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Pensions Task Group recommends way forward

3 July 2006

 

The second report of the Archbishops' Task Group examining the Church of England's pensions policy is published today. It sets out developments since its first report on March 1st, analyses a number of possibilities and recommends a particular option for the Church to consider.

In common with private companies and public bodies with defined benefit pension schemes, the Church’s pension schemes are under pressure because of the long-term reduction in returns from stock exchange investments, and the increasing life expectancy of members. Recently-introduced government regulations designed to make pension schemes more secure for their members are also likely to have an adverse impact on the cost of the Church’s pension schemes.

Today's report will form the basis of a presentation to General Synod in York on Sunday July 9th. The Group acknowledges that they "are aware of a strong groundswell of opinion that the Church should be looking for a durable solution rather than a temporary fix."

The Task Group ask for feedback from the funding bodies on the key question: "Do you agree that the policy of simply relying on the dioceses and other funding bodies to meet whatever increase in the contribution rate is required to sustain present arrangements unchanged will not be sustainable from 2008?"

Respondents who agree with this are then asked if they support the Group's preferred option and, if so, are there any points they want to register in relation to it. People are also asked to comment on two other approaches that the Group has considered in a preliminary way but does not recommend.

The Group's preferred option involves: a commitment from the dioceses and other funding bodies to a higher level of contributions from the current rate of 33.8 per cent; a willingness by the clergy to accept some reduction in benefits in order to preserve the main present pension scheme largely as it is; and a readiness by the Church Commissioners to help if called on to do so.

The option would mean that all future increases in pensions in payment would increase in line with Retail Price Index up to a maximum of 2.5 per cent p.a., rather than at present annual stipend rises (the clergy scheme is the only known occupational pension scheme where post retirement increases track earnings rather than prices). The Group also recommends that, for all future service, the accrual period for full pension should increase from 37 to 40 years, again as in most other occupational pension schemes.

The option could also involve the Church Commissioners agreeing to provide some limited support to the funded scheme, though since this would require fresh legislation the Group says that this should only be pursued if necessary.

In recommending the option, the Task Group say: "Taken together, the package would, in our judgement, be likely to preserve the defined benefits scheme for the foreseeable future without the need for radical change."

The other options would involve the closure of the Church's defined benefit scheme, or the Church Commissioners taking over the ongoing responsibility for collecting pension contributions for the defined benefit scheme and managing the investments and liabilities. This latter option is explored in only a preliminary way because its feasibility raises a number of regulatory issues that the Group will be exploring over the coming months.

Responses to the report are to be submitted to the Task Group by November 10th.

The full report is available on the Church of England website's dedicated Pensions Update section.

 

Notes

The key points from first report of the Pensions Task Group, issued on March 1st 2006 were:

  • In common with other defined benefit pensions schemes, the Church has to make key decisions about the future of its pensions schemes. The report emphasises: “The new situation is not the result of anything the Church has done. The new requirements apply to all such pensions schemes, many of which are, as a result, closing or making significant changes.”
  • New pensions scheme funding regulations and a code of practice to be introduced under the Pensions Act 2004 will radically change the way in which schemes have to assess their assets and liabilities.
  • Firstly, the Pensions Act 2004 places a requirement on pensions funds to take a more cautious view of likely investment returns and to adopt an investment policy that attempts to reduce risk.
  • Secondly, new regulations stipulate that deficits in pensions funds should be made good as quickly as possible. The clergy pensions scheme, like nearly all such schemes, has been in deficit in recent years as a result of increased longevity and lower investment returns. In 2003, the Trustees agreed that a deficit of £91 million accumulated since January 1st 1998 could be funded by additional contributions over 15 years - an acceptable period under the previous arrangements. Now the Pensions Board will have to review whether this period is sufficiently prudent and be prepared to justify its decision to the Regulator.
  • Taken together, the impact of the new regulations could prompt a substantial increase in the contribution rate paid into the Clergy Pensions scheme from the present 33.8 per cent. In the light of developments the Pensions Board has increased, as an interim measure the contribution rate to 39.8% from January 2007. The rate will need to be reviewed next Spring in the light of the formal valuation and the outcome of the consultation exercise. This increase will cost dioceses an extra £9.5m per year, around £1,100 extra per member of clergy. In context, it costs an estimated £900 million a year to run the Church of England’s 13,000 parishes and 43 cathedrals.
  • These costs will need to be met by the dioceses from contributions made by parishes, as the scheme is currently non-contributory for clergy members.

The examination of the way forward for the pensions schemes comes in advance of the statutory three-yearly valuation of the clergy pensions scheme as at December 2006.


2. The pensions task force comprises: Allan Bridgewater (Chair of the Pensions Board), Michael Chamberlain (Chair of the Archbishops’ Council Finance Committee) and Andreas Whittam Smith (First Church Estates Commissioner). The group has been supported by the three Chief Executives: Andrew Brown (Church Commissioners), Shaun Farrell (Pensions Board) and William Fittall (Archbishops’ Council) with Chris Smith (Chief of Staff at Lambeth)


3. The Church Commissioners fund all clergy pensions earned from service up to the end of 1997. All clergy pensions earned from January 1998 are funded by contributions paid by dioceses from parish share payments.


4. Parochial clergy are currently paid an annual stipend of around £19,500, with some variance between dioceses, and in addition have the use of a house provided by the Church. The current (defined benefit) pension, payable at 65 to those with 37 years’ full time service is £12,389. A lump sum of three times the pension is also payable on retirement. In retirement, members have the responsibility for accommodating themselves, the Pensions Board does provide housing assistance for those with limited resources.


5. Clergy in the Church of England are members of the Clergy Pensions Scheme. The Pensions Board operates two other schemes. One for the staff of the National Church Institutions and one for lay staff employed by dioceses and many other church organisations. The benefits payable under these schemes vary but many are on a defined benefit basis. They will therefore also be affected by the new scheme funding regulations in due course.