What does prefunding OPEB involve?

Prefunding OPEB, or other post-employment benefits, primarily involves financing benefits as they are earned. This approach is designed to manage the future costs associated with benefits that will be paid to retirees. By prefunding, an organization sets aside funds in advance of actual benefit payments, allowing those funds to accumulate and earn investment income over time. This method can help reduce the financial burden on the organization when these benefits become due, as the necessary resources have already been allocated and can potentially grow through investment returns.

The benefits of prefunding include greater financial stability, better cash flow management, and potentially lower long-term costs due to accrued interest on the prefunded assets. It also aligns the funding strategy more closely with the liabilities, leading to improved financial reporting and management of the organization’s overall financial health. Prefunding contrasts with the approach of financing benefits when they become due, which can lead to cash flow issues and increased costs if not properly managed.