1. Introduction

1. Pensions and Benefits—International

1. Creation by the General Board

In accepting the recommendations of the Commission on General Board Organization, the General Board approved the creation of the office of Pensions and Benefits—International. These actions were ratified by the 1985 General Assembly.


The creation of this office grew out of the implications of "internationalization" and the need to provide consulting services to world areas desiring to establish pension plans. Also the need for the General Board to be informed better on the existence and stability of the pension plans that are already in existence became apparent.

2. Duties
   

The duties of Pensions and Benefits—International include the following elements:


1. To develop and maintain generic guidelines for pension programs denomination-wide.
2. To provide counsel to Nazarene entities desiring to implement pension programs.
3. To review proposed charters for new pension programs for consistency with the generic guidelines in (a) above.
4. To provide for ongoing review and monitoring of pension programs denomination-wide.

3. Organization
   

Pensions and Benefits—International is accountable to the General Treasurer/Headquarters Financial Officer.


The recommendations and reports that it presents to the General Board are made through the Finance Committee of the General Board.


Rev. Don Walter serves as the Director of Pensions and Benefits—International. He was first elected to this position in February 1994.

2. Purpose of the Guidelines

The purpose of the guidelines is to provide a basic understanding of the pension concepts and terminology necessary to facilitate communications with the office of the Regional Director and plan fiduciaries.

It is impossible to know the laws of all world areas that might govern a pension plan's provisions. It is just as difficult to be aware of the prevailing social customs and practices of the world area. This lack of knowledge may make some of what Pensions and Benefits—International suggests and recommends seem ridiculous and not practical to include in a pension plan. It is for this reason that only basic guidelines can be presented. How these fit in any context must be worked out by the Regional Director and pension plan fiduciaries to fit the legal basis for pension plans as well as the cultural practices of a particular world area.

3. Role of the Local Board of Pensions

The 2005-2009 Manual provides that:

336. There shall be a Pensions Board, or equivalent authorized body, with fiduciary responsibility for each church-related pension plan. A pension plan may apply at organizational, district, multi-district, national, regional, or multiregional level as the needs may dictate.

The action does not require that a separate pension board be established where it is desirable to use an already existing board for this purpose. However, recognition should be given to the unique role of a pension board.

A pension board has fiduciary responsibilities that require them to measure carefully both the short and long-range implications of their decisions. They are required to invest funds carefully for the long-term good of all participants and not to allow the funds to be viewed as a source of money to solve any other nonpension financial problem.

The structure of the pension board and the pension plan(s) it administers should remove the decision to grant benefits from simply emotional responses to immediate needs. Care also should be taken to separate the process of the district assembly's granting of a retirement status and the granting of a pension benefit. The pension benefit should be the decision of the appropriate pension board.

2. Pension Concepts and Terminology

1. Deferred Compensation Concept

The idea of a pension plan, or "superannuation" plan as it is known in some world areas, has gone through several changes. Most recently, a pension plan has come to be seen as a form of "deferred compensation" as contrasted to cash salary which is "current compensation." In other words, a pension benefit is directly related to and a part of compensation for service rendered during one's active service years.

2. Funding—"Pay As You Go" or Pre-funding

Current compensation is provided on a pay-as-you-go basis since current salary must come from current income. Reserves are not gathered ahead of time and invested to meet the budgeted payroll. This pay-as-you-go approach also can be used for deferred compensation. However, this is a very expensive method to provide for a pension since the full cost must come from the current income which may not be adequate for the current salaries let alone the income (deferred "salaries") of retirees.

A more effective and less expensive means to pay for a pension plan is through pre-funding. Pre-funding means setting up a reserve in trust for the future benefits to be paid at retirement and setting aside small amounts each year over the working life of each participant.

The amounts set aside are invested and the future benefit is paid for by the contributions and the interest. Since the interest can be quite substantial if compounded over the working life of the participant, the "cost" of the benefit is reduced from the pay-as-you-go method.

All pension plans seeking to conform to the suggested guidelines of this document must include pre-funding provisions. The pre-funding can involve the use of a pooled trust account invested to accumulate. Where appropriate, insurance company programs can be used. The International Contributory Retirement Program uses a United States insurance company for investment and record keeping services.

3. Defined Benefit Plan

There are two basic types of pension plans: (1) a defined benefit plan and (2) a defined contribution plan.

A defined benefit plan has a definitely determinable benefit that is clearly defined in the plan document. The plan document is the legal instrument that contains all provisions of the plan. Most often, the benefit is based on years of service and provides a fixed benefit for each year of service, such as $1.00 per month per year of service.

