Wespath FAQs: Commission on a Way Forward

 

Wespath FAQs: Commission on a Way Forward

The Commission on a Way Forward sought additional expertise from Wespath regarding the potential pension impacts of the Commission’s three proposals to the 2019 Special General Conference. Wespath provided information and analysis about how various scenarios under consideration might impact clergy pensions (U.S. plans), as well as related effects on local churches and annual conferences. Wespath provided detailed analyses in “Appendix 4 – Wespath Resource to the Commission’s Report,” which was published in Exhibit D of Judicial Council Docket No. 1018-12 (see pages 216-224 of the Docket PDF).

Wespath is prepared to serve the Church in whatever form it takes in the future under any scenario. The following FAQs provide additional information. We will update this page as more information becomes available.

Context

  • Information in Appendix 4 and FAQs below applies to plans for U.S. clergy.
  • Annual conferences are the “plan sponsors” of the UMC pension plans, and are legally responsible for paying the benefits promised to clergy (BOD ¶1507).
  • 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). See “Long Tail of Pension Payments” illustration.
  • The annual conference needs to receive assets from the local church to offset the liabilities—related to clergy service in that local church and all its local churches—that remain with the annual conference after the local church departure.

Overview of the Appendix

For Clergy

For Local Churches

For Lay Employees at UMC-Related Employers

Impact of Church Models on Pensions


What is the “Wespath Appendix”?

The Wespath Appendix (Appendix) is Appendix 4 of the Report submitted to the 2019 Called General Conference by the Commission on a Way Forward (Commission). The Appendix explains potential pension impacts of various proposals (“models”) considered by the Commission.

The Appendix summarizes Wespath’s analyses of potential impacts of different Church scenarios, including insights on:

  • Long-term funding liabilities for local churches and annual conferences
  • Impact on individual clergy benefits
  • Long-term sustainability for plans and plan funding
  • Record-keeping and administrative complexities

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Why did Wespath develop the Appendix?

While contemplating various models for the future of the Church, the Commission sought additional expertise relating to clergy pensions and the Church’s benefit plans.

Wespath Benefits and Investments (Wespath) is the administrator and record-keeper of the benefit plans for the UMC, and is the trustee and investment manager for plan assets—as defined and described in The Book of Discipline (¶1504).

The Commission and the Council of Bishops asked Wespath to provide information and analysis about how various scenarios under consideration might impact clergy pensions and have related effects on annual conferences and local churches.

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Does Wespath have a preferred Church Model?

No. Wespath is prepared to make whatever changes are required to continue serving the Church in whatever form it takes, while caring for those who rely on the benefit plans for their retirement security.

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If a clergyperson leaves the UMC, what happens to his or her accrued pension benefits?

Clergy who leave the UMC will not forfeit retirement benefits they have earned during their service in the UMC. However, the form of their benefits from the primary clergy pension plan may change, and they will not earn future accruals or receive certain benefit improvements such as cost-of-living increases.

  • Under BOD ¶360, active clergy participants who terminate their annual conference relationship will be treated as “terminated vested participants” under the Clergy Retirement Security Program (CRSP). Their accrued pension benefits would be converted and transferred to the United Methodist Personal Investment Plan (UMPIP, a voluntary defined contribution plan maintained by Wespath).

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How are individual clergy pension benefits determined?

Each clergyperson has a unique combination of benefits based on one’s specific years of service and the plan designs in place at that time of service.

Learn more about UMC retirement plans here.

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If a local church exits the UMC, is there a set amount each church would owe to the conference to cover its future pension obligations?

No. The amount that any exiting local church would owe would vary depending on the funded status of its annual conference and its scale relative to other churches in its annual conference. The amount of unfunded pension liability varies from conference to conference.

Context:

  • The term “exit” or “exiting churches” includes, but is not limited to, the following:
    • If the 2019 General Conference enacts legislation that permits churches to disaffiliate from the UMC
    • Churches that withdraw under BOD ¶2548 or close under BOD ¶2549

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What role would Wespath have in determining pro rata unfunded pension obligations?

