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, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 84.

    Speaking from personal experience as a Diocesan Board of Finance member there will be a very large indeed reduction in costs if some Diocesan Offices were merged . There is no economic logic in each Diocese maintaining a local cost centre. Wake up to reality like "industry" has had to.

  • rate this

    Comment number 83.

    This is just a funding problem. If the CofE expect to expand in the future then a deficit now is OK. If not retired vicars will need to tighten their vestments.

    More broadly, demographic change is one of the larger problems of our time.

  • rate this

    Comment number 82.

    BBC wh yno blog on NR with the "Cameron's 'gay witch-hunt' fears"

    maybe the New Arch should be having a say on the trial by ITV/Mob.

    As for money it does not matter if they in debt on earth is the psoition in heaven that the real balance sheet issue and the relam of the Archie surley

  • rate this

    Comment number 81.

    GOD will sooth all concerns.......Or perhaps NOT! What they really need is all those wealthy hypocritical attendees dipping into their collective offshore accounts and bailing out their GOD representatives...If collection tray is left to the Joe Bloggs of the world......I can see quite a few churches becoming warehouses....

  • rate this

    Comment number 80.

    The division of the Anglican church with its rich American benefactors over gay marriages and ordination of women is going to hurt finances.What will the CEO and CRO (Chief Religious Officer) of the church opt for, religious purity or financial practicality.I can hear him praying now; "give me a sign lord, give me a sign."The love of money is the root of all evil.What happend to vows of poverty?

  • rate this

    Comment number 79.

    All very interesting Robert, but surely you could cover something closer to home, like BBC's recent announcement that its own pension fund's deficit has doubled to two and a half billion. Yes, I know our Licence Fees can and will be diverted to fill it, but it's still worth a mention don't you think?

  • rate this

    Comment number 78.

    The Lord giveth and the Lord taketh away

  • rate this

    Comment number 77.

    Welby took a short step from sellling crude oil to selling snake oil. Clearly he was born to the house of Slytherin. Perhaps he can get a load from the EU Central Bank or the IMF. He must have some friends somewhere who can help him out. HSBC perhaps? He could invent some sort of derivitive or other slick instrument to "sell" them. Invest for your future well being in the afterlife.

  • rate this

    Comment number 76.

    Many pension funds and other types of saving are suffering from very poor returns on investment as government and society now favour spending and debt to saving - In keeping with the general short-termism approach to everything.

  • rate this

    Comment number 75.

    Not to worry: Recent hunger for bonds, particularly gilts, has created problems for pension scheme managers inside & outside the holy pen. This has forced govt bond yields to record lows, in turn pushing up pension DEFICITS.
    Pensions is just another area of concern for persons hoping to retire with something to live on.

  • rate this

    Comment number 74.

    67 Live on a tiny island with no dependency on any other people or any sort of stable society do you?

    Good for you. I hope you and your money are very happy together (hint - you can't eat it)

    Why is it people who are obsessed with money always think everybody else is more stupid than they are?

  • rate this

    Comment number 73.

    Are they going to raise their retirement age ?
    Perhaps the Church could raise funds thro supporting ( and then sharing the profits) of local businesses........

  • rate this

    Comment number 72.


    Removed because it was advertising? Yer 'avin' a larf!

    Theose were ideas for alternative uses of churches should the CoE need to sell unused assets.

    Or do you think I get commission on every church sold?

  • rate this

    Comment number 71.

    This 'deficit' is based on an assumption that we know to be wrong: "the way it [the regulator] 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." The church will not sell its shares and buy bonds, they will use dividends to pay pensions. A responsible, contrarian strategy.

  • rate this

    Comment number 70.

    Stipended clergy don't take wedding/funeral fees for themselves, they are given to their dioceses. Indeed, the stipend and house (for which they pay all bills but council tax) are intended to meet living costs and are very far from lavish as anyone with google can check (similar to teacher in their 1st year). Stipends don't increase with length of service, nor is a house provided on retirement.

  • rate this

    Comment number 69.

    re 68 - mad frog
    Actually clergy get no benefits from marriages and funeral fees. They are either handed over directly to the central church authorities, or declared and then deducted from the following year's stipend.

  • rate this

    Comment number 68.

    I think part of the problem would be resolved if clergy actually made a contribution to their pension fund. When looking at the total salary packkage we should ignore the basic salary and look at all the other benefits - wedding fee, funeral fees, vicarages which are provided - when taken in totality they form quite a good income . So what I am suggesting is not unreasonable.

  • rate this

    Comment number 67.

    FauxGeordie. 66, You miss the point. You have to pay for your pension and several others.

  • rate this

    Comment number 66.

    "I've a novel idea: why don't we fund our own pensions with our own money?

    Shock, horror ..."

    I'm attempting to do that but I am in a company scheme to which my employers contribute.

    But the f services industry takes such huge fees and does so badly at investing my pension (this doesn't affect their immense salaries) that I wonder if I would be better off cutting myself loose

  • Comment number 65.

    This comment was removed because the moderators found it broke the house rules. Explain.


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