Tuesday, 4 February 2014

Church of England Funded Pension Scheme valuation

Updated Wednesday

The Church of England Pensions Board issued this statement last month.

The Church of England Funded Pension Scheme valuation
21 January 2014

In response to the claims in the media by Mr John Ralfe in relation to the Church of England Clergy Pensions Scheme, the pensions board has issued the following statement:

John Ralfe’s claim that there is a big hole in the clergy pension scheme is simply inaccurate. At the last valuation of the scheme, on 31 December 2012, the funding deficit was 25%, and we are on target to be fully funded over the next decade. Had the valuation been carried out at the end of 2013, we might have expected the funding deficit to be closer to 15%.

Mr. Ralfe says that the clergy pension scheme’s discount rate was increased by 0.5% without an explanation. The pensions board made the assumptions for the valuation based on their assessment of the strength of the responsible bodies’ financial covenant, the fall in yields on fixed interest gilts, market expectations for future RPI inflation and up to date mortality expectations. The discount rate is in line with advice from an independent actuary and with the requirements of the pensions regulator.

Mr. Ralfe has raised these sorts of issues in the past, but has refused numerous offers by the Church of England Pensions Board to meet to discuss this matter.

Our return-seeking funds have returned 20.8% over the three years to the end of 2012, and provisionally, 27.7% over the three years to 2013, improving the funding position of the scheme.

Mr Ralfe also fails to take into account that, unlike most other defined benefit schemes, this scheme is still quite immature and is still open to new members giving it a healthy contribution inflow. A bond heavy investment policy is not normally seen as either necessary or desirable for relatively immature schemes, and would make them unnecessarily expensive.

Robert Peston, the business editor of the BBC published this article on the same day: An unholy pension hole.
The following day Simon Read wrote in The Independent: Vicars’ retirement savings in jeopardy, says pension expert

John Ralfe has now published an open letter to the Archbishop of Canterbury in the Financial Times: Dear Archbishop, the Church of England is in pension denial and on his website. [Registration (free) required in both cases]


Following Ralfe’s release yesterday of his letter to the Archbishop of Canterbury, the Pensions Board has today issued the letter that it sent in reply; read it here. It goes into much more detail than the press release above.

Posted by Peter Owen on Tuesday, 4 February 2014 at 6:13pm GMT | TrackBack
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Categorised as: Church of England

At the current level of interest rates, a change 0.5% inevitably makes a huge difference to the projected deficit - the outcome will depend on whether the projections are right. I hope the actuaries considered finer adjustments as well - in my experience 0.5% is the default, with 0.25% a remotely possible option. I would suggest that 0.1% gradations should have been considered. What is more the thinking should be more public.

However, these are just projections, and the ones we have are conservative in relation to historical rates.

The Pension Board comment on the maturity of the scheme and the investment policy is, to my mind at least, correct. A rebalancing towards fixed interest investments (gilts and bonds) would lead to a significant reduction in assets as interest rates increased. All assets would be affected, of course, but equities would tend to increase in value reflecting economic growth (if the economy were to grow).

The big issue that is whether by direct or indirect investment, clergy pensions are likely to depend on taking (at least part of) the rewards of growth out of economies other than our own (which are growing more quickly). That works in the era of the free movement of capital, but there is an unacknowledged political risk (as well as an ethical question) behind the inherent assumptions here.

The clergy pension I am promised when I retire is supposed to go up in line with the minimum stipend benchmark. But in cash terms, what was projected ten years ago when I might retire at 65 is approximately what I will get when I am 68 on projections now. I am not in ministry for the pension, but having chosen to be (expensively) inducted into the world of finance in my youth, this is pretty much what I expected, except that my generation will not properly retire below 70 anyway, unless health intervenes.

The Church Commissioners, who once thought their whole fund might be taken up by pensions now have a pension liability about a third of their assets. This shows how fickle projections are, and this is especially true in a relatively young fund, which has a limited asset base in relation to the number of prospective pensioners.

Posted by: Mark Bennet on Tuesday, 4 February 2014 at 9:37pm GMT

It's a bit of a pity that the Pensions Board statement includes the sentence about asking to meet Mr Ralfe. In their statement they should stick to arguments about the facts---Mr Ralfe states his case clearly and the Board are absolutely right to refute them as they have.

This also raises issues about whether General Synod is really a fit governance body for this purpose---both because of general competence and because of conflicts of interest, with such a large representation of members of the scheme.

Mr Ralfe says that if his concerns had reached the floor of Synod then there would have been pressure for a defined benefits scheme. An interesting question---I doubt it, because the risk calculation is a difficult one for most pension scheme members to make. But the larger question is to what extent the Church needs to step back from providing clergy with things like housing, pensions, etc and to what extent it would do better to pay a higher salary with much fewer fringe benefits. At present the church goes on about homelessness but an audit of unoccupied and underoccupied clergy housing would be interesting.

Posted by: Turbulent priest on Wednesday, 5 February 2014 at 8:24am GMT

Fairly arrogant piece by Mr Ralfe in the FT, who tracks many large pension funds, appearing to second guess their trustees and advisers. It is unclear who, if anyone, he is trying to serve. His bond mantra is well known and is not universally accepted by other pension investment experts. My experience of the Pensions Board (of which I have never been a member) while on the General Synod is that it is highly accountable. The clergy scheme has to be a balancing act. Current members do not contribute to it (for good reasons) and it will be preserved as part of the overall clergy terms of service until such time as it becomes unsustainable for the individual parishes. The General Synod does debate this stuff and has decided that currently the church does not wish to depart from the defined benefit scheme or move to a hybrid version.

Posted by: Anthony Archer on Wednesday, 5 February 2014 at 8:28am GMT

Apologies for typo in my comment...I meant "move to a defined contributions scheme".

Almost nobody would choose of their own volition to move to a DC scheme because of risk aversity, certainly not in a public debate, but some experts think this is because DC schemes aren't properly explained. There is a big upside potential, but of course individuals get only one throw of the dice!

One of the big problems is that they are usually linked with lower contribution rates, so people are being asked two questions at once.

I wasn't criticising GS's good intentions on this matter, but I really wonder whether there are all sorts of unexamined issues around conflict of interest, lack of understanding of financial issues and pensions in particular, etc etc.

Anthony Archer is not in either of these categories! But lurking here is another question, almost theological: should clergy have "public sector" or "private sector" conditions?

Posted by: Turbulent priest on Thursday, 6 February 2014 at 7:40am GMT
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