Wespath would calculate the total unfunded liability for pensions and annuities being paid and for benefits earned as of that date for the entire annual conference. But the conference would then decide how to allocate a proportional share of that liability to a local church.

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If a local church exits the UMC, how would that church’s pro rata share of unfunded pension obligations be calculated?

The individual church’s share of unfunded pension obligations would be determined by its annual conference. Conferences have flexibility in how they might calculate this. Some potential options that conferences might use to calculate individual church obligations include:

  • The local church’s apportionment decimal
  • The local church’s income as a percent of income from all churches in that conference
  • The pastor’s compensation as a percent of total compensation for all pastors in the conference
  • Other methodologies as determined by the annual conference

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Does Wespath have any suggestions on how annual conferences might calculate an exiting church’s “share” of possible future pension funding?

Any final recommendations would be made after General Conference 2019. In the meantime, for discussion purposes related to General Conference 2019 considerations, Wespath has suggested this two-step approach for calculating an exiting church’s “fair share”:

  1. The conference would obtain from Wespath the additional dollar amount needed to fully fund all of the conference’s retirement plan components using actuarial assumptions similar to what a commercial insurer would use (i.e., actuarial assumptions based on a “market basis” like corporate pension plans use), including funding for: Pre-82 Plan, Ministerial Pension Plan (MPP) and Clergy Retirement Security Program (CRSP).
  2. The conference would determine the departing church’s pro rata share of this amount based on that church’s financial capacity as compared to other churches in the conference. This might be based on apportionment decimal or other methods described above.

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Why would an exiting local church be expected to pay monies to the annual conference to cover unfunded pension obligations?

The connectional nature of The United Methodist Church means that departure by one church affects the whole Connection. An exiting church would leave some portion of its long-term pension obligations to the annual conference from which it is departing. This means that the exiting church in effect would leave behind its share of market and longevity risks related to retirees and survivors receiving benefits to the other local churches in its annual conference and, to some extent, to other annual conferences and their local churches.

By paying its “fair share” of the annual conference’s aggregate unfunded pension liability as part of its exit, the exiting local church provides to the conference funding to compensate for taking on more of the responsibility involved in the promise of long-term pension payments for active and retired clergy and their surviving beneficiaries. This “fair share” payment also compensates the annual conference for assuming what would have been that church’s risks (investment, longevity and mortality risks) for long-term clergy benefits now that the church will no longer be part of the annual conference.

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Is Wespath permitted to serve conferences, churches or individual clergy who follow an avenue of exit from The United Methodist Church?

Yes. Wespath is authorized (by The Book of Discipline and the U.S. Internal Revenue Code) to manage funds and offer services to churches and nonprofit organizations related to or that share “common religious bonds and convictions” with the UMC. Under this authorization—unless changed by General Conference—Wespath would be permitted to administer benefit plans for clergy who terminate their conference relationship and most local churches and other United Methodist organizations that depart or otherwise change the nature of their connection to The United Methodist Church.

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How is Wespath preparing for the future?

  • Wespath has a “scenario planning” team analyzing the impact of various changes to UMC structure.
  • Wespath remains focused on assuring that the plans we manage and funds we invest remain sustainable for future generations. We are evaluating plan design changes to present to General Conference 2020 that we believe will help make our plans more sustainable over the long term.
  • Wespath is prepared to make necessary adjustments to continue serving the UMC in whatever form it takes following the Special General Conference 2019.
  • Wespath is well-positioned to continue fulfilling our mission of caring for those who serve the Church.

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Are potential amendments being considered for retirement plan designs for the 2020 General Conference a result of potential changes to the Church during the 2019 General Conference, or membership attrition or other disruptions that might follow General Conference 2019?

Wespath believes that a changing society (globally and in the U.S.), along with potential disruptive changes to the structure and governance of the Church—including shifting demographics and declining size of the U.S. Church—necessitate a substantial change to the U.S. clergy retirement plan in the foreseeable future in order to reflect a more sustainable design. We believe a transition from a traditional pension to an account balance type plan would be more sustainable over the long term. This belief is based not only on Wespath’s analysis and scenario planning, but also in part on feedback received from many stakeholder groups within the Church, as part of a recent Wespath plan design study. Any disruptive changes to the Church during or as a result of the 2019 General Conference will accelerate the need for the transition.

