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Pension problems beset Lutheran organizations

The sharp decline in investment markets in 2008 and early 2009 has struck a delayed, painful blow to retired ELCA pastors and other retired employees of the church body and its congregations. The monthly annuity payments they receive from a large retirement fund of the church were reduced by nine percent beginning in January, and recipients were told to expect additional nine percent cuts at the beginning of 2011 and 2012. That computes to a 25 percent reduction over three years. Officials of the ELCA’s Board of Pensions said the action was spread over three years to lessen the impact on retirees’ monthly income.

Members of the ELCA’s Participating Annuity and Bridge Fund (the Fund) who are near retirement but haven’t yet taken that step were told that the interest rate applied to money in their accounts will fall into minus territory in 2010 — at -3.5 percent. Similar -3.5 percent rates will apply in 2011 and 2012.

For a limited group of plan members who receive a dividend in addition to an annuity, there will be no dividend in 2010, and they will be subject to the same nine percent reductions in their annuities as other members. The cuts affect more than 11,000 employees of the ELCA and its congregations, including some 900 in the Minneapolis and St. Paul Area Synods, according to John G. Kapanke, president of the Minneapolis-based Board of Pensions.

Former employees of church-related institutions are confronting challenges to the future that face other American workers.

Former employees of church-related institutions are confronting challenges to the future that face other American workers.

During the big tumble in investment markets in 2008-09, the ratio of assets in the Fund to projected lifetime benefit obligations fell into the low 60 percent area, Kapanke said. “We have determined that we need to get back to a fully-funded state by the end of 2012, with sufficient assets to pay for all long-term expected liabilities,” he explained. That means bringing the ratio back to around 100 percent.

Changes in plan create stress

Kapanke, who has traveled across the country to explain the board’s action to plan participants, acknowledged that the reductions have produced “a lot of unhappiness” among members. “This has been the most challenging time for us in a long time because it is painful to have to announce to people who have served the church for so many years that their monthly annuity is going down,” the president said. “All of us here are deeply concerned how this affects the retirees.”

While investment markets have been recovering in recent months, Kapanke said the announced cuts will still be needed until the Fund reaches a fully-funded status. The Fund still has a way to go to recover, he said, having lost 31 percent of its value for the 17-month period ending in February 2009.

The ratio of assets in the Fund to projected lifetime benefit obligations fell into the low 60 percent area.

However the cuts are not completely carved in stone. The three-year program assumes a 7.6 percent rate of return on the Fund’s investments, and Kapanke did say that “if future investment returns on the Fund are higher than the assumed rate of 7.6 percent, we will re-evaluate the funded status and could potentially lessen the remaining two years of projected reductions.”

But Kapanke added, “Conversely, if the investment returns are less than the Fund’s assumed rate of 7.6 percent, the Board of Pensions will evaluate what additional measures may be necessary to reach our goal of closing the funding gap by the end of 2012.”

By year’s end in 2009, the ratio of assets to obligations in the Fund had improved somewhat and stood at 80 percent.

Determining compensation

During ELCA clergy members’ working years, their employers contribute an amount equal to no less than 10 percent of their annual compensation to a retirement fund. For lay workers the minimum figure is six percent. Employees invest the money in one of 20 different funds offered by the Board of Pensions. These range in risk from money market funds to global stock funds.

John G. Kapanke (right), president of the Minneapolis-based ELCA Board of Pensions, discusses pension adjustments with participants in a College of Retired Church Workers forum in Minneapolis. Metro Lutheran photo: Bob Ylvisaker

When it’s time to retire, employees can keep their money invested in one of these funds, but many choose to put it in the Participating Annuity and Bridge Fund. There it is converted into an annuity which provides monthly payments for the remainder of his/her life and the life of the spouse.

A number of factors go into computation of the size of annuity payments, including an assumed annual rate of increase of 4.5 percent. In a document summarizing features of the Annuity and Bridge Fund, the Board of Pensions says, “If investment returns on the Fund (averaged over time) exceed the 4.5 percent assumed rate, the excess is potentially available to increase annuity payments. Conversely, if the investment returns on the Fund (averaged over time) fall short of the 4.5 percent assumed rate, it may become necessary to reduce annuity payments.”

Solutions are hard to come by

In determining annual adjustments in the amount of an annuity, the board says it replaces the actual investment returns with so-called interest- crediting rates. These are based on a formula that smooths out the highs and lows of the market and combines the long-term expected rate of return (7.6 percent) with the actual return for the last 12 months.

The interest-crediting rate is then compared to the assumed investment rate of 4.5 percent, and the difference, positive or negative, is used to adjust annuity payments. The interest-crediting rate is also the rate applied to money invested in the “bridge” portion of the Fund by persons approaching retirement. The Fund was closed to new entrants in April 2009.

The current year, with its interest-crediting rate of minus 3.5 percent, “is the first year we’re crediting a minus number,” Kapanke said.

Kapanke spoke at a luncheon meeting of the College of Retired Church Workers on February 9 at Bethlehem Lutheran Church in south Minneapolis and explained the reasons for, and goals of, the reduction in annuity payments. Afterwards, in response to a reporter’s question, he said he had met with a group of pastors from the Minneapolis Area and Southwestern Minnesota synods who were concerned about the cuts. They were working on a proposal to lessen the annual nine percent reduction in payments by adding a surcharge to the contributions congregations make to the retirement funds of their employees. Such a proposal would apparently be submitted to local synod assemblies. It would also have to be acted on by the ELCA Church Council, Kapanke said.

The Rev. Paul Harrington, retired senior pastor of Shepherd of the Valley Lutheran Church in Apple Valley, expressed some skepticism about such a proposal, given the “stressed” condition in which many congregations find themselves. He did find fault with the way the “bridge” portion of the Annuity and Bridge Fund had been promoted.

The bridge fund was presented as a safe place where those nearing retirement could place their savings and escape the bumps and volatility of the investment markets, Harrington said. “Obviously that hasn’t been the case at all.” (Harrington is a member of the board of directors of Metro Lutheran, but did not initiate contact with Metro Lutheran concerning this story.)

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