Vol. XXI, Issue 37

July 19, 2022

Reduction of Liability Premium Component of Allocated Underfunding from 10% to 5%

Local churches that wish to separate from The United Methodist Church are required by The Book of Discipline to make certain payments as part of the separation process. One such payment is related to a local church's pro rata share of an annual conference's aggregate underfunded pension liability.

When calculating an annual conference's underfunded pension liability in the context of a local church separation, Wespath is required by ¶1504.23 of The Book of Discipline to use "market factors similar to a commercial annuity provider." In this calculation, Wespath uses the market interest rate from the FTSE (Financial Times Stock Exchange) Pension Discount Curve, which is an interest rate published monthly by FTSE Russell specifically for the valuation of pension liabilities.

Liabilities calculated using that market rate (and other actuarial assumptions) are then increased by a liability premium to arrive at an amount that is similar to how a commercial annuity provider would value pension liabilities if the provider assumed responsibility for all future benefit payments.

In keeping with applicable professional standards and an effort to ensure our practices remain commercially reasonable, Wespath periodically reviews the assumptions it uses to determine whether they need to be updated based on the relevant market or environment. With the help of an independent, third-party consultant, Wespath recently completed a review of the liability premium used by commercial annuity providers in pension liability transfer scenarios. Based on that review, effective July 1, 2022, Wespath has updated the liability premium it uses by reducing it from 10% to 5%. Allocated Underfunding letters with "as of" dates on or after July 1, 2022, will reflect the new liability premium of 5%. All else being equal, this will reduce an annual conference's underfunded pension liability amount.

A liability premium of 10% continues to be the appropriate assumption for Allocated Underfunding letters with "as of" dates prior to July 1, 2022; therefore, no retroactive adjustments are required.


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