(Board of Pensions press release.) The Board of Pensions, amid a sluggish economic recovery, has set a more conservative long-term investment return assumption for the Balanced Investment Portfolio, which holds the Pension Plan assets.
The agency’s Board of Directors today approved a reduction in the assumed return, from 7 percent to 6 percent. By moving to a more conservative assumption for financial planning, the Board has taken a step to ensure the long-term solvency of the Pension Plan.
“This is yet another extension of the sound investment management that has made it possible for us to take care of our brothers and sisters in Christ who have served the Church,” said Frank C. Spencer, president of the Board of Pensions. “In addition to keeping the Pension Plan sound and managing it to keep up with inflation, we also are called on to make sure that retired church workers of the future can anticipate benefits similar to those of today.”
Every year, the Board of Pensions Investment Committee revisits the investment return assumption for the long term, a period of 10 to 15 years. The return assumption was 6 percent when the plan was implemented January 1, 1987. It was increased to 8 percent in 1999, as market performance was strong in 1996 through 1999, and then reduced to 7 percent as a result of the Board’s 2005 Asset/Liability Study. The 2012-2013 Asset/Liability Study affirmed the 7 percent assumption.
Today, global market conditions and long-term asset class assumptions differ significantly from those reflected in the 2012-2013 study. Low interest rates and slower growth worldwide have resulted in a rerating of long-term capital market assumptions.
For its latest review of the long-term investment return assumption, the Investments team of the Board of Pensions gathered 2016 long-term asset class assumptions from top investment managers. Then, it modeled portfolio asset allocations. The team determined that 7 percent was unattainable without a radical change in portfolio asset allocation. Such change would reduce liquidity and increase risk in the Balanced Investment Portfolio.
“The guidelines are designed to ensure that the plan is able meet all existing pension commitments, which includes those decades down the road,” Spencer said. “We would not be serving well if we continued to rely on a long-term investment assumption of 7 percent when all indicators are that we are simply not going to achieve that in today’s market environment, at least not without exposing the plan to untenable risk.”
The Board of Pensions will continue to monitor financial markets as it balances the short- and long-term goals of granting annual increases, ensuring the plan’s long-term financial stability, and maintaining generational equity.
Spencer concluded, “If we are wrong and markets outperform, then we will simply provide larger experience apportionments in the future. But if we are right and the markets are experiencing a secular shift, then we have acted to protect our members’ financial security.”
About the Board of Pensions
The Presbyterian Church (USA) is a connectional church. The Board of Pensions, one of six agencies of the General Assembly of the PCUSA, fulfills a unique role in the community by upholding the commitment made by congregations to care for installed pastors and by providing ways for churches and other Presbyterian-affiliated employers to care for other teaching elders and other employees. The Board administers the church Benefits Plan, serving about 20,200 pensioners and survivors, 13,600 active plan members, 20,900 dependents, and 8,500 inactive members (those with vested pension credits who are not actively participating in the plan).