When the Great Recession intensified in late 2008, global stock markets went into free fall and investors of all stripes, including pension funds, suffered painful losses.
The Pension Fund of the Christian Church (Disciples of Christ), a nearly $3 billion Indianapolis-based fund, was not spared, and it saw assets decline a hefty 40 percent at one point. But the hit caused hardly any pain. The fund had a reserve cushion so fat that it kept paying the thousands of Disciples of Christ pastors and employees—either in retirement or saving for it—the retirement benefits and savings rates it promised.
“In the end, no one lost a penny, no pensions were ever reduced, and no one ever missed a [pension] payment,” said James P. Hamlett, the fund’s 67-year-old president, who’s retiring this summer. This held true even though the fund lost $1 billion in market value during one stretch, he said.
Pension funds have largely garnered negative headlines the past several years, mostly related to companies and governments facing the music after decades of stashing away too little to meet future retiree obligations. The situation, exacerbated by the recession, has prompted administrators to restructure plans and propose benefit cuts, among other things.
The Pension Fund has been able to avoid that notoriety by striving to stay overfunded and keeping commitments for its generous retirement plans, even as it endured investment losses. But the 121-year-old organization, which serves 13,000 beneficiaries across the country, is facing a challenge that could prove more painful than the last recession—shrinking congregations.
“Our congregations are getting smaller, they’re getting older, as it is with most mainline Protestant churches in the U.S.,” said the Rev. Todd Adams, 44, who’s assuming the reins after Hamlett steps down. He said his challenge will be figuring out how to “continue to add members when you’re drawing on a shrinking pool.”
The Pension Fund is for church clergy and lay workers who otherwise might struggle saving for retirement. The churches that employ them make monthly contributions to the fund equal to 14 percent of the employee’s salary, though that figure could be less if the employee pitches in.
The number of Disciples of Christ members has fallen 27 percent since 2000—a trend that could leave churches ill-equipped to cover pension dues for employees.
“Mainline denominations have been in decline for the last 20 years, [meaning] fewer congregations, fewer members and perhaps even fewer clergy,” Hamlett said. “So that will ultimately play out in the number of folks that we serve. But that’s a long-term trend that could swing around or, maybe not.”
The Disciples of Christ denomination falls under the Restorationist family of the mainline Protestant tradition, as opposed to the evangelical Protestant tradition, which tends to be more theologically and socially conservative.
The denomination has roots in the Stone-Campbell Movement of the early 19th century, and, according to its website, emphasizes baptism by immersion, the centrality of communion and “wholeness in a fragmented world.” In 2013, its governing body passed a resolution stating that homosexual and transgender people are welcome to worship and serve in its churches.
The Indianapolis-based denomination has more than 600,000 members and 3,800 congregations in the United States and Canada.
The Pension Fund was founded in 1895 as the Board of Ministerial Relief, and its purpose was to raise money to aid destitute ministers and their families. Its principal founder, Wabash businessman Alonzo M. Atkinson, started it after his pastor—former Indiana Gov. Ira J. Chase—died that year, leaving behind a blind widow and three children with little means of support.
“So Mr. Atkinson raised money to help buy a house for her and to provide for their well-being for the remainder of their lives,” Hamlett said.
The organization went on in 1931 to establish a pension fund, to which clergy and lay workers contributed for retirement. Today, the Pension Fund is one of about a dozen so-called church plans in the United States that have more than $1 billion in assets.
The New Jersey-based trade group Church Benefits Association includes 47 denominational pension funds, though there might be other funds not affiliated with the group. The largest church plan in the country is the Illinois-based General Board of Pension and Health Benefits of The United Methodist Church, which has more than $20 billion in assets.
The Pension Fund still donates money to less-fortunate church employees, staying true to its late-19th-century roots. But its bread and butter these days is retirement benefits, and it has two main retirement products: a defined contribution plan and a defined benefit plan.
The defined contribution plan is essentially a tax-deferred savings account that pays a minimum interest rate—3.5 percent last year—and disperses those savings in retirement until the funds run out.
The defined benefit plan is a meatier plan that effectively doesn’t run out, paying beneficiaries pensions until they die. For every dollar church employees contribute to the fund they get one pension credit, and those accumulated credits dictate what they will get in pension checks starting at age 65.
If a beneficiary dies in active service, his or her spouse starts receiving a pension equal to half the accumulated pension credits, but no less than $400 a month. The family also gets $500 a month per child until age 21, and up to $5,000 a year for college tuition.
“Defined benefits are incredibly valuable,” said Ted Goldman, senior pension fellow at the American Academy of Actuaries in Washington, D.C. “The employees don’t have to make decisions about how to invest the money. When they retire, they get income for the rest of their life, guaranteed. Those are features that defined contribution plans are struggling with delivering on.”
The Pension Fund covers its operating expenses by charging 0.5 percent on the investment gains of the assets.
