The General Board of Pension and Health Benefits of the United Methodist Church is bucking the trend on defined benefit plans. It is starting one.
Its radical action comes at a time many companies with defined benefit plans have closed, or plan to close, or plan to limit them, while companies without defined benefit plans don't intend to start them. Even some public pension plan sponsors wonder if defined benefit plans will be affordable in the future.
The United Methodist decision might spark interest in re-examining the merits of defined benefit plans. But the new United Methodist plan isn't necessarily a model for potential new corporate defined benefit sponsors, in part because of differences between the church group and a corporation.
The United Methodist organization, based in Evanston, Ill., isn't na%EF;ve about retirement programs. It already has an $12.5 billion defined contribution fund, managed by an array of investment advisers. Accruals to that plan will cease when the new defined benefit plan and a companion defined contribution plan are launched. By adding a defined benefit plan for clergy and lay staff, it will have a two-tier retirement program, effective 2007.
A spokesman said the new two-tiered program is designed to be cost-neutral to the existing plan. While no figures are available, that design eases concern about affordability. The spokesman said the church would not offer a new plan unless it was affordable, and added the denomination supported it.
In starting the defined benefit plan, the United Methodists can look forward to, in the view of most corporations, an occasional need for sudden, hefty contributions, when a collapsing stock market devastates pension assets and low interest rates raise the present value of pension liabilities.
In recent years such conditions forced corporate sponsors to contribute huge amounts to try to restore funding to levels that stayed within regulatory requirements and to seek temporary legislative relief from even more contributions.
Those volatile contributions, along with the prospect of tougher regulatory, legislative and accounting rules and increasing global competition, have provoked a continued corporate exodus from defined benefit plans.
Two-thirds of corporate executive respondents to a Deloitte Consulting LLP survey cited in Pensions & Investments indicated their primary concern about their defined benefit plans was the level of contributions needed and the impact of pension cost on financial statements.
The United Methodists, while certainly aware of the consequences, believe establishing a defined benefit plan has advantages over simply continuing the defined contribution plan. The two components are "designed to provide security at the time of retirement, stewardship of church and conference funds plus choice and flexibility," according to a statement from the organization.
A major problem with defined contribution plans is much of the benefit is tied to the performance of the market. In the event of a protracted downturn, there is no sponsor to provide makeup contributions for the losses, as in a defined benefit plan.
A defined benefit plan, where more benefits accrue the longer an employee stays with the sponsoring organization, might make more sense for an organization like the United Methodists where employees, certainly clergy, tend to stay with the organization. In the corporate world where employees, for a variety of reasons, tend to work for a number of employers throughout their careers, employees might lose benefits from a defined benefit plan each time they change jobs.
In addition, the church, while it has to answer to its membership, doesn't face the bottom-line scrutiny of shareholders like a corporation, nor does it have to meet price competition from others in its industry.
The upshot is no single type of plan, defined benefit or defined contribution, is a retirement income panacea for all employees or sponsors.
Defined benefit plans can have a place in some organizations, as the United Methodist Church believes. But this startup seems unlikely to prove the beginning of a great awakening for defined benefit plans, though some corporations ought to at least reconsider the positives of defined benefit plans.