Wednesday, January 13, 2010

Clergy pensions and the dangers of conventional thinking‬‪ ‬‪

This is a guest post by Paul Lee, a senior professional in the Pensions industry and active church member. He is writing in a personal capacity.

The Church of England is facing some key and very difficult decisions. Its relatively new pension fund, the CofE Funded Pensions Scheme, which was only set up in 1998 following previous investment problems, has developed a significant deficit -- its liabilities to pay pensions in the future (estimated at £813 million) far exceed the assets it has available (£461 million) -- and, like many other organisations in this country, the Church is faced with the challenge of trying to fill this deficit and fulfil its obligations to the clergy, its future pensioners.‬‪ ‬‪

In significant part, this deficit has arisen through following conventional thinking: after taking advice, the scheme put all of its assets in shares, then conventionally seen as the best place for long-term investments such as these. The turmoil of recent markets -- in 2000/01 as much as in the most recent couple of years -- has exposed the risks embedded in that conventional thinking. There has also been increasing realisation in recent years of the impact of the increasing life expectancy‬‪, which has boosted the assessed liabilities of the scheme. ‬‪

The Church recently closed its public consultation on changes to clergy pensions to limit the liabilities which the fund and the Church itself faces. The Task Group on Clergy Pensions proposed some limited housekeeping changes which will have a useful impact on the apparent deficit. Increasing the retirement age to 68 and the expected period of service to qualify for a full pension to 43 years, and reducing the inflation protection in the scheme will cause some personal pain to individual clergy but this pain is perhaps outweighed by the overall benefit for the scheme and the financial position of the Church and its parishioners.‬‪ ‬‪

There are, however, some much more radical steps which the Task Group considered, in particular moving away from a so-called defined benefit scheme to a defined contribution one, either in whole or in part. Defined benefit (DB) schemes are also often known as final salary schemes and guarantee a portion of (usually the final year's) salary will be paid as the pension; defined contribution (DC) schemes invest the money collected each year and each individual's pension pot is determined by the investment performance of this money over their working life. In effect, in DB schemes the pension is guaranteed and is mathematically fixed depending on the salary and the years of service; in DC schemes nothing is guaranteed apart from the contributions. The investment risk is taken by each individual rather than by the scheme and the employer.‬‪ ‬‪

This looks like conventional thinking again: many companies have already switched from DB pension schemes to DC ones. They have felt themselves pushed to do so because of new accounting rules which have made clear the scale of their deficits as pension beneficiaries have been living longer, and because of the nervousness of their investors about the scale of those deficits. But the Church should not be prey to these short-term pressures; we as a church do not have the inherent instability built into our structure seen in the corporate construct. We should have confidence that we are sustainable and can afford the burdens we are currently facing; while they currently look severe they should diminish over time (the current projections assume filling the deficit over a period of a few years, not over the lifetime of the scheme).‬‪ ‬‪

I personally am clear that a DC structure for clergy pensions would be wholly inappropriate. The Task Group's consultation contains a key sentence: "A wholesale transfer of risk is inevitably a more sensitive subject in relation to a group of people who, during their working lives, are paid only around £20,000 per annum and are expected to house themselves in retirement after many years of living in tied housing."‬

I believe that this understates the case. It is not only more sensitive, it is inappropriate to transfer risk to this group of people. While the Task Group is right to state in defence of DC schemes that 'there is no general reason why they should provide lower pensions than DB schemes, but they have gained bad media coverage because many employers have also taken the opportunity to cut contributions', this is not the whole story. A key difference with DC schemes is that they introduce an element of lottery: one cadre of clergy would benefit disproportionately from positive financial market performance over the lifetime of their DC investment, and one cadre would suffer when the market performance over their lifetimes was less favourable. This differential treatment of clergy simply through the luck of when their investing lifetimes fall seems wholly inappropriate to me. It does not reflect the caring and nurturing organisation that the Church is, but rather introduces an unwholesome element of blind chance into the process.

Not least as a contributing parishioner I hope that performance in the scheme improves but I also hope that the Church has the confidence not to be prey to every element of conventional thinking going forwards. The Church is there to nurture the faith among its community; in order to do this it needs to nurture its clergy and care for their long-term well-being. Providing appropriate pension coverage is an important part of this.

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