The General Board of Pension and Health Benefits on the Current Market Situation
During the last several months, a number of large U.S.-based financial institutions have failed or appear to be near failure. This is a direct result of losses incurred related to risky home mortgages and other loans held by these firms, as well as other high-risk transactions. The firms include investment bankers Bear Stearns and Lehman Brothers, along with mortgage lenders Fannie Mae, Freddie Mac, Countrywide Financial, Indymac Bank and insurance giant American International Group (AIG). Merrill Lynch agreed to be purchased by Bank of America in order to avoid a fate similar to Lehman Brothers. There has also been speculation about the future viability of other financial institutions.
The General Board of Pension and Health Benefits (General Board) understands that participants are aware of the market situation and may have concerns about the financial impact these failures have had or might have on their General Board account balances and/or monthly benefits. We have attempted to address some of these concerns in the following questions and answers.
Considering the activity in the financial markets over the past several weeks, what impact does the failure of the financial institutions cited above have on the investments that support my General Board account(s)?
The General Board holds a broadly diversified portfolio of investments that includes U.S. and international stocks, bonds, real estate securities, inflation-protected bonds, commodities futures contracts, private equity, real estate, privately placed mortgage-backed loans through its Positive Social Purpose investments program and other types of investments. While the General Board has invested directly in securities issued by most of the failed financial institutions, the total losses directly attributable to these institutions, as a portion of our overall investment program, have been minimal. However, the failure of these institutions has adversely affected investor confidence in the U.S. and world economies. As a result, stock and some bond markets around the world have declined, and many of the General Board’s investments have been negatively impacted as well, though not quite to the same extent as the broad market averages. Fund performance information is available at www.gbop.org/sri_funds/performance/home.asp.
What action has the General Board taken to protect its investments as a result of the current crisis in the financial markets?
As always, the General Board closely monitors its investments. We also continue to adhere to our philosophy of investing for the long term by building and maintaining broadly diversified investment portfolios. We believe this disciplined approach will continue to best serve our participants during up and down markets.
How has the Lehman Brothers’ bankruptcy affected the investments that support my General Board account(s)?
The General Board’s holdings of securities issued by Lehman Brothers have resulted in investment losses, but they are minimal as a portion of our overall investment program.
Looking at the General Board’s website, I have noticed that Lehman Brothers manages investments for the General Board. What impact has the announced bankruptcy had on the value of these investments?
Lehman Brothers Asset Management (LBAM)—the Lehman entity engaged by the General Board—is a wholly owned subsidiary of Lehman Brothers Holding Company but is not subject to the Lehman Brothers’ bankruptcy filing. Securities representing investments made by LBAM on behalf of the General Board are held by and under the control of Bank of New York Mellon, acting as the custodian of our investments. Approximately 60% of the securities managed by LBAM for the General Board are safe U.S. government issued securities. Because of the conflict of interest, LBAM did not invest in any securities issued by Lehman Brothers Holding Company. The total value of investments managed by LBAM increased for all the accounts it manages on the day Lehman Brothers Holding Company filed for bankruptcy.
Should I change the investment allocation in my defined contribution accounts to eliminate exposure to the stock market until the situation in the financial markets improves?
The General Board provides participants no cost financial planning services from Ernst & Young to assist you in making these personal decisions. Ernst & Young financial planners do not sell investment or insurance products or services. You can expect to receive sound advice without the sales pressure one often receives from stock brokers or other financial planners.
Please call 1-800-360-2539 to talk to an Ernst & Young representative or refer to the Ernst & Young Financial Planning Services brochure at www.gbophb.org/TheWell/Root/ALL/3411.pdf.
I am a participant with a balance in the Ministerial Pension Plan (MPP) and plan on retiring in several months—what impact will the current market crisis have on my expected monthly benefit?
The LifeStage Investment Management Service (LifeStage) selects investment funds for nearly all clergy with balances previously accumulated in the MPP that have not yet been converted to a monthly benefit payment or “annuity.” LifeStage is designed to reduce a participant’s exposure to higher-risk equities as retirement approaches. Although the recent decline in the stock market has had an adverse impact on MPP balances, most participants approaching retirement have a majority of their balances invested in lower-risk fixed-income funds.
I receive a monthly benefit payment (annuity) from the General Board. Who insures or reinsures my annuity? How are the funds supporting the annuity invested? Who is ultimately responsible for continuing to make the annuity payments?
The General Board does not insure or reinsure any monthly benefit payments (annuities). MPP, Clergy Retirement Security Program (CRSP) and Pre-82 Plan benefits are supported by a broadly diversified portfolio of equity and fixed-income investments and are well-funded despite the current weakness in the financial markets.
In the unlikely event that assets are insufficient to make future monthly benefit payments, the annual conferences are responsible for any shortfall. All non-MPP, non-CRSP or non-Pre-82 Plan benefits paid by the General Board are supported by a carefully designed, low-risk portfolio. The value of these investments is sufficient to fulfill the General Board’s obligations to its lay retirees and have only marginally been impacted by the current crisis in the financial markets.
Beginning January 1, 2004 the General Board discontinued offering annuities to any participants with non-MPP or non-Pre-82 Plan accounts. As an alternative, we originally recommended three insurance carriers (subsequently reduced to two) for participants to consider if they wanted to convert any or all of their accumulated account balances to an annuity. These two carriers are AIG and Principal. Given the present situation, the General Board is no longer recommending AIG.
I elected to convert all or a portion of my non-MPP balances to a monthly annuity benefit payment with AIG or another insurance company. If AIG or the insurance company I used declares bankruptcy, what impact will this have on the monthly annuity benefit payment that I receive?
Annuities are backed by the claims-paying ability of the issuing company and are rated by independent ratings companies, such as Standard & Poor’s, Moody’s, Fitch and A.M. Best. Their ratings reflect the strength of the guarantee. Although AIG’s ratings recently have declined, the U.S. Treasury announced that it was providing significant financial resources to support AIG. This will likely mitigate the risk that the firm will be unable to fulfill its obligations. If an insurance company should become insolvent, however, State Guarantee Associations provide some protection. While each state may provide differing levels of protection, every state provides at least $100,000 of coverage for annuity owners. Some states may provide more, with New York covering up to $500,000 in annuities. For more information about the National Association of Life & Health Insurance Guaranty Associations, please visit its website at www.nolhga.com/policyholderinfo/main.cfm/location/insolvencyprocess.