Equity Concepts in Retirement Plan Design

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Aldous Underwood
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1 CARING FOR THOSE WHO SERVE 1201 Davis Street Evanston, Illinois Equity Concepts in Retirement Plan Design January 2010

2 The concept of equity directly impacts the design of a retirement plan. This discussion focuses on the concepts of equity that impact retirement plan design and what concept of equity you think is most appropriate to govern the design. A later discussion will focus on the extent to which the plan design should provide for choice and flexibility by conference. Two concepts of equity exist within the Church with respect to retirement plan design: equal dollar amount and proportional to compensation. Some feel that clergy who serve poorer (and often ethnic) churches that can t afford much in the way of compensation should not be given lesser retirement benefits. They believe that benefits should be based on the Denominational Average Compensation (DAC), thereby producing benefits of uniform dollar amount. Others feel that those clergy who excel and draw more people to the Church should be rewarded with higher benefits. They believe that benefits should be based on actual compensation. Further, when people talk about equal dollar amount, some seem to be talking about contributions of the same dollar amount, while others seem to be talking about benefits of the same dollar amount. Proponents say Detractors say Equal Dollar Amount Clergy go where they are sent, and if they are sent to appointments that pay less, they shouldn t be penalized. Clergy who serve poorer (and often ethnic) churches that can t afford much in the way of compensation should not be given lesser retirement benefits. It s a matter of equity that clergy receive the same benefits. Benefits of the same dollar amount may provide inadequate income replacement ratios for higher-paid clergy. Benefits of the same dollar amount may provide excessive income for lower-paid clergy. Proportional to Compensation Clergy who excel and draw more people to the Church should be rewarded with higher benefits. It s vital to the future of the Church that outstanding clergy be rewarded. Benefits proportional to compensation may provide inadequate income for lower-paid clergy. Benefits proportional to compensation discriminate against racial and ethnic clergy. 2

3 Equity in Prior and Current Plan Designs Pre-82 Plan (Pre-82) Pre-82 pays monthly benefits. Pre-82 formula benefits are based on the past service rate set by each conference multiplied by years of service, resulting in essentially the same dollar amount per year of service within the conference. Since each conference sets its own rate, rates and benefits vary widely by conference. In addition, most conferences established Defined Benefit Service Money (DBSM) accounts to fund the formula benefits. Each conference set up DBSM accounts in its own way. Some set them up only for new participants after a certain date, for example, while others had different rates for elders than local pastors. And DBSM accounts are invested and subject to market fluctuation, resulting in still different account balances for individuals. Participants receive the greater of the formula benefit or the benefit that can be funded by their DBSM account. Ministerial Pension Plan (MPP) Generally, contributions to MPP were based on the DAC. One conference elected to base contributions on actual compensation up to 150% of the DAC, and six conferences elected to base contributions on actual compensation. Conferences could elect contribution rates of 11% or 12% of the contribution base. In addition, benefits are highly dependent on the investment markets experienced by each participant over his or her career, the conversion rate at the time the participant annuitizes his or her benefit and the extent to which contributions were made on a timely basis. Deacons were covered under MPP only if their local church elected to cover them. Clergy Retirement Security Program (CRSP) The Benefits 2004 Task Force concluded that CRSP should balance both concepts of equity. In CRSP DB, benefits are essentially the same dollar amount per year of service because they are based on the DAC. But CRSP DC contributions are based on actual compensation. 3

4 How Prior and Current Plan Designs Rate with Respect to Concepts of Equity Equal Contributions Equal Benefits Equity Concept amount contributions for clergy within a conference amount contributions for clergy across conferences Contributions proportional to compensation amount benefits per year of service for clergy within a conference amount benefits per year of service for clergy across conferences Benefits proportional to compensation Pre-82 Formula Benefits Pre-82 DBSM Benefits MPP CRSP DB CRSP DC No Sometimes Yes* No No No No No No No No No No No Yes Yes No No Yes No No No No Yes No No No No No No *True for most conferences, but not all 4

5 How Equity Concepts Mesh with Plan Types Both defined benefit and defined contribution plans can be designed with either concept of equity in mind. Advantages are indicated by +. Disadvantages are indicated by -. Equal Dollar Amount Defined benefit plans + A benefit amount of the same dollar amount or the same dollar amount per year of service is easy to calculate and administer. - Defined benefit formulas based on the same dollar amount will result in higher contributions for older participants. Defined contribution plans + A contribution amount of the same dollar amount is easy to calculate and administer. - Defined contribution formulas based on the same dollar amount will result in lower benefits for older participants. - Defined contribution plans cannot provide benefits of the same dollar amount. - Internal Revenue Code section 415 may limit contributions to lower-paid individuals. Proportional to Compensation + Compensation errors can be more easily fixed, and resulting benefit corrections can be paid over time. - It is more difficult to track actual compensation than the DAC. + A contribution amount proportional to compensation is easy to calculate and administer. - It is more difficult to track actual compensation than the DAC. - Late or inaccurate compensation data may require retroactive contributions with additional plan sponsor payments to make up missing investment return. Equity Based on Clergy Status As discussed above, contributions to Pre-82 DBSM accounts were sometimes different for elders than for local pastors, and MPP coverage of deacons was voluntary for local churches. Otherwise, full-time elders, local pastors and deacons serving local churches, conferences or other entities for which conferences have assumed benefit responsibility have been treated the same. 5

6 Transparency With some plan designs, it is easy to tell whether contributions are the same for everyone, or whether benefits are the same for everyone. However, certain plan designs, by their very nature, cause confusion, which even the most diligent communication is unlikely to dispel. For example, many people were under the misconception that MPP provided the same benefits for everyone, when, in fact, MPP did not necessarily provide the same contributions or the same benefits depending on the choices made by the conferences. Still other people thought that each conference bore the same costs for MPP. However, conferences contributed based only on actual compensation for those clergy earning less than the DAC. Contributions based on the difference between compensation and the DAC, known as build-up, were paid by the Comprehensive Protection Plan (CPP). Even when the contributions were the same, varying investment market returns caused significant differences in benefits. The concept of equity directly impacts the benefit/contribution formula for the retirement plan design. 6

CARING FOR THOSE WHO SERVE 1201 Davis Street Evanston, Illinois Part-Time Clergy.

CARING FOR THOSE WHO SERVE 1201 Davis Street Evanston, Illinois 60201-4118 847-869-4550 www.gbophb.org Part-Time Clergy February 2010 The Clergy Retirement Security Program (CRSP) originally provided both