Holy pension hole

Justin Welby The Bishop of Durham Justin Welby is expected to be named as the next Archbishop of Canterbury

The Old Etonian apparently due to be named as the new head of the established church has a huge, unsustainable financial deficit to shrink - which is perhaps redolent of the challenge faced by another Old Etonian who became head of government in 2010.

A bit like David Cameron who inherited a gap between tax revenues and public expenditure equivalent to a horrid 10% of GDP, one of the most pressing problems to be faced by Justin Welby as the new Archbishop of Canterbury is a massive hole in the fund that pays the pensions of retired clergy.

I am told that the current Bishop of Durham, a former oil industry executive, is good with money. He will need to be.

A new report on the Clergy Pension Scheme by the Archbishops' Pensions Task Group points out that the deficit in the fund -which is liable for all clergy pensions earned after January 1998 - ballooned from £262m to a peak of £507m in November 2011.

The Task Group includes the First Church Commissioner, Andreas Whittam-Smith, an unusually saintly and numerate erstwhile hack - who gave me my big break in journalism, by recruiting me to help launch the Independent newspaper in 1986 (goodness it feels such a long time ago).

He and his two colleagues believe the deficit has "fallen back somewhat", but that the December 2012 actuarially measured deficit will be somewhat greater than it was three years ago.

How much greater? Well a research note by the pensions consultant John Ralfe calculates the hole at the end of last month as approximately £500m.

This represents quite a potential burden for parishioners. Ralfe calculates that without further reductions in pensions payable to clergy, individual dioceses would have to make contributions to the fund equivalent to a staggering 60% of the value of salaries, up from an already high 38.2% (clergy themselves don't make contributions to the cost of their pensions; the liability falls on their employer).

Now the Task Group is clear that it would be wrong to rush into draconian pension cuts or radical overhaul of pension provision. But it notes the need to "balance the financial pressures on funders with the obligation to protect the interest of future pensioners".

There are a few salient points to make. First, clergy pensions would not be seen by many as lavish and egregious. For example, the pensions of the Archbishops of York and Canterbury will be in a range from £21,000 and £28,000, according to the annual report of the Church's Pensions Board - so perhaps 2% or 3% of the pension Mr Welby might have earned if he had got to the top of one of the oil companies that employed him in days of yore.

Second, the Church is jolly unusual in retaining its faith in equities or shares.

As you will know, there has been a huge shift by most pension funds out of shares and into bonds. And as the FT points out this morning, for the first time ever UK pension funds now hold more bonds than equities: the Pensions Regulator shows that UK funds hold 43% of their assets in gilts and fixed-interest debt compared with just under 39% in equities.

But the Church did not join this herd galloping into the debt sold by governments and companies. On my calculations of the asset allocation in the Church of England Funded Pensions Scheme, 84% is held in shares, property and derivatives - or what are perceived to be riskier assets.

As it happens, the Church's unfashionable refusal to abandon the cult of the equity has not gone wholly unrewarded: over the three years to the end of December 2012, the return on the assets was 7.1% per annum, which compares quite well with some mammon-obsessed hedge funds.

'Through the roof'

The problem - characteristic of the pensions industry in general - is that liabilities have gone through the roof. And the proximate cause is the soaring price of bonds, and the collapse in the yield on those bonds.

The explanation is that the earth-bound Pensions Regulator has less faith than the vicars in equities. So the way it measures liabilities is to calculate the quantity of assets a pension fund should ideally hold to meet future pension payments if all those assets were in low-risk bonds.

What this means is that when the income generated by bonds falls, as it has been doing, any pension fund would theoretically have to hold massively more of those bonds to meet the cost of future pension payments. And the point is that for all the decent performance of the shares and property held by the Church's pension scheme, their aggregate value is several hundreds of millions of pounds less than would be needed if they were cashed in and converted into allegedly safer bonds.

There is of course a very interesting question whether the risk aversion of the regulator is more or less rational than the priesthood's apparent appetite for risk. But the problem for the new Archbishop is that on this sort of non-spiritual, fiduciary issue, his authority is rather less than that of the officers of the state.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 44.

    Tax income is only steady if earnings are steady. Earnings are diminishing in real terms. Future pension guarantees/promises are only fair if those who pay them are party to agreeing them. Am I wrong?

  • rate this

    Comment number 43.

    Public sector pensions are guaranteed/underwritten by tax on future earnings or government borrowings. Our children are thus paying pensions promised by past governments, from taxation of current earnings or by kicking the can down the road by borrowings, increasing the potential liability for future generations. Someone please tell me preferably in simple terms how this is sustainable?

  • rate this

    Comment number 42.


    But why is that a problem? A steady income (tax) is pretty safe. Investments, as we've seen lately, are not.

    I am of the opinion (and have stated so here in the past) that pensions should be funded by tax. No fund managers skimming either, so more 'efficient'.

