Don’t forget history when you fund the future, Commissioners warn

16 January 2015

BRENT CLARK

Intergenerational Equity

Intergenerational Equity

THE Church Commissioners have indicated that they are willing to eat into their capital to fund the reforms outlined in this week's reports, if they have the approval of the General Synod.

They warn, however, that such a move will reduce irreversibly the Commissioners ability to support the Church in the future.

At present, the Commissioners manage £6.1 billion of the Church's money. On current calculations, £2 billion of this is needed to meet the Commissioners' liabilities relating to historic clergy pensions. Interest from the rest is used to fund the Church activities: the Commissioners are responsible for funding bishops and many cathedral clergy, and contribute about £50 million a year in subsidies to the dioceses.

In 2013, the total spend was just under £208 million, of which £121.5 million went on pensions. Of the rest, 47 per cent went to dioceses, 36 per cent to the bishops' ministry, and 11 per cent to cathedrals.

The Commissioners' report, Intergenerational Equity, released on Friday in response to the programme of renewal and reform outlined in the task-group reports, is, in large part, a history lesson.

It begins positively. "The Church Commissioners strongly welcome these initiatives, and wish to play a full and creative part in their implementation."

 It recognised that this is likely to involve a period of "over-distribution" from its funds, so that it would need to spend not only the interest on its investments but eat into some of the capital.

The report draws a distinction between "good" over-distribution and "bad" over-distribution.

Good over-distribution "is undertaken for a clear purpose, in response to plans that are evidence-based, fully costed, and is entered into with the agreement and understanding of all parties". Safeguards would be put in place, and, if the plans are successful, a by-product would be an increase in the Church's financial strength.

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For a description of bad over-distribution, the report recounts the story of the Church Commissioners in the 1990s. In a candid account of that period, the report admits that unregulated over-distribution to support increased stipends and pensions coincided with an over-reliance on volatile investments in commercial property and unwise borrowing.

Two decades of prudence and, at times, spectacular success have turned the Commissioners fortunes round. Had the return on their investments merely matching inflation, the fund would be worth £2.9 million, instead of double that.

"There is, therefore," the report says, "scope for the Commissioners to contemplate some additional 'pump-priming' type expenditure over and above its current support for the Church, even over a number of years, but only if the expenditure is to be non-recurring.

"The analysis suggests that without this additional spend to support diocesan growth plans, the Church will simply continue to decline and so there is an imperative to act."

In summary, it says: "Over-distributing without knowing it or without understanding the consequences is a sure road to disaster. Over-distributing knowingly and with precautions in place is a legitimate strategy."

In a blog to accompany the report, the First Church Estates Commissioner, Andreas Whittam Smith, says that the Commissioners are "rightly" the "go-to body for any church institution that is seeking additional funding". In order to judge whether it can meet these requests, the Commissioners rely on their actuaries to calculate what can be given away while still preserving the capital value of the Commissioners funds.

"The question now arising is whether this admirable rule can apply when the membership of the Church is shrinking. One doesn't want to arrive in a situation when a small Church of England has a huge endowment. Our successors might then wonder why we hadn't used our financial strength to arrest the decline when there was still time.

"This is precisely the issue that is now up for debate."

Mr Whittam Smith's blog echoes the view that the Commissioners "strongly welcome" the various reforms proposed in the week's reports. But he says: "Before the Commissioners can make a final decision whether we should 'over-distribute', given our other pressing commitments, and, if so, with what safeguards, we wish to know what is the opinion of Synod as expressed in next month's debates."

"Good over-distribution" in detail: notes by Ian Theodoreson, chief finance officer

It would be important to be clear that any "over-distribution" would have a permanent impact on what was available for distribution subsequently. The figures would need to be validated by the actuaries at the time but, in round numbers, for every additional £100m spent the annual amount available for distributions would reduce by of the order of £2m for ever (and historically this reduction would have been greater at nearer to £3m per annum).

This would be the case even if, as intended, the distributions helped to generate growth and greater financial resilience, since the Commissioners' fund is closed to new contributions. While the scale of future investment returns would influence the precise numbers the reality is that 'over- distribution' would, like the spending out of capital for pensions, produce an irreversible reduction in the size of the historic endowment.

The justification would be that it had helped to generate growth in church membership and local financial sustainability, thereby reducing the need for support from national funds in the long term. The risk would be that instead of having a substantial endowment and few members the Church might have neither.

There would be important questions to address over:

- the scale of the money released (if a special distribution is to be made it has to be sufficient to make a difference);

­- for what purposes it was to be used, and;

- how to distribute funding in such a way as to avoid a "boom and bust" culture, or to create dependency. The profile and purpose of the spending would need to be shaped to avoid long-term operational funding commitments and to build long-term sustainability.

Any such distribution would need to be tightly governed, in particular to ensure the additional monies are being properly directed towards the change programme and are not being mopped up by "business as usual" activity.

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