In January, SCA, a Stockholm-based consumer products company with $8.8 billion in 2002 revenues, implemented a global program to cut the costs of its employee benefits without actually reducing their value to employees. The method: underwrite the benefits for its 40,000 global employees through its wholly owned captive insurance company in Dublin, SCA Re. One problem: SCA has 5,000 employees in the United States, and U.S. law requires that before a company may use a captive to finance employee benefits, the captive must underwrite at least 50% of non-corporate business and be domiciled in the U.S. So before SCA could apply its captive strategy to benefits plans for its U.S. workers, it would have to create a new U.S. captive. "We're in the process of doing that now and are looking at several domiciles, including Vermont and the U.S. Virgin Islands," says Sofia Tesfazion, SCA benefits manager. She anticipates a captive will be licensed and capitalized within three months.

SCA also has to get the Labor Department to okay its plans and grant it an exemption from prohibited transaction rules contained in the Employee Retirement Income Security Act of 1974 (ERISA). Only two U.S. companies have received the green light from the Labor Department to pursue this course–Columbia Energy Group (in October 2000) and Archer Daniels Midland Co. (in March 2003). SCA wants to become the third. "We've filed for permission to use a captive to finance our U.S. employee benefits program and have received the impression from the Labor Department that they have no problem with our application," Tesfazion says.

Why would a company work so hard just to use a captive to finance benefits such as long-term disability, life insurance and employee and retiree medical coverage? "Costs savings and possible tax advantages are the key drivers," replies Mitch Cole, a principal at New York-based consulting firm Towers Perrin. "In terms of retiree medical costs alone, which for many companies is the most expensive debt they have on their balance sheets, rising at a 12% to 15% annual clip, companies can save 5% of their accumulated post-retirement benefit obligations by funding them through their captives."