    Pensions (via investment funds) are a tool to lock us all into the status quo. Very effective too.

  • rate this

    Comment number 41.

    A Tale from 1901 as told by my maternal grandfather.

    After her young daughter died my recently widowed great grandmother was doing her weekly bake when the vicar called round.

    She was at her wits end but the vicar said `Never mind, the Lord will provide.'

    The good woman raised her flour stained hands into the face of the vicar and said `These are the only providers'.

    So over to you, bishop.

  • rate this

    Comment number 40.

    #38 ComradeOgilvy

    "expenditure is covered by income not savings"

    True, but with a pension fund the income comes from the investment of the fund and in the case of a number of public sector pensions they don't have a fund; the then government instead deciding to retain contributions in the exchequer and meet liabilities directly from taxation. Much as #35 Franco pointed out.

  • rate this

    Comment number 39.

    Perhaps the Church of England should start selling indulgences ..

  • rate this

    Comment number 38.


    "At present, the govt has NO fund to pay for public sector pensions. We're currently paying for these via current tax payments..."

    A contradiction there. As with many other organisations, expenditure is covered by income rather than savings. This does not seem unreasonable.

  • rate this

    Comment number 37.

    It always amazes me that some people never seem to question where the interest on savings come from.The fact that it directly affects the cost of everything in the present seems to escape them
    Scroll link to 'What about provision for old age'
    The whole page is worth a read for anyone who still confuses capitalism with a market economy

  • rate this

    Comment number 36.

    The trick is to move the guilts... off shore. :) Bless them.

    I take it that guilts are collateral?

  • rate this

    Comment number 35.

    At least they seem to have a fund - even if it is 0.5bn short.

    At present, the govt has NO fund to pay for public sector pensions. We're currently paying for these via current tax payments, while the govt continues to keep these debts 'off balance sheet'.

    I think 'fraud' is the word ...

  • rate this

    Comment number 34.

    I thought the answer had already been found.... force everyone into a government mandated pension scheme and then use the funds of the stupid underpaid to cover the holes in the gambling decisions of the overpaid pension fund executives. Seems to be what has happened.

  • rate this

    Comment number 33.


    Don't worry about Old Etonians - most of them end up getting a huge 'gold plated' public sector pension.

    In God we Trust - more that can be said for a good number if not all of the large UK private pension providers particularly if you have a long forgotten guaranteed annuity provision in your personal pension. I can see more Churches getting sold off so that the property spivs can profit

  • rate this

    Comment number 32.


    Well, yes, ho hum, I suppose. We've all been caught out being too trusting at some point. Probably better than being paranoid though, even considering the risks.


    Moved to Oxford to save money? Hmmm. But... the church is about the people in the end. Any building will do if necessary. (Of course we were told the same about our school as kids, before they sold the playing field).

  • rate this

    Comment number 31.

    Anyway, surely it should be "unholy pension hole"? or "unholy hole in the holy pension" or "unholy hole in the whole holy pension"?

    is it time to go home yet?

  • rate this

    Comment number 30.

    Or even gullible?

    Re pension fudns hold bonds; a potential disaster awaits. I cringe at the thought of the bond market unwinding! Watch this space.

  • rate this

    Comment number 29.

    See 27: My church's Head Office moved out of London to save money but they moved to a new building (most people in our Church call it the White Elephant) near Oxford. Its far too big, its too expensive to run but with a very smart staff restaurent! Location is very difficult and expensive to get to unless you live in the south. Now, unfortunately, the Church is struggling to pay for it. Surprise!

  • rate this

    Comment number 28.

    27 Yep. I'm a trusting soul or perhaps just gilluble. Anyway what makes it even worse is that I went there 24 years ago & smeone tried exactly the same trick but that time I didn't fall for it! Ho hum

    CoE will be driven to radical reform; perhaps new guy may be able to get it's finances in order but it's a near impossible task. Did that Church Comms not lose a bundle in the 1990s?

  • rate this

    Comment number 27.


    Not until just now. How very enterprising!

    I believe the term is "preaching". Seems to have developed negative connotations.

    No, not semi-circular. Crosses rather than crescents.

    If they're not using them, then it's time for the church to realise the potential value of their assets. Same as Greece and other states.


  • rate this

    Comment number 26.

    25. Ever heard of the Shanghai Tea Ceremony Scam. I have now!

    No re my survey when I bought.

    CoE has huge portfolio of property most of it non-performing. Our last minister's R for E seemed to be picking up CoE pension; nothin much else mattered except ramming his Marxism down our throats each Sunday. Gave up in the end. CoE probs will only get worse.

    Semi-secular or semi-circular? .

  • rate this

    Comment number 25.


    Welcome back stranger. They weren't trying to get in.

    "Unfortunately they insisted that someone else should pay the charge (typical huh)."

    When I bought my house, my survey included a check to see if the CoE would be demanding money for nothing from me. Same for you?

    Odd that the UK is only semi-secular.


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