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A Balance of Art and Science: The Granting of an Experience Apportionment


Since reunion in 1983, the goals for the Pension Plan of the Presbyterian Church (U.S.A.) have been to ensure that existing commitments are met and that current retiree benefits are protected from inflation without compromising future benefits.

The Board of Pensions Balanced Portfolio return for 2017 was 17 percent. Portfolio returns measure the performance of, not the growth in, assets because benefits obligations are paid out of the portfolio returns. As benefits obligations multiply with each experience apportionment, they take larger and larger bites from the returns.

The Board of Directors approved a 3.9 percent apportionment at its meeting March 3, 2018, based on the ratio of plan assets (portfolio value) to plan liabilities (benefits obligations) at year-end 2017. The ratio is the plan's funded status. The funded status at year-end was 131.0 percent.

For the five-year period 2013-2017, the apportionments' cumulative increase is 18.4 percent. Cumulative increases in the consumer price index for the same period amount to only 7.4 percent, as shown in the graph below.

"We are committed to the primary mission of keeping the plan secure and to protecting retiree benefits against inflation, both today and into the future," Board President Frank C. Spencer said.

The Board of Directors follows a step-by-step process (click here to learn more about the process) in determining whether to grant an experience apportionment and, if so, what it will be. The process was put in place five years ago when Directors amended the apportionment policy based on recommendations of the 2011-12 Asset/Liability Study.

Plan solvency is the most important objective of the Pension Plan, followed by generational equity and inflation mitigation, in that order. The policy allows apportionments to be considered when the plan's funded status is below 125 percent; previously, it had to be at least 125 percent. The 2011-12 Asset/Liability Study found that granting small apportionments at lower funded status levels could protect benefits from inflation with minimal risk to the plan.

If the plan is funded at 110 percent to less than 120 percent, a 1.0 percent apportionment may be granted; at 120 percent to less than 125 percent, a 2.0 percent apportionment. When the funded status is 125 percent or more, an apportionment greater than 2.0 percent is considered, and actuarial analysis is used to determine apportionment size.

Since the policy was amended, an apportionment has been granted yearly. In 2015, for example, the portfolio had a negative 1.1 percent return, the funded status of the plan was 123.7 percent, and Directors granted a 2 percent apportionment, effective July 1, 2016.

"This involves a balance between improving pension benefits in the near term and securing future benefits in the long term," President Spencer said.

A robust funded status is critical to securing future benefits. When the market crashed in 2008, the value of plan assets dropped 28.6 percent, and the plan's funded status went from 153 percent to 95 percent. For four consecutive years, no apportionments were granted. Other church plans cut benefits as a result of the 2008 market activity; the PC(USA) did not.

"The Board and its Directors have a commitment to long-term planning and management," President Spencer said. "We want to reduce volatility for our pensioners as much as we can, even when the markets are fluctuating wildly."

Dr. Dan M. McGill, the architect of the plan, wrote in 2003 in Financial Soundness of the Pension Plan of the Presbyterian Church (U.S.A.): "With the continued vigilance of the Board of Directors and the Board staff, the Plan can be relied upon to meet all its obligations throughout the many decades to come."