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Traditional Plan potential impact on pensions

Posted: January 29 2019 at 06:45 AM

Response from the Northern Illinois Conference Board of Pensions
To Clergy Members of the Northern Illinois Conference. 

Long Tail

Pension liabilities are a long-term responsibility under current defined benefit (DB) plans. Annual conferences have pension liabilities for currently active clergy through approximately 2090 (based on actuarial projects)

Conference staff has received several requests for clarification on the impact of the Traditional Plan on the pension projections for active clergy persons. Similarly, at listening sessions hosted this autumn our delegation to General Conference was asked if the conference would attempt to leave the denomination if the Traditional Plan passes. This is a question that can only be answered by the annual conference. The Board of Pension’s role is to provide information so the conference can weigh our options accurately.

Quoting from popular websites, you may have read: “Neither your pension, nor any retirement account balances, will be reduced by enactment of any of the 3 Commission plans [sic] as they are written.” Or, “clergy in an annual conference exited by the Traditionalist Plan would lose… benefits.” Or, an observation that, “the ‘sequestration and capping’ (of pensions under the traditional plan’s proposals for a separating annual conference) will impact the benefits earned for years already worked by the clergyperson.” Or the claim that the legislative language will, “avoid any disruption or confusion with clergy benefits no matter what decision GC2019 makes.”  We can report to you that all of these quotes, except the final one, are accurate.

How can it be that seemingly contradictory points are all accurate? It has to do with the way the purchasing power of money changes over time because of inflation. For example, if the conference gave a clergyperson $500 in 2019 (and we aren’t, this is an illustration) that would be great. Imagine that the conference places the $500 in a checking account not earning any interest and the clergyperson cannot receive the money until the year 2050. The clergy person would still be grateful for the funds, but the purchasing power of that $500 would be reduced because inflation would increase prices over the period of time that the money was in the account.

The current CRSP-DB pension benefit accommodates the impact of the time value on money with two features that adjust for inflation. The first is that benefits are calculated at the time of retirement. Benefits are calculated using a formula based on the Denominational Average Compensation rate of UMC clergy (DAC) of the year the clergyperson retires times the number of years served. Second, that rate increases by 2% each year for as long as the clergyperson and their spouse live. 

The traditional plan would eliminate The UMC’s provision of these inflation adjustments if an annual conference chooses to (or is made to) leave the denomination. The traditional plan says, “…the former annual conference’s sponsorship of and legal responsibilities under the CRSP will continue as a self-governing Methodist church or affiliated autonomous Methodist church. However, accruals and benefit improvements under the CRSP shall cease.” (petition #90041 at proposed language new 2801.9.b)

In other words, upon leaving the UMC (by choice or force), the CRSP-DB retirement benefit will be based on years of service and the DAC at the time of the conference’s departure, in the present, and not at the inflation-adjusted rate at retirement, in the future. And the 2% post-retirement benefit increases are forfeited. This applies to all clergy in an annual conference that leaves the denomination by choice or by force. 

As an illustration: A 50-year-old clergyperson has served a local church from 1/1/2007 to  7/1/2018. On 7/1/2018 that clergyperson accepts an appointment beyond the local church and has no other service credits in CRSP. When that clergy person retires in 2033 they will have annual pension payment estimated at $12,785 per year, which is based on the DAC in 2033, and it would increase 2% every year. If that same 50-year-old clergyperson with 11.5 years of service was part of a United Methodist annual conference that was forced to leave the denomination in 2018 and continued to serve in an affiliated Methodist denomination (the departed annual conference) until retirement, their pension benefit would be based on the DAC of 2018, not 2033. Their pension benefit would be approximately $7,907 per year and there would be no annual increase. That’s a difference of $4,878 and increasing for the lifetime of the clergyperson. At 20 years of retirement income, this amount in reduced expectation will be over $150,000.  

A clergyperson a year or two from retirement right now would not notice much change. The impact will be greater for clergy who are currently 10 or 20 years from retirement, at least under CRSP-DB as we know it now. While the expectation from a pension for working this year is changed, the clergy person’s benefits would not be “cut.” They would receive the same amount they would have if they retired in 2018, which is all they have really earned.  

To alleviate at least some of this impact, Wespath suggested and the Commission recommended petition #90017 to be considered by general conference regardless of the plan that is selected. This petition would convert the defined benefit promised the clergy person into a cash amount deposited into a UMPIP account when a clergy person, “terminate(s) their annual conference relationship under paragraph 360 of the book of discipline….”  By converting your benefit to UMPIP, through investment earnings, the clergy person’s benefit is likely to keep up with at least the 2% post-retirement increases, although there is a risk that it may not, especially if there is high inflation in the U.S. Also through investment earnings, the converted benefit might keep up with DAC increases.