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What does the term “long tail of pension payments” (or “long tail of liability”) mean?

Wespath uses this term to describe the long-term pension obligation (monthly payments) that are promised to retired clergy and their beneficiaries through the UMC’s defined benefit plans, including some plans that have been “closed” to new participants. For example, the Ministerial Pension Plan (MPP, for service 1982 through 2006) is projected to pay out annuities until about 2075. The annual conferences remain legally responsible for paying those benefits if additional funding is needed. Nearly 60,000 participants are covered under MPP.

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How does the connectional structure of The United Methodist Church influence retirement benefits?

“Connection” is core to the UMC. The connectional nature of our denomination means that departure by one local church affects other churches. An annual conference’s pension liability and funding are aggregated for all of its clergy and local churches, collectively. Moreover, under the UMC pension plans, the annual conferences promise to support one another. It’s something like a “Three Musketeers clause”—all for one and one for all. If any annual conference for some reason were unable to fund pension benefit payments when needed, the other annual conferences would make up the difference. Defined contribution (DC) plans like UMPIP are much less connectional in nature, given that they are fully funded at the outset. Market, longevity and demographic risks for DC plans are borne by participants.

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Do any of the Commission on a Way Forward plans impact pensions of currently retired clergy?

Generally no. Retirement benefits for already retired clergy are secure. The pension-related provisions in the Commission’s proposals seek to maintain that security.

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Will monthly pension benefits being paid to a clergyperson be reduced in the event of a UMC restructure? What about accrued benefits not yet in payment?

The chance that pension payments would be reduced is very remote.

Pension benefits already earned (accrued) to date through defined benefit (DB) retirement plans are “vested” and generally secure. In the event of a major disruption the UMC, DB plans may be frozen, which means that future accruals would cease. Clergy who depart from the UMC (i.e., terminate their UMC annual conference relationship) would have a change in the form of their benefit*. Departing clergy would not forfeit benefits they have accrued; however, the DB accruals (i.e., the promise of future fixed payments for life in retirement) would be converted into an equivalent account balance (a dollar amount that belongs to the clergyperson and grows or shrinks based on market fluctuations) in the United Methodist Personal Investment Plan (UMPIP).

Local churches that exit must pay a fair share payment (also called “withdrawal liability”) to the annual conference in order to help ensure that pensions being paid can be preserved.

* Provisions to convert DB accruals to an account balance for clergy who exit the UMC are described under the Commission’s One Church Plan (pages 25-26 of Judicial Council Docket—Exhibit A). However, the Commission on a Way Forward and the Council of Bishops have recommended adopting this policy regardless of which plan is approved by General Conference 2019.

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Is the exiting church’s “pro rata fair share” payment based on any specific retirement plan?

No. The local church’s pro rata fair share (also called “withdrawal liability”) will be based on total liability for all defined benefit (DB) retirement plans [Pre-82 Plan, annuities from the Ministerial Pension Plan (MPP), and the DB portion of Clergy Retirement Security Program (CRSP)].

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What is the difference between “market factor” and “funding factor”—and how does that affect an exiting church’s “pro rata fair share” payment (also called “withdrawal liability”) to cover unfunded pension liabilities?

  • Pension plan liabilities on a long-term funding basis are calculated using a discount rate* that reflects the long-term, average expected earnings of the plan assets. All annual conferences currently make contributions on a funding basis for MPP annuities and CRSP DB.
  • Pension plan liabilities on a market basis are calculated at a discount rate that reflects what an insurer or other outside party would use in pricing the liabilities if taking over the responsibility for benefit payments from the plan sponsor (the conference, in this case).

Depending on current interest rates, market liabilities are typically higher than funding liabilities. This is because market-based discount rates are generally lower, reflecting more conservative assumptions about future earnings of plan assets. Using market-based rates helps minimize the financial risk that is transferred to the party taking over the long-term responsibility for benefit payments. Sometimes the difference between market basis and funding basis liability amounts are quite substantial.

