What’s the risk?
Presbyterian Board of Pensions evaluates the landscape 12-24 months in the future
By Carmen Fowler LaBerge, The Layman, October 31, 2011
SAN DIEGO, Calif. – The Board of Pensions (BOP) of the Presbyterian Church (USA) received a comprehensive enterprise-wide risk assessment from Deloitte & Touche LLP Thursday, October 27, in San Diego.
The first such external BOP risk assessment was conducted in 2002 and has fueled the business plan of the BOP ever since. Internal risk assessments were conducted in 2005, 2007 and 2009 and management deemed it time for an outside independent opinion.
With a fairly short view of the future (12-24 months), risks to the organization were based not only the current business objective but the larger environmental factors that, according to the report, “contribute to a shift in the risk landscape in 2011 which significantly differs from prior assessments.” It was observed that those factors are largely outside the control of the BOP and include the global financial crisis and ongoing market instability, PCUSA dynamics, national healthcare reform and an ever-evolving regulatory environment.
The report observes “a convergence factor whereby events will come to a head in the next two plus years.”
The top 11 risks, arrayed in priority order, were identified by the Deloitte representative as:
1. Medical Plan: The sustainability of the current medical benefits model as a self-insured medical plan. This concern is based on declining Plan membership, future membership projections, medical cost trends and the threat to the community nature of the Plan if federal healthcare reforms proceed as currently formulated.
2. Investments: The volatility of market risk and long-term investment returns.
It was noted that as retiring clergy outpace new clergy and positions are eliminated as churches close, dues do not keep pace with costs. The BOP is increasingly dependent upon the return on its investments to fund the benefits plan.
3. Human Resources: Succession planning risk for senior executives and retention of key subject matter experts. One of the great strengths of the BOP is the high number of very seasoned people in upper management. However, the majority of them are at or very near retirement age.
4. Pension and Assistance programs: Funding for the Benefits Plan and assistance programs depends on careful management of reserves. Since 1988, the Pension Plan has been asset dependent, relying upon investment returns to pay out benefits. The medical plan is pay as you go which means that if dues fail to keep pace with demand the Medical Plan reserve could be quickly depleted. The Assistance Plan is dependent on the on-going voluntary generosity of Presbyterians. If the BOP fails to achieve a proper balance of risk/return, difficult decisions will have to be made particularly in terms of the continuation of funding for the assistance program.
5. Church and member relations: Communications and marketing. As consumer demand continues to expect immediate access, high-touch service and as the denomination continues to explore controversial benefit related issues, communication and marketing become increasingly important as does the role of the regional representatives.
6. Fundraising; Declining membership and non-investment revenues are not being offset by fundraising. Funds development efforts become more critical as governance changes lead to a more congregational approach to financial decisions. The BOP is going to be challenged to be perceived as having funds that it is not willing to spend on worthy causes because those funds are already pledged. Again communication is essential so that people understand the money the Board is perceived to have must be used for the purposes for which it has been contributed and invested.
7. Third party risk. Many of the board’s operations are accomplished through a network of third party providers. The BOP has a very good set of oversight controls in place. However, these need constant vigilance particularly as the business practices of your partners changes (as through sub-contracting).
8. Data security and protection and the ability to adapt and comply with changing data requirements. This risk is on every risk assessment – but the Board has extensive controls and monitoring in place.
9. PCUSA governance and demographic changes. The dynamic nature of the PCUSA denominational environment means that regional representatives have a more difficult role as shifts take place. The economic challenges facing churches themselves affect their willingness and ability to comply with BOP current dues and put at risk the ability of churches to pay scheduled and projected dues It was observed that there is opportunity with every change and how the Board responds to the PCUSA’s evolution could provide the opportunity to expand and not contract, serving a wider clientele than exclusively the PCUSA.
10. The risk of the BOP not being sufficiently facile (flexibility, agility, scalability) to respond to changing business environment challenges. Given the pace of change, it is going to be critically important that the Board be flexible, agile and scalable. The Board is taking a number of steps to enhance its competiveness: benchmarking, business plan, cross-functional teaming within the organization and variable compensation arrangements. Scenario planning is essential: anticipating EVERY possible scenario and planning NOW for it.
11. Regulatory risk and increased compliance requirements. There is a lot of government regulation coming – which brings increased costs related to compliance.
The Deloitte representative concluded that “there is a convergence of factors here – assuming that you can continue operating status quo would be a huge ‘miss.’ And, “this is not the complete list. Hundreds of risks arose in dialogue but this is a distillation of that information.”
BOP President and CEO Robert Maggs assured the board, “You can’t fix problems you don’t know about and you can fly into the fog without radar. This is helping us to navigate the storms still on the horizon. These are possible. Some of them are probable. What do we have in mind to get around it? In 2002 the highest risk to the board was that we had no bench strength. It took 10 years to get to the place where we’re comfortable. The good news is that we’re not flying blind.”