BCI hopes you all had a blessed Holy Week and Easter! About 2 weeks ago, the archdiocese sent letters out to a number of former employees to address any questions or concerns they might have about the pension plan. Apparently, those darned “recent media reports” might have sparked some concerns.
We think it is a step in the right direction that the archdiocese sent such a detailed communication, but the letter still leaves a number of issues unaddressed. Here is the letter. Our commentary will follow the letter.
ROMAN CATHOLIC ARCHDIOCESE OF BOSTON
66 BROOKS DRIVE, BRAINTREE, MASSACHUSETTS 02184
Dear Archdiocese of 80ston Pension Plan Participant:
You may be aware of recent media reports regarding the Roman Catholic Archdiocese of Boston Pension Plan. It is possible that these reports raised questions or concerns for you as a former employee, or a retiree or beneficiary, of the Plan that you feel have not been answered. The purpose of this letter is to provide additional background information that the Trustees of the Plan hope will address any concerns you may have. This letter will also provide details about the timing of the changes to the Pension Plan. These changes were outlined in a letter sent to you in the Fall 0f 20 10.
Recent Financial Performance of the RCAB Pension Plan and Goals for the Future
As you may know, the Plan, like most pension plans, is funded through two sources. One source is employer contributions from parishes, schools, the Pastoral Center, and other Catholic entities in the Boston area, on behalf of approximately 10,000 current and former employees of these locations. Historically, employers have contributed a percentage of each eligible employee’s salary on a monthly basis. In recent years, these contributions bave totaled approximat ly $ 10 million per year. Some media reports have suggested that parishes and schools failed to make necessary payments into the Plan over an unspecified period of time. In fact, in 2006, recognizing that some parishes had old debt to the Plan that had not been paid, the Archdiocese transferred $ 12.7 million into the Plan from the Reconfiguration fund, created to receive assets of closed parishes and intended to be used, in part, to cover unpaid debts incurred by parishes. This additional contribution brought the parish portion of the Plan to over 90% funded. A year later, in 2007, all funding locations were at least 97% funded.
The second means of funding the Plan is through investment returns on employcr contributions. Because pension plan funding is tied to investment returns, it is norma l for the funded status of pension plans to go up and down over time. While cmployer contributions have continued throughout the life of the Plan, the extraordinarily difficult financial market performance beginning in 2007 caused the Plan to become significanlly underfunded by 2009, with only 74.6% of assets available to cover the plan’s obligations, and a deficit of over $81 million. With the recovery of the investment markets, the average funding ratio of the Plan for 2010 improved to approximat ly 83%. Open parishes continue to have a deficit of$39 million, and closed parishes have a deficit of$5 million. The remaining $24 million deficit is spread across all other locations based on their allocated assets and liabilities. The Plan’s funding level is comparable to Fortune 1000 company pension plans, which were funded at an average of 82% at the end of2010. This funding level also compares favorably to state and local government pension plans, many of which were less than 80% funded, on average, at the end 0f 2010.
Since the inception of the Plan almost 50 years ago, benefits under the Archdiocese Pension Plan have not been guaranteed or insured, a fact that has not been emphasized in the past but one that the Trustees feel must be noted as the Plan undergoes significant changes. However, it is the goal of the Trustees to achieve full funding for the Plan through a combination of the changes described below, continued employer contributions, and a prudent investment strategy. We have worked closely with legal counsel, actuaries and pension consultants, all of whom have been outside consultants to the Plan for many years, to determine how best to achieve this goal. In a recent statement published in The Pilot, Cardinal O’Malley reaffirmed the Archdiocese’s commitment to continued payment of its portion of the Pension Plan’s obligations. This commitment will be essential as the Trustees work with all employers in the coming years to improve the Plan’s financial position.