While the future benefit is easily determined for any number of years of service, the actual amount of the "cost" of the benefit to the plan is not easily determined. The cost will depend on the interest earned on the pre-funding contributions (the more interest earned, the less it costs in contributions), the mortality experience of the participants (how long they collect a retirement benefit), and expenses in administering the plan. Whether the plan has enough money with interest to meet all promised future benefits can only be determined after all benefits have been paid to the last living participant.

Such a plan must use a conservative interest rate assumption that reflects the average rate of return that can be expected over the next 30 to 40 years. The estimation of the annual contributions to pay for the benefits is done by an actuary familiar with other plans in that area. It may be difficult, if not impossible, to secure actuarial assistance in some world areas. Pensions and Benefits—International may be able to provide limited actuarial assistance in some cases.

4. Defined Contribution Plan

A defined contribution plan has a predetermined annual contribution cost to the participant and/or the church. It may be set up as a percentage of salary or a fixed amount of money. The contribution may be paid by the minister, the church, or in part by both.

No promise can be made as to what future pension benefit might result since it is not possible to predict the exact interest return on the funds over an extended period of time. Each participant must have an individual account and whatever is deposited for them must be credited to that account along with any prorated portion of interest earned. At retirement, the account could be paid in lump sum to the retiree or in some form of regular distribution of the balance. If the plan provides a guaranteed lifetime income from the funds in a participant's account, great care must be taken to see that it is based on sound actuarial calculations.

5. Vesting

Vesting is an important concept in any pension plan. It means the time that the benefit of the plan becomes nonforfeitable to the participant. Vesting may not be required by law in some world areas.

Vesting has two important functions. First, it is important for the plan document to describe clearly what happens to a participant's benefit if they leave the ministry before retirement or after the beginning of pension payments. It also should cover the rights of the participant's family in the event of the participant's death whether before or after retirement. For example, the U.S. pastor's defined benefit pension is not vested until a minimum of ten years of service is achieved. If they leave the ministry before this time, no benefit is payable at retirement. After having reached the minimum ten years of service, the retirement benefit is nonforfeitable even if they are not ministers at retirement.

Clarifying these issues before they happen is the best way to avoid the legal problems that can arise.

3. Defined Benefit Plan Issues

Generally, the basic pension plan for world areas/regions will be a defined benefit type plan since it provides a means to recognize past years of service immediately and a means to begin paying benefits to those who are already retired. The cost of recognizing past service must be determined carefully and can be quite expensive. A larger benefit can be provided if no past service is counted, but such a plan ignores the needs of those who have served the church and need the immediate assistance, even if it is modest.

A defined benefit plan does not require that separate accounts be maintained for each participant. All funds contributed are deposited to a single account for the benefit of all eligible participants.

Fundamental to administering a defined benefit plan is the accurate maintenance of service records on either a calendar or assembly year basis. These records become the key to determining the benefit at retirement and lack of accuracy will result in confusion and misunderstanding. Accurate records of service and basic personal data (i.e., dates of birth) are critical for any actuarial calculation of future costs to the plan.

The definition of a year of service is very significant for a defined benefit plan. Ministry patterns for each world area will dictate these definitions. In some plans, service is granted to each full-time pastor serving a local congregation on a district participating in payment to the pensions fund. Full-time may include all who are bivocational pastors. However, associate pastors generally must be full-time and earning their full livelihood from that ministry for a year of service credit. Evangelists are granted a year of service credit if they hold 30 Sundays of services where they received compensation. Although these are only a few examples, your plan must deal with the definition in a manner suitable for local ministry patterns and be subject to refinement as the patterns change.

The level of benefit provided by the basic defined benefit plan must be modest in that benefits after retirement cannot be greater than pre-retirement income for most pastors, though there may be limited exceptions. A target benefit can be derived by finding the average of the lower paid full-time pastors and taking a percentage of the average. If a national government plan benefit is also paid, it must be considered in the calculation process. A typical target for total annual retirement income might be 70 percent to 80 percent of the final year's salary for the average participant.

The appropriate percentage of pre-retirement salary that becomes a retirement benefit will depend on the local economy, financial resources of the churches, and their ability to support the plan. Generally, the benefit must be high enough make the plan credible to the churches and participants and yet low enough to be affordable. This is particularly difficult to accomplish where the range between the lowest and highest salaries is large. It should be remembered that benefits can be raised if they begin too low, but it is nearly impossible to lower them once they are promised.

Funds to pay for the plan can be appropriated in a variety of ways. A percentage of local income or expense could be designated for the pension plan. It could be a percentage of the salary and be paid for by the pastor, by the church, or in part by both. The amount of payment must be a part of the actuarial calculations and depends upon the benefit level established. As an incentive for participation, some penalty for nonpayment or payment below a certain level may be necessary.

