Gather’17 – Detroit Pastor / Delegate Summary
Evaluation Process – Covenant Pension Plan
We welcome your insight and feedback at . Emails will be routed directly to Paul Hawkinson, Director of Pensions.
Summary context
The Finance team and the Board of Pensions & Benefits (“BPB”) are engaged in a proactive evaluation process - studying the most effective “future form” of the ministers Covenant Pension Plan (“CPP”). The CPP has served us well as a traditional Defined Benefit (“DB”) plan with a required 12.5% contribution rate for credentialed clergy. Defined Benefit plans offer a “defined” retirement benefit for the life of a participant, while also offering various levels of surviving spousal benefits.
This is not the first thorough evaluation of the CPP. As stewards of the plan, it is our duty to constantly ensure we are best serving the retirement needs of our pastorate while also appropriately managing risk.
Importantly, our plan evaluation is undertaken from a position of relative strength. The current plan, serving over 2,200 active, inactive, retired credentialed clergy and surviving spouses, is ~98% funded as of December 31, 2016, with plan assets of ~$225.4 million at and actuarial liabilities estimated at ~$230.0 million.
The valuation of our plan liability is based upon a set of key assumptions which we believe to be reasonable. These assumptions include a long-term net investment rate of return (6.5%) as well as a core plan “discount rate” (5.5%). We also utilize life expectancy assumptions that are more conservative than current precedent for corporate plans.
Guiding principles
· Ensure the highest quality retirement benefits for our pastorate
· Ensure long-term plan health à deliver benefits earned by all plan participants
· Optimize future retirement offerings to match increasingly diverse service pathways
· Increase fairness / access to retirement programs for lower-income church settings
· Thoroughly evaluate plan risk to protect both the Church and her faithful servants
· Listen well to a wide array of ECC constituents, seek expert advice, and understand economic and all other (ministerial / calling / credentialing) effects of future changes
· In concert with Lilly Financial Leadership work, ensure that financial education is at the center of any plan changes and all future retirement offerings
Our evaluation is predicated on broader trends affecting Defined Benefit plans:
1) Increasing life expectancy continues to place long-term pressure on plan funding. Over the last 20 years alone, U.S. life expectancy has increased by more than 5%, while contribution rates to the CPP have remained unchanged at 12.5%.
Plan Example: Under our current CPP benefit formula, actual participant contributions into the plan cover the equivalent of ~8 years of eventual retirement payments. Thus, if a participant lives for 25 years in retirement (age 90), the cumulative “earnings” on those same contributions must be sufficient to cover ~17 years of benefit payments. As context, the CPP now has ~60 retirees over age 90.
2) Long-term target returns in the capital markets are increasingly uncertain, based in part on a sustained environment of exceptionally low interest rates. Today, the plan requires a ~6.5% annual investment return to simply remain “even” with ever-rising liabilities. Over the last 7-years, the plan has exceeded this rate with an annual compounded rate of return of ~7%. However, given the substantial effect of the 2008 market downturn, our 10-year rolling returns remain below target.
3) As ministerial service pathways continue to change, a “one-size-fits-all” plan with a 12.5% required funding rate is no longer serving the overall pastorate as well as it once did. The CPP structure remains prohibitive for many low-income churches, and does not serve effectively for ministers with shorter tenure in ECC ministry.
These and other common trends have affected countless Defined Benefit plans in corporate, government and denominational contexts. Within the Church Benefits Association (“CBA”), the vast majority of denominations have closed or frozen their Defined Benefit plans in favor of other forms - either 403b(9) plans similar to our GuideStone Financial offering, or “hybrid” plans which retain elements of both plan types.
Reflecting these trends, our auditors indicate that of ~60 benefit plan audits they perform, only 9 remain Defined Benefit pension plans, with even fewer “active” plans.
Unfortunately, we have also witnessed some very tough recent church plan reorganizations – where sister denominations have been forced into substantial reductions to vested, accrued benefits as a means of shoring up plan funding. We are grateful to be in a position of relative strength as we proactively evaluate options.
Timeline and process for plan evaluation
Since early 2015, the BPB has increasingly engaged in good discussion on the advantages, risks and limitations inherent in the CPP. In late 2016, at the board’s direction, we retained an outside plan liability consultant, and are working in tandem with outside legal counsel, investment advisors and actuarial experts to evaluate the merits and risks of all future plan forms. Along the way, we work hard to carefully consider both economic and ministerial / credentialing implications of all plan decisions.
In addition to the BPB (which includes direct pastoral representation), we have been engaged in healthy, candid discussion with the Lilly Financial Leadership team, Ordered Ministry, Covenant Offices Leadership Team, the Council of Administrators, the Council of Superintendents, the Finance Committee and the full ECC Executive Board. We will continue to engage with ministerial associations within the ECC, as well as the broader pastorate whenever possible. We also constantly learn from the actions and strategies of other denominations within the CBA, who have been gracious in sharing their experience.
Our strategic discussions and plan analysis will continue throughout the balance of 2017. We anticipate narrowing our list of potential plan revisions (if any) for review by the BPB in October 2017 - refining analysis through winter to inform an initial decision at our board session in February 2018. Plan changes (if any) would then be brought through Covenant Offices Leadership Team and the Executive Board for presentation at Gather’18. Implementation timing would depend upon the scope of any such changes. Our objective is that a commitment to good process and careful diligence will serve us all well – with any future announced changes having already been well vetted.
Please note that we are not currently evaluating or anticipating any potential benefit cuts to accrued / vested participant benefits. We are also not evaluating any full “termination” of the plan, so if you are “in the plan” your accrued benefits will remain intact. In fact, concurrent with this plan evaluation, we are investing in a new IT system with online participant access – reflective of our expectation to manage some CPP form long-term.
This is a proactive evaluation, started from a position of relative strength. We seek to evaluate how to best care for the ever-changing ministerial service pathways, while remaining attentive to risk. No decisions have been made to date, and it is conceivable that we end up with only minor revisions to our plan.
A select list of plan modifications under evaluation include, but are not limited to:
· Certain plan amendments
· Buyouts of “inactive vested” participants with a low $ level of accrued benefits
· Closing of the plan to new credentialed participants (existing participants continue)
· Freezing benefits in the plan, with 100% of all future contributions into a new form
We understand the sensitivity of this matter and we take this work very seriously. We commit to do our best to be thorough, and to listen well at every step along the way. We want to honor your faithful service. We covet your insight, your feedback as well as your prayers for this process as we try to discern the best future - together.