Presentation by Shaun Farrell Secretary & Chief Executive Church of England Pensions Board Pensions and Retirement Housing
Jan 12, 2016
Presentation byShaun Farrell
Secretary & Chief ExecutiveChurch of England Pensions Board
Pensions and Retirement Housing
1927 Clergy Pension Measures
Prior to 1927 no pension as of right
Pensions Board created
Guaranteed Pensions paid at age 70
Funded by
(a) Money from Ecclesiastical Commissioners
(b) Church Assembly grant
(c) Incumbent contribution 3% of stipend
1954 Clergy Pensions Measure
Church Commissioners took on full responsibility for all pension costs
Member contributions ceased
Church Commissioners took over assets of the fund then £8m
Note
Church Commissioners pension liabilities 2006 £1.8bn
1980 “The Three Aspirations” to improve pensions
Pensions = 2/3rds stipend at 65 for 37 years service (£12,400 p.a.)
Lump sum = 3x pension (£37,200)
Widow(er)s pension = 2/3rd of member’s pension (£8,266 p.a.)
All achieved by late 1980’s
BUT
1992 re-evaluation showed that
Church Commissioners had:- Taken on far more expenditure commitments
than their assets could support
so
Financial support to dioceses reduced by £45m p.a. 1992 – 1997
Clergy Pensions Measure 1997 established current funded scheme which takes over all pension commitments from 1998
Church Commissioners remain responsible all for pension benefits earned up to 1997
Funded clergy scheme
1998 – Scheme set upInitial contribution set at 21.9% of stipend (£2,900 per person - £27m for Church as a whole)
2000 - First actuarial valuation Contribution rate rises to 29.1% (£4,668 per person - £47m for Church)
Funded clergy scheme (cont.)
2003 - Second actuarial valuationContribution rate rises to 33.8% (£5,925 per person - £57m for Church)
End of 2006 – Third actuarial valuation to be carried out
Long term investment returns are lower
Life expectancy increasing
Government regulations
Why are costs rising?
All shares index – 10 year average returns to:-
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
10%
5%
15%
Total return p.a.
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
12.6
13.1
11.9
13.3 13.3
13.5
13.6
10.8
7.36.4
7.9 7.9
Average life expectancy at birth
0
10
20
30
40
50
60
70
80
90
1900 1950 1970 1999 2000 2020
Age(Years)
(Est)
68.270.8
75.4 77.084.0
47.3
Remaining life expectancy at 65
02468
101214161820
1950 1970 1990 2000 2020
Years
(Est)
13.915.2
17.218
20?
Types of Pension Scheme
Defined Benefit/Final Salary
Level of pension guaranteed
Employer must pay whatever is required to meet benefits
Funding risk all with ‘Employer’
Defined Contribution/Money Purchase
Employer contribution defined
Pension depends on how much goes into fund from contributions and investment returns achieved
Risk lies with employee
Recent Developments
Over 70% of all defined benefit schemes are now closed to new members or to all staff
Many firms have switched to less expensive pension schemes
New Government regulations
Designed to make schemes more secure for their members
Scheme trustees encouraged to take cautious view about future investment returns (particularly from stocks and shares)
Any scheme deficits should be made up over the shortest time possible
But – extra caution comes at a cost
Events:-
November 2005 : Pension Board’s actuaries provide update on financial position of the pensions scheme
Indicates likelihood that costs will rise again (perhaps substantially) when 2006 valuation takes place
Archbishops create Task Group to evaluate the situation – group first report published 1 March 2006 second report on 30 June 2006
Both available on website www.cofe.anglican. org
Report Findings:-
Deficit on the scheme could rise from £91m (2003 valuation) to £170m+
Pension costs would have to rise again significantly if current benefits maintained
Could mean annual contribution rising from £6,000 per person to over £8,000
Could mean another £20m p.a. for the Church as a whole
Church members unlikely to be able to find all the extra money required
Scheme benefits will need to be reviewed
Report Findings:-
Pensions Board raises pension contribution to 39.8% (£7,188 p.a.) for 2007 on an interim basis
Second Task Group report makes some specific recommendations
Two consultations carried out (a) dioceses (b) scheme members
General Synod approves recommendations in July 2007
Subsequent Steps
The changes
1. The ‘defined benefit’ scheme will be retained but modified to make it less expensive
2. Scheme changed as follows for all service from 1 January 2008:-
(a) Increase from 37 to 40 years service needed to earn a full pension
(b) Pensions, once in payment, to increase each year in line with price inflation (up to a max of 3.5%) not stipends
Key points
All pension rights earned up to the change are protected under law – can’t be taken away
Increase to 40 years service only applies to current active clergy (i.e. not those already retired)
All service up to change ‘banked’ on basis of 37 year accrual period
Clergy can still retire at 65
Key points (cont)
Does not mean all existing clergy having to work an extra 3 years to get full pension
Examples
30 years current service – 7 months extra
20 years current service – 1 year 5 months extra
10 years current service – 2 years 3 months extra
Key points (cont)
Pension benefits ‘earned’ up to 1 January 2008 are increased in line with RPI up to 5% p.a.
Pension benefits ‘earned’ after change are increased in line with RPI up to 3.5% p.a.
2006 Actuarial Review
Pensions Board sets new contribution rate for period 2008 – 2010 at 39.7% i.e. no more than interim rate for 2007
Without the changes approved by General Synod rate would have been 45%+
The CHARM SchemeChurch’s Housing Assistance for the Retired Ministry
Clergy with some capital to invest are granted mortgage loans by the Pensions Board (mostly financed by Commissioners) to enable them to purchase property
Those without sufficient resources are able to occupy a property owned by the Board (mostly financed by the Commissioners)
The CHARM Scheme (Cont.)
On mortgage loans, pensioner pays interest only at 4% p.a. rising each year (in line with index of stipend and price inflation growth)
On rented properties, occupiers pay occupation charge to cover interest and other property costs (around £300-400 per month at current rates)
Subsidy of £3m p.a. paid into the scheme by dioceses so that no pensioner pays more than 30% of his/her total gross income on housing costs
The CHARM Scheme (Cont.)
Approx one third of clergy use scheme
Mortgage loans are value linked so that the increase in the value of the properties is split between the Commissioners and the pensioners (or his/her estate) in line with the initial capital contributions
Maximum loan of £125,000 recently increased to £150,000
Maximum purchase price on ‘rental’ scheme recently increased from £150,000 to £200,000 (£225,000 in SE Counties)
Review of retirement housing
Review group set up to look at additional options to assist clergy
Due to report back to General Synod in July 2008