Decision time in the pension crisis

by
02 November 2006

There has seldom been a more challenging time for pension trustees, as the industry undergoes one of its biggest upheavals for decades. Now, in common with private companies and public bodies, the Church of England faces significant questions about pensions.
 
As people live longer and longer, pension-fund liabilities have continued to grow. At the same time, predictions about pension funds' future returns from stock-exchange investments keep going down. Average returns from stocks and shares have dropped from 13 per cent per year to about 8 per cent per year since 1995. That means more to pay out, and less to pay out from.
 
Now government moves designed to make pension schemes more secure for their members are imposing further obligations on the trustees of all defined-benefit pensions schemes. The Pensions Act 2004 and recent regulations will require trustees to be still more cautious in estimating future investment returns. And, where the long-term bill appears to exceed the estimated assets available to meet it, trustees will be expected by the Pensions Regulator to require those funding the scheme to tackle the problem within a realistic time-
scale.
 
That means one of only two things. Either significantly more money has to be pumped into pension funds, or the increasing cost of the schemes has to be contained. Through no fault of our making, the Church now finds itself having to make its own hard decisions on the way pensions are funded for clergy and lay staff.

In the past ten days, the Church has published a report, Clergy Pensions - The Challenge Facing the Church, by a pensions task group set up by the Archbishops of Canterbury and York ( News, 3 March). This sets out the facts and the issues that the Church now has to address as it embarks on an important consultation exercise, which is likely to lead to decisions by the General Synod next year.
 
In considering the way forward, we shall have to take account of the proposed changes to the state pension. The report to Government in December from a group chaired by Lord Adair Turner proposed raising the state pension age, and introducing a national pension savings scheme, into which all employers and employees would be enrolled, unless they already belonged to a suitable occupational scheme.
 
The Church has been committed to offering good-quality occupational schemes for clergy and lay staff to supplement what the state provides. I am sure it will want to continue doing so. The question is what to do about the ever-escalating cost of providing the present guaranteed levels of benefit.
 
Outside the public sector (where the taxpayer provides the guarantee), the vast majority of defined-benefits schemes are currently carrying substantial deficits. That is why more than 70 per cent are already closed to new (and in some cases to existing) members for future service. Over the first weeks of 2006, several large companies - including Iceland, Arcadia, John Lewis, Rentokil, and the Co-op - have announced significant changes to their pension schemes.
The scheme that the Board administers for the staff of the National Church Institutions is currently undergoing its formal three-yearly valuation, and the one for clergy takes place at the end of 2006. The report published last week reveals that the cost of the present clergy pension is likely to increase by at least a third, and possibly by as much as two-thirds. That would mean that the dioceses, which currently pay more than £55 million in clergy-pension contributions, would face an extra annual bill of between £20 million and nearly £40 million.
 
The Pensions Board first became aware of the likely impact of the new regulations in the middle of last year. Like many others responsible for pensions, we indicated our concerns to Government and the Pensions Regulator that the proposals could have the effect of making the future for pensions less, rather than more, secure. A code of practice, which covers the detailed operations of the new regulations, is due to be published by the Pensions Regulator in April.
  In the mean time, the Church needs to prepare itself to make some tough choices in the coming months. How much more is the Church able and willing to afford? If rising costs have to be contained, how should pension arrangements be changed in a way that still makes adequate provision for retirement?
  The report from the pensions task group will be discussed at a meeting of diocesan representatives on 27 March, and followed by a consultation exercise throughout the Church, starting later in the spring.
 
These are not easy issues. They matter greatly. I would like to emphasise that the Pensions Board, working with the Archbishops' Council, the Church Commissioners, and the dioceses, will be doing all it can to identify the best way forward.

Allan Bridgewater CBE is chairman of the Church of England Pensions Board. He is also the chairman in the UK of Swiss Re, the world's largest life and health reinsurer. Clergy Pensions - The Challenge Facing the Church is available at www.cofe.anglican.org.

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