Pension Liabilities: A Real Problem?

By Todd Chancey, Holston WCA Board Secretary

Churches thinking about departing the United Methodist Church for the Global Methodist Church likely are hearing a lot about so-called pension liabilities, usually described as a potentially expensive stumbling block at the exit door.

We need to explore that issue as thoroughly as we can. We want to be fair in our dealings as we seek our exit, but we also should not allow those we are leaving behind to take advantage of our situation.

I am by no means an expert on pension funding, but I was part of the Holston Conference Board of Pensions and Health Benefits Board for many years, chairing that committee for four years. What follows is solely my personal understanding and not the understanding of an expert. Please take this for what it is—it is my opinion, and do not rely on this solely for truth.

First, a little history so we are all on the same page.

The Holston Conference has had an active pension program for clergy for many, many years, an expression of the group’s desire to care for our pastors and their spouses in retirement. Prior to 1982, at each annual conference, the annual conference would vote to approve a set amount to pay pension benefits to retired pastors.

In 1982, the conference plan changed, and from 1982 to 2006 funds for pastors’ pensions were deposited in personal investment accounts held at what we called the Board of Pensions and Health Benefits of the United Methodist Church. (This eventually became Wespath.) These funds were fully vested, and were managed by Wespath and distributed per agreement to the pastors and spouses in their retirement. 

Many pastors then and now have service years prior to 1982. They still receive a pension for those years. Somewhere around the late 1980s or early 1990s the Holston Conference raised money to go toward the unfunded liabilities of those so-called “Pre-’82” pensions.

An unfunded liability arises when there is a promise to pay someone a pension even when funds are not readily available to do so. Investment growth and longevity projections are major factors in calculating any such liability.

Simply said, the longer clergy live on average, the more pension funds we need, and if clergy die on average earlier than expected, less pension funds are needed. I hate to sound morbid, but that is the reality. We talk about unfunded liabilities when the reserves are less than the projected expenses. 

Understanding the history and some basics, let’s get into a little analysis of where we are now.

In regard to Pre-’82 pensions in the Holston Conference, there is good news. According to the last audit, in 2021, the Holston Conference Pre-82 pensions are funded at 102 percent. As stated before, this is simply a projection based on the projected longevity of the retired pastors and spouses, and the performance of investments.

From 1982 to 2006, money contributed toward the pastors’ pensions went into individual accounts in the pastors’ names. Those individual accounts are managed by Wespath and will be distributed at retirement to the pastor and spouse under contractual and fiduciary obligations placed on Wespath.

The Conference helped fund those individual accounts, but did not guarantee any returns on those investments. Therefore, in my opinion, the conference has no unfunded liabilities from 1982 to 2006. Again, good news!

In 2006, the relationship with the Conference and Wespath changed and the Clergy Retirement Security Program was created, a new way of handling pension investments. This was a bad development, in my opinion.

CRSP basically pools part of the pastors’ pension funds together and then guarantees a stated amount in return in retirement. An individual pastor’s entire pension no longer is held under that pastor’s name and designated for that pastor alone. We now have a system where a part of every pastor’s pension is merged into one big fund, with payments coming out of that big fund. 

Because the big fund has to deal with market investments and also longevity unknowns, it carries with it some future potential for unfunded liabilities. Will the invested funds be enough to cover a guaranteed return? The answer will always be, “Who knows?”

When you guarantee pension payment amounts and you then merge or pool funds, you are always facing the possibility of having some future unfunded liability. You promise a certain amount of payout, and if your investments fall short, you end up being “unfunded.”

However, if you put funds in personal accounts and only guarantee pensions to the individuals based on their individual accounts, then there are no unfunded liabilities. The pastor and spouse simply draw their pension through their own individual account. (This is a very simplified statement.) There is always a possibility that Wespath could go bankrupt and funds would not be available, but the probability of this happening is extremely low.

So since 2006, we have created an environment of potential future unfunded liabilities for the conference. But that doesn’t automatically present a problem in our current circumstances; in fact, I think it’s safe to say there is no problem.

According to a recent video I watched from a law firm specializing in religious property law, Wespath has enough funds to pay the liability beyond the year 2090. So, unless pastors live to be an average of 130 years old, or unless the stock market crashes and never comes back, Wespath and the annual conference should not have any easily identifiable unfunded liabilities. 

We need to be asking a serious question: If the annual conference says we have unfunded liabilities, what proof do they have that such liabilities exist? They will need to give us more than speculation. I would like to see the math and rationale behind their actual projections. 

It would be easy to take the projected CRSP funds, turn these into real cash for each pastor and put those funds into a personal investment plan. This could be a very simple mechanism for moving pension funds from the UMC to the GMC, and in my opinion the GMC pastors and their churches would immediately be better off.

Pastors who are already retired are under a contractual agreement with Wespath, and their pensions should not change, nor should any surviving spouse’s pension change. If you are now retired, you do not have to worry about any of this! Enjoy your retirement. Wespath is under a fiduciary responsibility to care for your retirement money.

As we move forward, let’s press our conference officials to work from actual facts and not speculations about what markets might or might not do. And as we move to the GMC, let’s certainly not agree to pay for liabilities that do not exist.

We might as well call such payments what they would really be—exit fees.