Decisions and Communication of Plan Changes
In the Fall of 2009, the Trustees began to review and analyze the information summarized above, adding projections for future employer contributions and investment returns to the historical information available. In mid-2010, pastors. business managers, school principals and other Catholic employer representatives were asked for their feedback on various options for stabilizing the Plan. In July 2010, the Trustees voted to cease or “freeze” accruals for active employees at the end 0f 2011. This freeze will dramatically slow the growth of future Plan liabilities, which will allow employer contributions and investment returns to bring the Plan to full funding more quickly.
The freeze will not reduce the benefits accrued through 2011. The Trustees also voted to offer two new voluntary options to eligible individuals: an early monthly annuity payment or a lump sum payment, each reduced to reflect the Plan’s underfunded status (83% as of 2010). The decision was made to offer less than full v lue for the two new voluntary options in order to reflect the Plan’s approximate funded status at the time of the election, rather than the funded status that might be attained at some point in the future. The v luntary lump sum option reduces both the Plan’s deficit and overall liability. In addition, it prescrves the Plan’s current funded percentage and does not disadvantage participants who elect to wait to receive their benefits as a monthly annuity in the f ture. The Trustees fclt strongly that thc lump sum option be entirely voluntary and that there be no reduction or change in thc monthly annuity benefit paid upon retirement.
In late February 2011, a detailed package of information was sent to approximately 1,800 former employees who are not already receiving a monthly pension payment. This information was voluntar ly shared with the Public Charities Division of lhe Massachusetts Anorney General’s Office a few weeks later. The package emphasized that the choice to take a lump sum payment or keep vested benefits in the Plan was a voluntary one based on each individual’s own lifc circumstances. To emphasize the voluntary nature of the election, each former employee who has or will elect a lump sum will be sent a letter from Cardinal O’Malley offe ing him/her the opportunity to revoke this election prior to April 30, 2011.
Some media reports have suggested that the v lue of lump sums is being overstated by the Plan to attempt to mislead former employees about their options. This statement is not accurate. Each ,individual’s life circumstances, including age, number of years before retirement, estimated life expectancy, and how and when the funds are invcsted, will result in a different detennination of the value of a lump sum to that person. All individuals offered a lump sum have been encouraged to consult with a financial planner, and meetings have been held in March and April 20 1 1 with financial educators present, who have provided information to attendees about how to evaluate these options. If you are a former employee who would like additional information about your lump sum or annuity offer, please contact me as soon as possible at (6 17) 746·5830 or firstname.lastname@example.org. I will make myself available to you to answer any of your questions.
Beginning in September 2011, current employees who will be vested and at least age 55 as of December 2011 will be offered a lump sum or in·service annuity, both reduced to reflect the 83% funding of the Plan from 2010.
If you are a retiree or beneficiary of the Plan, you will recall receiving a request for an anonymous response t0 a survey sent to you in the Summer 0f 2010 asking whether a lump sum option should be made available to you. At a Trustees’ meeting in the Fall 0f 2010, the responses (approximately 1,000) were reviewed. A slight majority of the respondents indicated that they would not be interested in a lump sum. The remaining responses were divided between defmite interest in a lump sum and a request for more information before an opinion was offered. The Trustees will continue to review a lump sum option in the coming months and will communicate a decision when it is made.
In January 2011, the Plan document was filed with the IRS for routine review based on a schedule set by the IRS in 2005. Notice of the filing was posted on the Archdiocese website (www.bostoncatholic.org) and tbe Archdiocese’s benefits website (www.catholicbenefits.org). We have again reviewed the legal status of the Plan with counsel and believe that the Plan meets the requirements for a qualified church plan. Information about the Plan, including audited fmancia! statements back to FY2005, is available on the Archdiocese website and the Archdiocese’s benefits website. Benefits Office staff members knowledgeable about the Plan can be reached by phone at (6 17) 746-5640 or by email at email@example.com for specific questions.
