Q&A Regarding Recent Media Stories about Pensions and Pension Plan Funding

The popular press has featured many stories over the past year regarding under-funded pensions at various corporate entities. These stories tend to cast defined benefit (DB) plans in particular in an unfavorable light. What follows is a series of questions and answers regarding pension plans in general and the specific plans administered by the General Board that attempts to shed some light on an opaque and often misunderstood topic.

1. How do companies get in trouble in meeting their pension obligations?
2. What is the Pension Benefit Guaranty Corporation (PBGC)?
3. By way of background, what is the nature of the United Methodist Church's retirement plans that are administered by the General Board?
4. What is the funding status of the various existing DB plans administered by the General Board?
5. If there were not sufficient funds available to pay my retirement benefits, is there a safety net like the PBGC for United Methodist retirement plans?
6. What is the General Board's investment role in administering retirement benefits?
7. President Bush recently signed the Pension Protection Act of 2006. What impact is this legislation expected to have on participants of United Methodist pension plans and the individuals participating in those plans?
8. How do I find out the status of my retirement benefits? Will the General Board notify me if and when a problem occurs?

1. How do companies get in trouble in meeting their pension obligations?

This is a complex question, which has much to do with the manner in which certain corporate pension plans are funded. Corporate pension plans and their funding are governed by complicated rules imposed by various regulating bodies, many of which have competing interests. (The United Methodist Church, like other churches, is not subject to all the same rules or regulating entities.) Also, corporations may need to reduce costs (including pension expenses) as a result of operating in a highly competitive industry, such as airlines or automobile manufacturing, and may, in fact, enter bankruptcy to prevent the business from being shut down. Management may then decide that the only way for the company to emerge from bankruptcy with a viable cost structure is to terminate certain defined benefit pension plans and pass responsibility for those plan liabilities to the Pension Benefit Guaranty Corporation.

2. What is the Pension Benefit Guaranty Corporation (PBGC)?

The PBGC is a government agency created in 1974 by the Employee Retirement Income Security Act (ERISA) to function as a backstop for companies' retirement plans where the plan sponsors may be experiencing financial distress, as in the case of much of the airline industry. The PBGC is similar to the Federal Deposit Insurance Corporation (FDIC) that insures bank accounts against bank failures. The PBGC receives no taxpayer dollars but rather collects a premium payment from all participating pension plans. Today the PBGC administers about 3,500 pension plans and provides a capped, guaranteed payout for retired workers in those plans. Church plans, including those administered by the General Board, are not subject to PBGC insurance premiums or coverage. As described further below, a prudent funding program and inter-conference back-stopping protect General Board defined benefit plans.

3. By way of background, what is the nature of the United Methodist Church's retirement plans that are administered by the General Board?

To answer this question, it is necessary to understand the types of plans for which the General Board has oversight. Today the General Board administers both defined benefit (DB) and defined contribution (DC) plans. General Board DB plans include the pre-1982 plan, the Ministerial Pension Plan (MPP) annuities and other similar plans for lay and agency employees. The nature of a DB plan is that it guarantees a monthly stream of benefit payments once a worker has reached retirement age. DC plans administered by the General Board include MPP before annuities begin and the United Methodist Personal Investment Plan (UMPIP). Under a typical DC plan, a participant accumulates an account balance throughout his or her working life and receives at retirement the value of all accumulated contributions and investment returns on those contributions in one or more distributions. Alternatively, a participant can convert his/her DC account balance to an annuity at retirement. (MPP participants must convert at least 75% of their accumulated balance to an annuity at retirement.) A key difference between DB and DC plans is that under a DB plan, investment risk belongs to the plan sponsor conferences, while, under a DC plan, the participant assumes the investment risk.

Beginning in 2007, the General Board will implement two new plans: the Clergy Retirement Security Program (CRSP) and the Retirement Security Program (RSP) for General Agencies. Each of these plans has a defined benefit (DB) and defined contribution (DC) component. From January 1, 2007 onward, the plan sponsor, i.e. the conference under CRSP or the General Agency under RSP, will assume the responsibility for funding benefits promised by the DB plan component. That means, for the DB component, the plan sponsor accepts investment and other risks associated with the retirement benefit. The plan sponsor must contribute enough so that the contributions and earnings will pay the promised benefits upon the participant's retirement.

