in the present worth tables of the Federal Estate Tax Regulations. Therefore, under our existing regulations, the FDIC cannot permit public pension plans to calculate accrued benefits using the GASB standard for deposit insurance purposes, because that method of valuation is in direct conflict with the restriction on the use of contingencies in evaluating trust interests.
While it would be theoretically possible to amend our regulations to accommodate the desired change, the process of enacting amendments is somewhat protracted, and we are unsure as to the ultimate ramifications of such changes. We believe, however, that as a practical matter KPERS should be able to obtain full insurance coverage for its bank deposits under our existing regulations.
Our regulations contemplate that a trustee may provide for an allocation of its assets among its various obligations. See 12 C.F.R. § 331.1(a). Assuming the trustee may permissibly make such an allocation under the existing trust documentation or under statutory authority, a pension plan could conceivably allocate a portion of its assets to satisfy those obligations to individual participants that are properly attributable under the procedures outlined in our regulations, and direct that those assets be invested first in bank deposits, and the excess in other legal investments. The trustee would direct that "non-attributable" assets be invested in legal investments other than insured bank deposits.
In practical terms, such as allocation allows the FDIC to ignore the interest of KPERS in the "non-attributable" or "overfunded" assets, since none of that money will be deposited in FDIC insured banks. The FDIC would then look at the interests of the individual participants, each of whom would be entitled to insurance of up to $100,000 in each bank in which funds were deposited. KPERS could assure that the entire ascertainable interests of all participants would be fully insured by dividing the deposits among that number of banks which, when multiplied by $100,000, exceeded the ascertainable interest of the largest single participant.
While we do not have the exact figures for the KPERS plan, if we were to assume that the individual participants had properly determinable interests of $1.2 billion, and no single individual had an interest in excess of $500,000, and the trustee made the type of allocation described above, it would appear that deposits by KPERS of up to $240 million in a single bank would be fully insured. Of course we would want to work with KPERS and its staff to get exact figures and assure that the allocation was both legally permissible and properly documented in order to avoid misunderstandings as to the scope of insurance coverage afforded.
I trust the foregoing will be helpful to you and to KPERS, and look forward to working with you on this issue. Please contact Mr. Claude A. Rollin of my staff for further information.