wfn.org | Changing markets prompt board to lower base credit rate

[NewsDesk@UMCOM.UMC.ORG]

Nov. 20, 2000 News media contact: Tim Tanton·(615)742-5470·Nashville, Tenn.
10-71B{520}

NOTE:  This report is a sidebar to UMNS story #519.

EVANSTON, Ill. (UMNS) - Changing markets and other factors have led
directors of the United Methodist Church's pension and benefits agency to
lower the base credit rate paid to participants for the first time since the
1970s.

The decision to lower the base credit rate on the Diversified Investment
Fund from 6.5 percent to 3.0 percent was one of several key actions by the
voting directors of the United Methodist Board of Pension and Health
Benefits during a Nov. 17-18 meeting. The change takes effect Jan. 1. The
$12.3 billion fund is the agency's largest pool of investment money.

"The bull market of the last 20 years has enabled participants to experience
excellent investment returns," said John English of Summit, N.J., chairman
of the Asset/Liability Committee. However, the bull market is "not
sustainable," and the board must prepare for change, he told board members
Nov. 18.

To protect the agency's long-term assets, the committee recommended changing
the base credit rate for 2001 and setting a reserve target of 14 percent.
That means that the board would have a goal of keeping the Diversified
Investment Fund's net assets at a level equal to 14 percent of participant
account balances. The current reserve level is about 11 percent.
 
Any reserves that exceed the 14 percent level on April 30 and Oct. 31 would
be paid out to participants as a special distribution, according to the
resolution approved by the board.

The base credit rate has been 6.5 percent since 1973, except for one year,
1974, when it was 7 percent, said staff executive Dave Zellner.

In terms of investment performance, the agency ranks in the top 25 percent
of public and private pension funds with assets greater than $1 billion,
Zellner said. The strong investment markets have been largely responsible
for that, but credit also must go to the agency itself, which has managed
the assets "quite well," he said.

The need for a more conservative rate was underscored by a study for the
board in 1998 by the Salomon Brothers investment firm. The study found a 10
percent chance that the board would have a reserve deficit of $2 billion in
the next five years, and a 28 percent chance that the reserve would go
negative and remain that way for five years, Zellner said. That was more
risk than the Asset/Liability Committee wanted, he said.

The fund has posted impressive gains during the long-running bull market.
However, the current uncertainty in the market has contributed to an
increase of only 0.5 percent for the year as of Oct. 31.

The board members also were reminded of the fact that, from a cash-flow
perspective, distributions from the agency have exceeded contributions for
several years. For the nine months ended Sept. 30, the board took in $239.5
million in contributions, excluding investment income, but paid out $400
million in withdrawals and distributions. Agency officials emphasized the
importance of growing the asset base.

The board will continue studying the Diversified Investment Fund, said Gale
Whitson-Schmidt, treasurer and chief financial officer. The differing
investment objectives of accounts within the fund will be included in the
study, she said.

The board will act immediately to communicate the change in the base credit
rate to conference benefits officers and participants, to ensure the move is
explained well, officials said.

"We do anticipate some concern," top staff executive Barbara Boigegrain said
after the meeting. But in fact, the board is protecting the participants and
their assets much better with this action, she said. She added that she
applauded the board for its courageous decision to make the change that it
did rather than just lower the rate incrementally over a period of time.

In other action, the board's directors approved changing the Investment
Policy Book to allow the agency to invest a slightly larger percentage of
the Diversified Investment Fund's assets in international stocks, if the
Asset/Liability Committee decides that should be done. As a result, the
board will be able to invest 10 percent to 20 percent of the market value of
the fund in international equities, compared with a range of 5 percent to 15
percent before. That increase is accompanied by a corresponding decrease in
the range for assets invested in U.S. equities. The fund's total investment
in stocks is limited to no less than 50 percent and no more than 75 percent
of its assets.

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United Methodist News Service
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