A leg up
Many public- and private-sector employers that in recent decades might have offered such bountiful retirement packages have shifted the burden of financing retirement onto employees—or they’re looking for ways to do so.
Aging workforces and the recession have only aggravated the crisis for some pension administrators, industry experts said, and many don’t have the assets necessary to meet their liabilities. U.S. corporations are dealing with $425 billion in unfunded pension liabilities, according to a March report by Citigroup Inc., and the tab is $1 trillion to $3 trillion for state and local government pensions.
What might give church plans a leg up over their non-religious counterparts is that they don’t have to adhere to federal regulations targeting corporate pensions, including limits on how much employers can contribute to the pool. Self-governing church plans also can reduce pension benefits at their own discretion without penalty, Goldman said, and, unlike corporations, they have more leeway in building up reserves.
“It kind of gives the religious plans a little more flexibility if they want to build up a cushion,” Goldman said. “So [churches] see the value of these plans, and they don’t have the same drivers that are pushing everybody else away from them, even from a compliance standpoint.”
The Disciples of Christ Pension Fund has a funding level of 118 percent, officials said. The only year in the last decade when the level fell below triple digits was 2008, when it slipped to 91.6 percent.
Pension experts said many corporate pensions plans are 70 percent to 80 percent funded. Hamlett said he can’t speak for other church plans, but he believes his fund’s success stems from a few factors, including underpromising.
“Our underlying return assumption has been considerably more conservative than many other plans,” he said about the Pension Fund’s 4.5 percent assumed rate, versus the 7 percent to 8 percent rate common with many underfunded pensions.
“[That] simply means that we have more assets under management to manage the reserves than they might,” he said.
That assumed rate is the amount the asset pool must grow annually for the Pension Fund to meet all its commitments without tapping into rainy-day funds.
Some years, the pool’s performance outpaces that assumed rate, but beneficiaries don’t directly experience those market gains the way they would if they were investing in a mutual fund, for instance.
However, when the Pension Fund outperforms, it can grant so-called special apportionments, which increase pension credits by a certain percentage for all beneficiaries in a calendar year, whether they’re in retirement or not.
If someone has $100,000 in pension credits, for instance, a 1 percent special apportionment would increase that figure to $101,000. If that boost is 3 percent the next year, it would be an increase over that new baseline. The last special apportionment credit was 3.5 percent in 2014, and the biggest one in the last two decades was 13 percent in 1999.
“Many of our retired pastors’ pensions today are two or three times what it was when they retired because of the special apportionment,” Hamlett said.
Declining congregations could be a headwind for the Pension Fund long term.
The issue is not short-term cash flow because, given its triple-digit funding level, existing contributors aren’t necessary for existing pensioners to get their checks.
Rather, a smaller base could diminish the economies of scale the fund enjoys. Adams, the incoming president, said the size of the beneficiary pool—about 13,000 people—is what allows the Pension Fund to capture large gains during market upswings and accrue reserves deep enough to protect retirees during market downturns.
Fewer beneficiaries could also make operating the fund, which enlists 23 outside fund managers, costlier for each member. Demographic trends among churchgoers threaten such outcomes.
According to the Association of Religion Data Archives, the Disciples of Christ denomination in 2000 had 1.02 million adherents—or people, including church members, who associated themselves with the denomination.
In 2010, the year of the most recent survey, that figure stood at 785,800, a decline of 23 percent.
It’s not just the Disciples of Christ. Denominations in nearly all the major Christian traditions—Catholic, mainline Protestant, black Protestant—have seen their ranks decline. In a report published last year, Pew Research Center said the United States was home to 178 million adult Christians in 2014, 5 million fewer than the country had in 2007.
For mainline Protestants, the population dropped from 41.1 million in 2007 to an estimated 36 million in 2014, a decline of 12.4 percent.
“Our organization weathered the 2008 economic downturn well,” said Colette Nies, a spokeswoman for the $20-billion-in-assets General Board of Pension and Health Benefits of The United Methodist Church, citing reasonable return assumptions and a diversified investment portfolio. “Demographic changes in society and the church may be the factor that is most affecting the trajectory of the denomination, and thereby, eventually, our benefit plans.”
Adams, the Disciples of Christ Pension Fund’s incoming president, said part of his strategy to maintain the outcomes the fund has produced is to reach out to its “cousin” denominations, including the Churches of Christ (Non-Instrumental) and the Christian Churches/Churches of Christ.
These denominations don’t have their own pension funds, Adams said, and their clergy and lay workers have always been eligible to participate in the Pension Fund.
“We just never heavily marketed to them,” he said.
Adams said he also intends to offset the impact of shrinking congregations by becoming “even more conservative,” lowering the assumed pension return rate from 4.5 percent to “4 percent over the next five to 10 years.” The idea here, he said, is to guard even more against volatility than the fund had been.
“As the available market to us tightens,” Adams said, “we look to other markets which we are able to serve, and we look to our investment philosophy and the needed return in order that we can continue to pay out these amazing pensions to those who have served the church well.”•