*The discount rate is an interest rate used to calculate the present value (i.e., money needed to pay all benefit liabilities today) of expected future benefit payments (i.e., the plan liabilities). Generally speaking, the lower the discount rate, the greater the liabilities.

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If a local church has dutifully paid 100% of its apportionments and pension payments over the years, why would it still be expected to pay an additional “fair share” if it leaves the annual conference or denomination?

Even though the local church has paid as expected for many years, the church still leaves behind a long-term financial risk when it exits. This is because an exiting church leaves behind what would have been its share of long-term liabilities (i.e., monies the church would have paid in future benefits to retired clergy). The annual conference and the remaining local churches in that conference therefore assume the long-term financial risk for benefit payments. Long-term financial risk is affected by factors such as investment conditions and longevity (how long participants and surviving spouses/beneficiaries will receive promised payments).

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If a local church exits from a conference whose plans are currently “fully funded,” would the church be excused from paying an additional “fair share” withdrawal liability?

If the conference’s plans are fully funded on a market basis (which would be a very rare circumstance), there would be no withdrawal liability. Otherwise, the exiting local church should still pay its share to the annual conference of the total needed to be fully funded on a market basis. Even if the conference plans are fully funded on a long-term basis at the time of exit, there is no guarantee that they will remain fully funded over the next 10 to 50 years or beyond because of fluctuations in investment markets, mortality, etc. over the long term.

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Where would exit payments be held?

Based on a petition being submitted to General Conference 2019*, a local church’s exit payment (“withdrawal liability”) would be paid to the annual conference. The Conference Board of Pensions or other decision-making body in the annual conference would determine the ultimate use of these assets, but would be encouraged to use them for pension and benefits purposes.

* Proposed new subparagraph 23 to BOD¶1504

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Other than pension liabilities, are there other financial obligations that an exiting local church may owe the annual conference?

Wespath’s proposal as included in the Commission’s report focuses only on pension liabilities. However, it is quite likely that an exiting church might need to compensate the annual conference for financial obligations such as retiree medical liabilities, apportionment payments, loans, grants or other future expenses. These details would likely be determined by the annual conference or another entity of the Church.

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Does the “long tail of pension payments” graph in the Commission’s report apply to lay employees in the Connection?

Generally no. Pension payment liabilities shown are for U.S. clergy.

Most eligible lay employees at United Methodist local churches, annual conferences, general agencies or other UMC-related employers are covered by defined contribution (DC) plans, such as the United Methodist Personal Investment Plan (UMPIP), Retirement Plan for General Agencies (RPGA) and Horizon 401(k) Plan. DC plans offer account-based retirement benefits instead of promised lifetime monthly payments in retirement.

A small number of former general agency employees who are now retired may be receiving pension or annuity payments from legacy defined benefit plans. Those legacy plans are well-funded.

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Would the plan to be proposed at General Conference 2020 apply to lay employees?

Account-balance plan design considerations for General Conference 2020 focus on U.S. clergy rather than lay employees. Most lay employees currently have a defined contribution/account balance type of retirement benefits instead of a defined benefit or annuity-based plans.

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Assuming nothing changes at General Conference 2019 and The United Methodist Church continues in its current structure, would Wespath still propose a DC-only pension plan to General Conference 2020?

Yes. Wespath believes that a defined contribution (DC) plan design or similar account balance type plan will be more sustainable over the long term, due to the disruption that will result even from the General Conference 2019 making no changes to the current state, and also due to shifting demographics, the declining size of the U.S. Church and other factors.

A defined contribution/account balance type plan would help:

  • Protect conferences from decades-long pension obligations;
  • Allow portability for individuals who move between churches, conferences and other employers; and
  • Support greater freedom and flexibility for the denomination.

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Submit a Question

Do you have an additional question for Wespath Benefits and Investments on how the scenarios under consideration might impact clergy pensions, as well as related effects on local churches and/or annual conferences? Please submit your question to Wespath.

 

 
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