Pension Liability Declines Dramatically
By Thomas Lambrecht
One of the important financial costs for local churches to disaffiliate from the UM Church is a payment of that local church’s proportional share of the annual conference’s unfunded pension liability. That liability is calculated monthly by Wespath and shared with each annual conference on either a monthly or quarterly basis (at the request of the annual conference).
For those looking for a good explanation about why there is an unfunded pension liability, Wespath has an excellent 18-minute video that carefully explains what this is all about. Other resources about disaffiliation and pensions are also posted on that Wespath page.
Several years ago, we learned that the unfunded pension liability payment for most local churches would be seven to ten times their annual apportionment. The dramatic growth in the stock market then reduced that liability to about four to six times a church’s annual apportionment.
The good news just received is that the July 1 pension liability calculation has dramatically reduced the liability once again. As of last September 1, 2021, the pension liability was about $2.6 billion. The latest calculation has reduced that liability to $1.35 billion. So in ten months, the liability has been cut almost in half.
According to Wespath, the primary factor in reducing the liability has been the rise in interest rates. As interest rates have risen, Wespath can project a higher rate of return on long-term bonds and other instruments an insurer would use to fund pension obligations. The higher rate of return means less money is needed up front to achieve a target amount down the road.
Of course, pension assets have declined recently, due to the decline in the stock and bond markets. However, the increased interest rate projections have far outweighed the decline in asset value. So the net effect is to greatly reduce the pension liability.
The further good news is that the Fed just raised interest rates another three-quarters percentage point, which should further reduce pension liability on the next calculation. Further interest rate increases throughout the rest of this year will also continue to reduce the pension liability.
The other factor that helps reduce pension liability is a reduction in the premium that insurers charge to assume annuity obligations or defined benefit liabilities. In the past, that premium added ten percent to the liability cost. Recently, Wespath found that the marketplace premium had declined from ten percent to between five and six percent. Beginning July 1, Wespath is now charging a five percent premium instead of ten percent, which helps lower the liability.
The bottom line in all of this is that pension liability payments for disaffiliating churches just got a lot less expensive. While each annual conference’s situation is different, some conferences will experience a drop of less than half, while other conferences will experience a drop of more than half.
The key is that local churches that are disaffiliating should insist that their annual conference use the most recent calculation of pension liability to set the church’s exit fee. Most annual conferences give an up-front estimate of the pension liability cost and then set the exact number based on the calculation closest to when the local church votes to disaffiliate. This would enable the church to take advantage of declining pension liabilities to lower its cost for disaffiliation.
Local churches that have up until now thought that the cost of disaffiliation was prohibitive might find that the new numbers bring the cost within a more reasonable range. Now would be a good time to take a second look.
For most annual conferences, the window for disaffiliating will close next May-June at the regular annual conference session. If churches do not move through the process in time to be approved next spring, there may not be an equitable avenue for them to disaffiliate at all. General Conference may enact a new pathway in 2024, but there is no assurance that will happen, especially with centrist and progressive leaders dropping their support of the Protocol.
If your local church is at all interested in exploring the possibility of disaffiliation, now is the time to get started in that process. The recent reduction in pension liability may be of great help in making that decision.
Updates on Annual Conference Disaffiliation
Since publishing last week’s list of annual conference disaffiliation terms, there are updates to some conferences.
Western Pennsylvania just established their additional terms of disaffiliation. Besides the pension liability and two years’ apportionments, they require the local church to pay 11.1 percent of any unrestricted endowment funds and 20 percent of the value of land and buildings. Unfortunately, this moves Western Pennsylvania into the category of annual conferences blocking disaffiliation, as most congregations could not afford to pay the additional 20 percent of property value, nor is it fair to require them to do so.
Eastern Pennsylvania has also recently added terms to its disaffiliation, most notably the requirement to renounce previously paid-for liability insurance and the local church’s need to purchase retroactive liability insurance. This retroactive insurance is very expensive, and it requires a church to double pay for liability insurance for the same past period of time. In addition, the conference trustees reserve the right to impose additional payments on a case-by-case basis. The local church will only find out about these additional payments at its first meeting with conference officials. The insurance issue alone is enough to block some churches from disaffiliating. And if the additional payments include a percentage of the church’s property or assets, it will block those churches, as well.
The Oklahoma Conference clarified its disaffiliation process, moving it from a conference that facilitates disaffiliation to one that adds additional costs, but where disaffiliation is still possible for most churches. Before a church can proceed with disaffiliation, the conference will make a study to determine if they believe the local church is “viable.” If not, they will recommend against disaffiliation. Oklahoma requires a church to become current in apportionment payments for the previous two years, instead of just one, which could raise the church’s cost of disaffiliation to three years’ apportionments if the church did not stay current. The conference disadvantages local churches that are hoping to avail themselves of the reduced pension liability cost (see the article above) by using a six-month average of the monthly figures. The next average will be calculated in September, which means that the number will only benefit from three months of reduced pension costs out of six months total. The full effect of the reduction in pension costs will only be felt in Oklahoma next March 2023. Uniquely, the Oklahoma conference includes active and retired clergy who relate to a particular local church as eligible to vote on disaffiliation. This may contravene Par. 2553, which requires “a two-thirds majority vote of the professing members of the local church present at the church conference.” Since clergy are not professing members of the local church, they should not be able to vote on disaffiliation.
In last week’s Perspective, I said that the Holston Conference had not yet developed its disaffiliation process. That was incorrect, and I apologize for the incorrect information. They have a process that is currently being used by a number of churches. It is not available currently on their website, but is available through the District Superintendent. Fortunately, the Holston Conference has decided to impose no other costs beyond what Par. 2553 requires. They do require a three-month spiritual discernment process. So the Holston Conference can now be classified as a conference that facilitates disaffiliation in a fair and reasonable manner.
In like manner, the Rio Texas Conference is now classified as a conference that facilitates disaffiliation. They impose no additional costs. I had stated that the church would not find out its cost of disaffiliation until after it had voted. While technically correct, the church would also receive an estimate of its disaffiliation cost at the beginning of the process, so they would not be operating in the dark. This will make disaffiliation in Rio Texas more straightforward. They do still require a six-month discernment process, so churches moving toward disaffiliation should get started soon in that conference in order to meet the deadline.
The bottom line on annual conference disaffiliation processes is that 22 conferences (44 percent) facilitate disaffiliation in a fair and reasonable manner. Four of them have reduced pension costs to zero, and one has eliminated the apportionment payments. Fourteen conferences (28 percent) add costs to what Par. 2553 requires, but disaffiliation is still possible for most churches. Fourteen conferences (28 percent) have added requirements that make it almost impossible for a local church to disaffiliate.
For some annual conferences, it appears the intent is to do whatever they can to prevent local churches from disaffiliating. Sometimes, it appears the extra requirements are just a way for the conference to get more money.
One hopes that the example of the reasonable conferences could influence the holdout conferences to become more gracious. Failure to allow gracious separation will only prolong the battle in the church and sap its spiritual and physical energy for ministry.