Edition: U.S. / Global

United Methodist Church Bucks the Trend on Employee Pensions

Published: May 21, 2004

More than 17,000 employers in the United States have discontinued their traditional pension plans in the last 10 years. Countless others have scaled them back. Such pensions, with their promise of guaranteed, gold-watch-to-grave income, are considered by many companies to be too costly and cumbersome, and, in their view, it is only a matter of time before they disappear completely.

Now, though, one big employer is resisting the tide. This month, the United Methodist Church voted at its quadrennial meeting to start an old-fashioned, defined-benefit pension plan for its 25,000 American pastors and lay employees -- the very type of plan that so many companies have scuttled.

The United Methodist Church appears to be the first sizable employer to create such a pension plan in many years. The church has about $12 billion in other types of retirement plans, putting it on a par with big pension plan sponsors like Bank of America and Dow Chemical. The Methodists' new plan will cover about as many people as the one that R.J. Reynolds runs for its employees in the United States.

The only other recent pension start-up known to regulators is a much smaller plan, created last year for the police and firefighters of Lighthouse Point, Fla.


For older workers, the birth of a brand-new pension fund holds out tantalizing possibilities. As aging baby boomers have begun to contemplate their retirements, some have shown renewed appreciation for the defined-benefit pension.

In the booming 1990's, workers happily enjoyed the gains they recorded on their defined-contribution plans -- like the 401(k) -- that companies often set up to replace their discontinued pension plans.

But the bursting of the stock market bubble showed how quickly a hard-earned 401(k) balance could melt away, and the sturdy old pension began to look better by contrast.

A pension is guaranteed by the government and is paid as a stream of checks from a pooled trust. Retirees who have them do not have to worry about investing badly or outliving their assets. The rekindled interest in traditional pensions, however, comes at a time when most employers have decided that it makes no sense to start a pension fund.

Defined-contribution plans are widely seen as simpler to set up and cheaper to offer. They offer employers tax advantages, just as traditional pensions do, but they do not involve making promises that an employer may not be willing or able to keep 40 years hence.

Nor do defined-contribution plans require companies to set aside money in a trust fund to comply with complex federal regulations. More than two-thirds of America's 500 largest companies still run such pension funds, but they have complained for years that the federal funding rules were confusing and punitive, forcing them to lock away cash at times when cash was unavailable, among other burdens.

In the last few years, so many companies complained and threatened to drop out of the pension business that Congress voted in April to relax the rules somewhat.

Against that unhappy backdrop, the United Methodists offer a rare sign that not everyone thinks pensions are a losing proposition.

''I guess I'm old-fashioned,'' said Barbara Boigegrain, secretary general of the United Methodist Church's General Board of Pension and Health Benefits. ''But I don't feel that a defined-contribution plan only is necessarily the best way to take care of employees. Especially for a large, stable organization that has a considerable future in front of it.''

The United Methodists have a couple of big advantages over profit-making companies in their ability to offer pensions. Churches are allowed to opt out of the federal pension insurance program, for one thing. Those that do, like the United Methodists, are no longer required to follow the much-criticized federal pension rules. For-profit companies have no choice but to follow the law or close down their pension funds.

Nor are the United Methodists trying to run a business on behalf of investors. They have no shareholders who might see large sums piling up in a pension fund and complain that the money would have been better spent on business pursuits.

But the United Methodists could set an example for others not subject to the federal pension rules. Potential converts include county hospitals, state universities, police and fire brigades, public and parochial school systems, professional associations and other employers outside the private sector.

Church officials say that in any case, they can justify their decision on solid financial grounds. Their experience running a 401(k)-like defined-contribution plan left them unconvinced that such programs are cheaper and simpler to run than pension funds. Their defined-contribution plan has been an administrative nightmare, with volunteer workers in thousands of far-flung churches doing the payroll deductions and paperwork, according to their own systems and schedules.

''Every time the money gets transferred, or somebody transfers the wrong amount, or does it late, it's just a mess,'' said Ron Gebhardtsbauer, a United Methodist pension trustee who is also the senior pension fellow of the American Academy of Actuaries. ''It was obvious that a defined-benefit plan would be easier to administer.''

Mr. Gebhardtsbauer said that making one big pension contribution a year, leaving the individual churches out of the administration, would significantly reduce the paper chase. ''More of the money,'' he predicted, ''can be spent on benefits.''

In addition, the United Methodists' existing retirement plan was troubled by its own success. The denomination followed the unusual policy of managing all pastors' retirement accounts for them, on the thinking that their time was better spent on the ministry than the stock market.

By 1999, their investments had reaped such big returns that some pastors could retire, withdraw their retirement balances, and buy annuities that paid better incomes than they would have earned by staying in the pulpit.

''We pushed them out the door,'' Mr. Gebhardtsbauer said. ''That was a mistake. Under a defined-benefit plan, you don't waste that money. You don't give too much away in some years.''

The church has decided to keep its defined-contribution plan going, so that pastors can still have a chance at the big payouts the retirees got in 1999. But that plan will be scaled back so that it provides only about a quarter of a pastor's total benefit in a typical year.

Instead, pensions will become the foundation of future retirement. The new plan will follow a conventional pension formula that pegs pastors' benefits to their final pay. Pastors who work 40 years, for example, should receive a pension of half their final pay.

After the trustees agreed to propose a traditional pension plan, Woody Bedell, an official of the pension board, spent about a year and a half traveling to the denomination's 63 regional conferences, which are the basic unit of governance, and explaining it to local officials and lay people.

''There was certainly negativity,'' Mr. Bedell recalled. ''All they thought about was: 'This is another unfunded liability. You're putting a greater financial strain on the conferences. Nobody else in the United States is doing this.'''

He said he told skeptics that the only way to offer long-term financial security to pastors was to create a pension plan. ''Otherwise you're putting all the risk on the participant,'' he said. ''They've got everything to gain, but they're also at the risk of losing.''

When the matter came to the plenary floor of the quadrennial meeting this month, it was passed by a 75 percent vote, Mr. Bedell said.

Photo: Barbara Boigegrain, secretary general of the United Methodist Church's General Board of Pension and Health Benefits, and Woody Bedell, an official of the board, at church offices in Evanston, Ill. (Photo by Stephen J. Carrera/Associated Press for The New York Times)(pg. C12)