Proactive Management of Maturing Church Pension Plans

Strategies for Long-Term Benefit Security and Organizational Efficiency

Throughout my career, I have partnered with church plan sponsors across a wide range of structures. This includes single-employer plans such as dioceses, religious orders, and standalone faith-based organizations, as well as multiple-employer arrangements that pool schools, ministries, and similar entities. These defined benefit plans provide essential retirement security for clergy, lay employees, and lifelong ministry servants who have dedicated their lives to service.

Many of these plans are maturing rapidly. Retiree populations are growing, active contributors are declining, and benefit payments increasingly exceed contributions, creating persistent cash-flow deficits. In my experience, it is common for sponsors to postpone comprehensive reviews of funding policies, investment strategies, and risk management. Often, the plan still feels manageable in the short term, making it tempting to defer these deeper valuations. However, delaying these reviews frequently leads to reactive decisions after major market events.

Church plans have ERISA exemptions. They are not required to meet minimum funding standards, they have no PBGC insurance to serve as a federal safety net, and governance flexibility is broad. This flexibility allows for mission-aligned solutions but also requires disciplined oversight to avoid crises and protect the promises made to those who have served faithfully.

Understanding Maturation Risks and Valuation Differences

Maturing church plans face structural challenges regardless of whether they are single or multiple-employer. Benefit outflows often exceed contributions significantly, leaving plans reliant on investment returns and disciplined contributions to cover the gap. Funded ratios commonly range from sixty to eighty percent, with substantial unfunded liabilities contributing to rising costs over time.

Valuation assumptions add additional risk. Church plans typically base funding policies and projections on expected long-term rates of return, often between 6.5% and 7.5% in recent years, though historically they have been higher. By contrast, ERISA-covered corporate plans discount liabilities using high-quality corporate bond yields. For early 2026, interest rates for these plans have generally been in the mid-5% range.

This difference means that church plan funded status can appear stronger than it would under a more conservative, bond-based measurement. A plan that looks fully funded internally may reveal material underfunding when liabilities are revalued at lower rates.

This can lead to overly optimistic decisions, such as approving benefit enhancements, which can create shortfalls if returns disappoint or demographics change. Proactive sponsors stress-test assumptions against conservative scenarios, to avoid over-optimism and build true resilience.

Integrated Long-Term Strategies for Benefit Security

The strongest plans integrate three interconnected pillars: funding policy, investment strategy, and settlement strategy. These pillars should be reviewed regularly, either annually or after major events. This enables proactive adjustments rather than reactive responses.

Funding Policy: Establishing Discipline and Predictability

A clear, written funding policy sets contributions for both new accruals and systematic amortization of any unfunded liability. Effective approaches include:

• Percentage-of-payroll contributions, which scale naturally with salary growth but require ongoing checks to ensure progress

• Level-dollar contributions, which provide year-to-year stability but are less adaptive to change

• Periodic recalculations, which lock in multi-year amounts for budgeting certainty

• Annual actuarial valuations, which calculate normal cost plus amortization of shortfalls and are the most accurate for mature plans despite some variability

Sponsors should ask themselves:

• When was the policy last formally reviewed and updated?

• Do assumptions for return, mortality, salary growth, and turnover reflect current realities?

• Is full funding reasonably achievable, and is the unfunded liability actually shrinking?

Accelerating amortization in maturing plans often strengthens security without abrupt shocks. Delays typically result in larger, more disruptive contribution escalations later.

Investment Strategy: Balancing Return Targets and Risk Investment policy should support the assumed long-term return used in funding projections while prioritizing capital preservation and volatility control. This is especially critical during cash-flow-negative phases when contributions no longer offset outflows.

Best practices include:

• Diversifying allocations across equities, fixed income, and alternatives aligned with the position of the plan

• Performing scenario testing for prolonged low returns, inflation spikes, or market declines

• Setting return assumptions conservatively to be achievable rather than aspirational

Higher return targets reduce reported liabilities but require greater risk-taking, increasing exposure to downside events. Given church plans’ typically higher assumptions compared to ERISA’s bond-yield approach, periodic downward adjustments when warranted help avoid overstated funded positions.

Settlement and De-Risking Options: Managed Transitions

As plans mature, targeted strategies can reduce ongoing risks and improve efficiency:

• Lump-sum windows allow eligible participants to take a one-time cash payment instead of future monthly benefits. When implemented thoughtfully, this eliminates longevity risk for settled liabilities, reduces administrative burdens, decreases overall exposure, and can improve overall funded status with proper design.

• Full plan termination with annuity purchases is an option for frozen plans approaching adequate funding. This transfers obligations to a reputable insurer through group annuity contracts guaranteeing lifetime payments. Unlike the current church plan, which lacks PBGC protection, annuities are backed by the insurer’s financial strength and, in potential insolvency scenarios, by state guaranty associations, typically covering $250,000 or more per annuitant (varying by state). Termination removes future investment volatility, administrative costs, and contribution uncertainty while providing participants insured benefit security.

These approaches require careful modeling of costs, participant impacts and governance. Done correctly, they provide controlled, meaningful risk reduction.

Practical Steps for Proactive Oversight

From our work with diocesan, school, and ministry plans, we recommend:

• Project long-term funded status under varied economic, return, and demographic scenarios

• Voluntarily benchmark against conservative, ERISA-like measurements, such as AA corporate bond discounting, for insight into potential understatement

• Review funding policy, investment strategy, and actuarial assumptions annually with trusted advisors

• Document decisions to demonstrate prudent stewardship

• Communicate transparently with participants to build and sustain trust

Church pension plans support those dedicated to faith-based mission work. Their flexibility enables tailored outcomes, but only when paired with proactive, integrated management. Reactive approaches often compromise security and efficiency, while disciplined early action protects both.

We’re Here to Help

Church pension stewardship is important, meaningful work, and it can feel weighty as plans mature. If your plan has not had a recent comprehensive review of these pillars, or if you would simply like a fresh perspective on funded status, assumptions, or next steps, we are here to help.