Under the DC component of CRSP and RSP, participants retain the investment risks (and rewards) associated with their retirement benefits, as they do today in the existing DC plans, such as MPP and UMPIP. At retirement the DC account balance is fully available for any purpose. Retiring participants can use the lump sum to buy a monthly annuity from an insurance company or can leave all or part of their DC monies in their General Board accounts.

4. What is the funding status of the various existing DB plans administered by the General Board?

The pre-1982 plan represents the largest DB obligation of the many plans administered by the General Board. Since 1982, conferences have been working diligently to fund this plan. Approximately three-quarters of conferences have fully or over-funded their pre-1982 pension obligations. For the other one-fourth, conferences continue to make contributions as scheduled in order to achieve a fully funded status by December 31, 2021 or earlier. The MPP annuities are, by definition, fully funded at participants' retirement dates; from that point forward, the plan sponsors (e.g., conferences and general agencies) are responsible for keeping them funded.

5. If there were not sufficient funds available to pay my retirement benefits, is there a safety net like the PBGC for United Methodist retirement plans?

For the DB plans, in normal circumstances, the annual conference plan sponsors support their own DB retirement obligations. (In other words, they each pay their own way.) Under the distinctively connectional nature of the United Methodist pension funds for clergy, if an annual conference in the U.S. finds itself in extreme financial distress, then the other annual conferences will cover the obligations of the defaulting conference to the extent that its past contributions are insufficient. The ultimate responsibility for plan funding, of course, as with all UMC expenses and obligations, rests with the members of local churches.

For DC plans, as mentioned before, participants retain the investment risk on those plans, meaning that there is no safety net to make up for investment losses for those plans, just as there is no safety net for corporate DC plans (such as 401(k) plans). As steward of plan assets and investments, the General Board works diligently to invest plan assets for which it retains investment responsibility with the highest integrity and skill.

6. What is the General Board's investment role in administering retirement benefits?

The General Board's role is to prudently invest plan assets. While it is possible that investment performance could deteriorate significantly in the short term due to adverse market conditions, the General Board believes that over the long term, exposure to a wide variety of asset classes, such as public equities, public fixed income securities, affordable housing loans and alternative investments, is the most prudent course to ensure that participants will have sufficient funds at retirement to lead lifestyles to which they have been accustomed. Additional information regarding the General Board's investments is available on our Web site at www.gbophb.org. In some retirement plans, such as UMPIP and the DC portion of CRSP, the participant has investment responsibility and can elect to allocate his or her account among the available investment funds.

7. President Bush recently signed the Pension Protection Act of 2006. What impact is this legislation expected to have on participants of United Methodist pension plans and the individuals participating in those plans?

The Pension Protection Act of 2006 affects nearly all plans that are subject to the federal laws governing corporate pension plans. Most church pension plans, including the United Methodist plans administered by the General Board, are exempt from many of those laws, including most of the Pension Protection Act, which is focused on better funding of corporate DB plans. The General Board has and will continue to implement its own DB funding policies based on prudence and sound financial and actuarial principles, with a focus on long-term solvency. As described above, plans administered by the General Board are either already fully funded or are on a reasonable schedule to be fully funded. The funding policy for the CRSP DB benefit is to fully fund the plan from its inception.

8. How do I find out the status of my retirement benefits? Will the General Board notify me if and when a problem occurs?

As part of its commitment to stewardship, the General Board endeavors to keep participants informed of developments in their retirement accounts through a variety of reporting and communication channels. These channels include, but aren't limited to, the Web-based OASIS system, frequent newsletters, a 15-person call center, a self-directed telephonic IVR system, and regular mailings that include a quarterly statement of your account balances. In addition, the General Board is committed to keeping conference pension administrators fully informed about all relevant issues.