Generally, all such plans must include a provision for a surviving spouse if the participant dies before retirement or after retirement. In unusual cases, this may require a lump sum payment to the family, but it is more desirable from an actuarial point of view to provide a periodic payment to the surviving spouse.

4. Defined Contribution Plan Issues

Many of the policy issues are similar for both types of plans. However, there are several distinct issues that should be kept in mind for a defined contribution plan.

A defined contribution plan does not provide any means to recognize past years of service before the plan began. This type of plan may be needed to supplement a basic benefit provided under a defined benefit plan for those pastors who have a larger average income and need greater retirement income.

A defined contribution plan requires more administration than does a defined benefit plan. An individual account must be set up to receive deposits and interest earned on the funds. Generally, periodic statements to participants should be made to confirm the deposits and interest earned. Also, there may be the need to include vesting information in these statements.

In a defined benefit plan, the focus is on the accurate keeping of service records since such records are what determines the future benefit. In a defined contribution plan, the emphasis is on the investment returns and the record of contributions.

Generally, a defined benefit plan should not provide any access to the funds before retirement, disability, or death. No borrowing should be provided. In a defined contribution plan, the same should hold true; however, it is more difficult, since there is a more direct sense of ownership of a specific account bearing the participant's name. The plan document should define clearly when and how any funds can be withdrawn from the plan, both at retirement and prior to retirement.

5. Establishing and Maintaining Pension Plans

1. Manual Paragraphs 336 and 336.1 provide that there be suggested guidelines relevant to all pension plans worldwide prepared by the General Board.

The guidelines will be maintained by the Finance Committee of the General Board and Pensions and Benefits—International.

2. The process for establishment of a new pension plan will have the following general pattern:
   1. Notification to World Mission Department that a pension plan is being established.
   2. Request for current guidelines for pension plans from Pensions and Benefits—International.
   3. Submission of a plan document to Pensions and Benefits—International for review. Pensions and Benefits—International will report findings of the review to the Pension Plan Fiduciary, the Regional office, the Finance Committee of the General Board, and the World Mission office.
   
   
3. Manual Paragraph 336.2 requires that:

   All pension plans shall submit an annual report to the General Board through Pensions and Benefits—International in the form and format requested.

A uniform format has been established for pension plan reports. The annual report form will be supplied to Regional offices by Pensions and Benefits—International. In order to complete the annual report, the following information and resources will be needed:

1. Legal name of the plan and when it began.
2. Verification that a copy of the most current legal document describing the plan's terms and benefits has been provided to Pensions and Benefits—International.
3. Balance sheet or actuarial study report showing the assets and liabilities of the plan.
4. Income and expense statement for the latest fiscal year.
5. A description of how benefits are determined, by whom, and who has the final authority to grant benefits and amend the plan.
6. A description of how funds are raised for the plan.
7. A description of how the funds are invested by the plan and how investment decisions are made.
8. Any other pertinent information necessary for the Pensions and Benefits—International office to understand how the plan functions.

Pensions and Benefits—International will provide a summary of these annual reports to the Finance Committee of the General Board, as required by the Manual, and to the World Mission office.

6. Investment Policies for Pension Funds

1. Prohibited Investments

   Prohibited investments by pension plans include any investment in a business whose activities are in contradiction with the ethical positions of the Church of the Nazarene as evidenced in the Manual and with the positions adopted by the General Board, General Assembly, Board of General Superintendents, and appropriate national boards as provided by Manual Paragraph 343.

   Prohibited investments include:

   1. Direct business ownership
   2. Real estate ownership or partnership
   3. Equity of a business for which there is no ready secondary market
   4. Second mortgages
   5. Commodities including precious metals
   6. Other investments generally considered to be of a speculative nature

   An exception to these prohibited investments may be granted upon consultation with the Regional Director, Jurisdictional General Superintendent, and Pensions and Benefits—International.

2. Investment Services
   1. Pooled trust funds (generally for defined benefit plans)

Since it may be preferable to have pension funds invested in the U.S., arrangements have been established with the General Treasurer's office to set up trust funds for this purpose. Such funds would be invested for the benefit of that specific pension fund and would be credited with interest earned. Should this service be desired, contact should be made with Pensions and Benefits—International.

2. International Contributory Retirement Program

The International Contributory Retirement Program provides for investment by or on behalf of individual participants through a group, flexible contribution, deferred compensation plan. Funds invested with the International Contributory Retirement Program are credited with guaranteed fixed-interest rates. The record keeping and investments are managed by a United States insurance company, Minnesota Life Insurance Company.