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In equities we trust

Finance | David Davison | 19 Apr 2010

David Davison looks at the Church of England's strategy to manage its final salary pension liabilities.

I read an interesting article in the FT on the difficulties being experienced by the Church of England in relation to funding its final salary pension liabilities.

It’s not surprising that a body such as the Church of England appears to place greater store in faith than in reason. What is surprising is that it appears to be placing its faith in equities and Mammon, the false god of riches and avarice.

Actuaries will tell you that equities provide a poor match for pension scheme liabilities and there is a clear risk for both employers and trustees in relying too heavily on equities to save the day. Clearly they can have a part to play, but for the trustees of the Church of England Scheme, unless they are satisfied that the Church will be around at all times to underwrite the Scheme (okay, so it has been around since the time of Henry VIII, which suggests a greater longevity than the average employer), this is a relatively high-risk strategy.

According to another article the Church of England does also appear to be taking some steps to try to address the liability side of the equation, and isn’t relying on blind faith alone. It is proposing to:

• Contract the Clergy Scheme into the state second pension
• Reduce the full pension from the Clergy pension scheme from two-thirds of National Minimum Stipend (NMS) to half of NMS for future service;
• Limit the annual increase in the pensionable stipend to price inflation (RPI);
• Change the pension age for future service from 65 to 68; and
• Move, again for future service, the accrual period for full pension from 40 to 43 years.

Whilst moving things in the right direction, evidence from the private sector suggests that such limited reforms rarely deliver the desired results and more fundamental change is required to address the risks posed to any employer by a final salary pension scheme.

Employers need to understand that they can be proactive in managing their schemes’ liabilities and they have a range of options available to them in dealing with their final salary schemes - which will hopefully mean that they don’t have to rely on divine intervention.

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Directory: Church Commissioners for England