Opportunities for additional information for former employees currently eligible for a lump sum or early annuity are noted above. If you are a retiree or a former employee who decides not to elect a lump sum or early annuity before April 30, 2011, so that you have an additional venue to ask questions or convey concerns, we will host meetings at the Pastoral Center at 66 Brooks Drive in Braintree in May 2011 as noted below. Plan Trustees will attend these meetings, along with representatives from the Plan’s legal counsel (Wilmer Hale), pension consultant (Towers Watson), and actuarial services (October Three). We would encourage you to attend a meeting or webinar in May to leam more about the reasons behind the changes to the Plan or to answer any questions you may have about your benefits.
7:00 pm, Thursday, May 12,2011
7:00 pm, Wednesday, May 18, 2011
1 :00 pm, Saturday, May 2 1, 20 11
7:00 pm, Tuesday, May 24,2011 (webinar – please RSVP to firstname.lastname@example.org)
We appreciate your consideration of the information described above and hope that you avail yourself of one of the many opportunities to learn more about your benefits under the Plan.
Carol Gustavson, Plan Administrator
on behalf of the Trustees, Roman Catholic Archdiocese of Boston Pension Plan
Most Rev. Sean O’Malley, OFM Cap. [BCI note: yes, the letter listed the Cardinal as “Most Rev.”]
Very Rev. Richard Erikson, Ph.D., V.G.
James P. McDonough
Very Rev. Joseph K. Raeke, VF
Rev. Robert Kickham
Very Rev. Bryan Parrish
– – – – – – – – – – – – – – – – – – – – – – – – – – – –
First the positive. As we said before, we think it is good that the archdiocese sent a letter explaining some things that were previously not explained. And for the first time in nearly a year, the letter lists the actual names of the trustees, rather than leaving them anonymous by just saying “The Trustees” or “Carol Gustavson, on behalf of the Trustees.”
Now the key concern and area for improvement. The biggest issue is that the letter and approach being taken still neglect to address the trust agreement’s promise that the plan would be fully funded by employer contributions. Part 19.3 of the trust agreement says “Each employer shall periodically make contributions which … are sufficient on an actuarial basis approved by the plan’s actuary to fund the costs of the plan arising with respect to the participants…” Does that commitment not sound like a “guarantee”? Even if the plan was not insured, this part of the trust agreement says that the Trustees effectively have an obligation to invoice the participating institutions as needed to meet Plan liabilities. How can the Trustees be trusted to be acting solely in the interests of the plan participants–to provide benefits to the participants and their beneficiaries–if they are not working to collect what is due from each employer?
Here is the crux of the problem as BCI sees it. The archdiocesean lay pension plan that is the subject of this controversy is a “defined benefit” plan. Like it or not, good or bad, in this type of plan, the employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending on investment returns. This means the employer–the archdiocese in this case–committed to bear the investment risk. The plan was fully funded, or nearly fully funded at times, but then the investments dropped. By definition of the plan and defined terms of the trust, it would be the employer who is responsible for re-funding the plan.
In a defined contribution plan, which the archdiocese is moving to, contributions are paid into an individual account for each member. As described in wikipedia, “The contributions are invested (e.g. in the stock market), and the returns on the investment (which may be positive or negative) are credited to the individual’s account. On retirement, the member’s account is used to provide retirement benefits.”
Apparently defined contribution plans are now the dominant form of plan in the private sector in many countries. The number of defined benefit plans in the US has been steadily declining over years–this report says that 49 percent of 200 of the largest U.S. companies had ongoing defined benefit plans in 2009, down from 61 percent in 2006, according to Mercer’s Retirement. Wikipedia and other sources say that more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan.
The move to a “defined contribution” plan for the plan going forward makes sense to BCI. But what should happen to the “defined benefit” commitments made by the current plan to former employees who relied on those promised benefits for their retirement? Even if it is legal to cut the benefits, is it ethically and morally the right move, given the plan itself by definition promised those benefits, and still does today? Are the Trustees in a conflict of interest trying to balance the needs of the archdiocese and those of the beneficiaries?
Many questions. No simple answers. What do you think?