What is an OPEB Trust?
An OPEB Trust (“Trust”) is an irrevocable trust designed to provide benefits to retirees of the municipality and may not be diverted to other uses until the obligation has been satisfied. The Trust can be invested in a variety of investment vehicles, but should generate sufficient cash flow to meet benefit obligations when they come due. Most plan sponsors will fund the Trust over a period of time in addition to their “pay-as-you-go” funding of existing benefits. There are a variety of trust companies and investment management firms that can custody such plan assets and make payments over time. In general, establishment & funding of an OPEB Trust is regarded favorably by the credit-rating agencies. However, a lack of ongoing funding or some plan to accumulate assets may lead the agency to see an ineffective approach and will react negatively. Also, as your Trust will generate expenses, you will want to ensure that the benefits of such funding outweigh the costs associated with the Trust.
The establishment and funding of an OPEB Trust yields many benefits including the use of a higher discount rate which will provide for lower disclosed liabilities for your plan. However, without a plan to sufficiently fund the Trust, it may be an expensive luxury with limited benefits.