PHILADELPHIA – The Board of Pensions of the Presbyterian Church (U.S.A.) voted March 9 to revise its policy for granting experience apportionments when financial conditions warrant.
As a result of that decision and of having sufficient funds available, the board will this summer grant the first experience apportionment in four years. Experience apportionments are percentage increases in the pension amounts paid to members of the plan – essentially increases in retirement benefits.
The board voted to grant apportionment increases effective July 1, 2013. They will amount to a 1 percent increase in retirement and survivor pension benefits to members and survivors who receive benefits, and a 1 percent increase in pension credits accrued as of Dec. 31, 2012, for active and vested terminated members of the pension plan.
A report to the board states that approving an experience apportionment is “a way for the pension plan to share favorable actuarial and investment experience with plan members” – an unusual feature of the plan. “It involves a balance between near-term benefit improvement and long-term security of future benefits.”
That apportionment was made possible in part because the board revised its policy at this meeting for granting such apportionments. It amended its previous policy, in effect since 2005.
The previous policy allowed experience apportionments to be made when the funding adequacy level reached at least 125 percent. The funding adequacy ratio is determined by dividing the market value of assets by the liabilities, or the estimated current value of accumulated plan benefits. Under that policy, an experience apportionment would not have been granted for 2012, and one had not been granted since 2008.
On March 9, however, the board modified that policy – and in so doing altered both the objectives of the pension plan and the funding levels required to make apportionments. The changes were made in response to a report from the 2012 Asset/Liability Task Force, which reported at the board’s meeting in October 2012.
One goal of that task force was to review the guidelines used for granting apportionments, and to consider guidelines that might permit the board to grant smaller apportionments more frequently, when that could be done responsibly and would not undermine the solvency of the pension plan.
Among the changes:
Previously, the policy held three objectives as equal – that of the solvency of the plan; of generational equity (that the impact of the plan would not treat one generation significantly differently than another); and of mitigating the effects of inflation. Under the revised policy, plan solvency is ranked as a first priority, while generational equity and mitigating inflation follow as lesser objectives, in that order.
The board also altered the criteria used for determining when experience apportionments could be made. Under the revised policy, the board will authorize apportionments as follows:
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No apportionment if the funding adequacy level is under 110 percent;
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If funding is from 110 percent but less than 120 percent, the policy would permit a 1 percent apportionment;
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If the funding is from 120 percent but less than 125 percent, the policy would permit a 2 percent apportionment;
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If the funding is 125 percent or higher, the policy that was approved in 2005 would be followed – utilizing an assumption-based calculation involving available pension plan assets and liabilities.
As of Dec. 31, 2012, the funding adequacy was at 114 percent, which meant that under the previous policy no apportionment would have been made. But under the revised policy just approved, an apportionment could be authorized.
The board has stated that making small, fairly regular increases through apportionments works better at offsetting inflation than making fewer but larger apportionments.