This proposed conversion is available to clergy who withdraw from the annual conference. It is likely unavailable to clergy whose annual conference separates from the denomination as legislation is currently written. Petition #90017 and Discipline paragraph 360 refer to a clergyperson withdrawing “…from their annual conference.” While the traditional plan asserts, “clergy members of the departing annual conference shall by default remain members of that annual conference unless they request to remain in The United Methodist Church.”

It is clear that the Traditional Plan has a fully developed method for handling clergy pensions upon separation of an annual conference that is different than that of petition #90017, absent a clergypersons' decision to withdraw while that conference is still a part of The UMC. But as currently written, the Traditional Plan will freeze the accrual of benefits for the clergy of a separating annual conference; The UMC will not fund the inflation adjustments that dramatically change what clergypersons expect to receive in pension for the years already worked. It has to be this way. The UMC can not promise benefit accruals to clergypersons of the separated annual conference unless that new entity chooses to fund them. A separate church is a separate church and will make their own decisions. The UMC must provide security to the pensions in the plan and can not take on the risk of additional benefit accruals. A general conference action can not obligate any action from a separate entity.

 Wespath assures that they are more than willing to continue to provide pension administration to the separated annual conference, now its own denomination, in writing a new plan for provision of pensions earned in the years worked after the separation and even in making improvements to the frozen plan if the separated conference decides to fund them. They are exceptionally creative professionals who strive to extend the best outcomes for clergypersons. If it is possible, they will find a way. Not every outcome will be possible. The separated annual conference may try to make up for the loss of pension expectations. But there is no way to guarantee the choices they will make, the number of churches they will have, if they will accept all clergy from the former annual conference, and if they have the financial capacity to make clergypersons whole on prior service while funding current service. 

Not all the money in the separated conference’s CRSP account will transition with that annual conference. The assets will be reduced by the costs of promises to clergy who decide to remain in The UMC and contingent annuitants by something like 170% of what a conference contributed (market rate vs. funding rate). Subtracting those amounts leaves fewer resources than originally contributed for the clergy who migrate with the separating annual conference. There are so many variables to take into consideration. While everyone may have the best intentions, recasting the conference relationship to the denomination as the traditional plan provides will change the capacity of the conference to provide benefits. Under the traditional plan, when an annual conference leaves or is forced out, The UMC will freeze benefit accruals. No one should be guaranteeing that clergy will not experience any change when much of that outcome lies with decisions of a future conference with less capacity than the present one.  

So, it is true “neither your pension nor any account balances will be reduced” from the rate set in 2019 or the amount operative the year the conference separates. Barring other potential outcomes, the promises made on the date the conference departs will not be reduced. But it is also true that there’s a reduction in the expected value of the clergy person’s benefit because the “benefit improvements” from The UMC have ceased. There will not be inflation adjustments to CRSP and this will likely result in a loss in the expected value of their pensions in the six figures for most clergy, though each clergy person will experience it uniquely. The defined benefit pension arrangement must be sequestered and capped when an annual conference is separated from the denomination for legal reasons and reasons of governance. 

It is incorrect to claim that any outcome of General Conference 2019 “avoids disruption to clergy pensions.” Shifting pension liabilities between separate legal entities is disruptive. It is impossible to predict the capacity or the willingness of a separated annual conference to restore the accrual of benefits frozen by The UMC. The Conference Board of Pensions feels a fiduciary duty to explain the ambiguities make any representation about the future of a separated annual conference unreliable and we see limits to the capacity of a separated conference that makes restoration of frozen benefits unlikely.

Should the traditional plan prevail, the Northern Illinois Conference will need to certify obedience to LGBTQ exclusions or face expulsion from the denomination resulting in freezing and capping of the defined benefit program, which is an outcome with real-world consequences on what clergy can expect from the pension benefits they have already earned. And if the conference is to debate a separation from the denomination at our own choice, the Conference Board of Pensions will want to provide accurate and reliable information about the impacts of that decision. 

Please continue to pray for the church, the special session, and for wisdom to prevail at general conference. 

Additional Resources

Click here to read Wespath's FAQs regarding the potential pension impacts of the Commission’s three proposals to the 2019 Special General Conference. 

Download At-a-Glance: Pension/Economic Impact of Commission on a Way Forward Options

Read more on the pension impact from the other two plans on pages 157-160 of the ADCA

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