The Methodist Church Council is consulting with all scheme members, including existing pensioners, on a proposal to link future pension increases to the consumer price index in an bid to temper the rising cost of defined benefit provision.
Where scheme rules allow, trustees are increasingly changing the inflation index used to measure future pension payment increases, a move estimated to reduce the ongoing costs of DB pension schemes by around 1 per cent a year.
Earlier this year, for example, British Polythene Industries tackled its growing liabilities by adopting CPIas the basis for its pensions-in-payment calculation.
Qinetiq ruling
In 2012 the High Court ruled the Qinetiq Pension Scheme could switch to using CPI for pension increases and revaluations and it could do this in relation to the whole of members’ benefits.
“Post Qinetiq, sponsors have the flexibility to make the change for benefits that have already accrued,” said Marcus Fink, partner at law firm Ashurst.
Fink said deferred members were hit hardest by indexation changes, while the impact on the benefits of active and pensioner members would accumulate over time.
A consultation has been launched with members of the Methodist Ministers’ Pension Scheme on the proposal, which could be applied to the benefits of all active, deferred and pensioner members from September 1 2016.
According to the document, the cost of providing ministers’ pension benefits has risen rapidly over the past 20 years.
Between 1988 and 2003 the church contributed 10 per cent of ministers’ stipends – the regular allowance paid to ministers – into the scheme, compared with 26.9 per cent today.
It’s a hit, but it’s a hit that’s worth taking to help keep the scheme viable long-term
Stuart Bell, Methodist Ministers' pensions board
The move to CPI from the retail price index would reduce the current 26.9 per cent church contribution rate to 20.8 per cent. The proposed change would also rein in the scheme deficit – measured at £40m at the September 1 2014 valuation – to £15.8m.
Reverend Stuart Bell, member-nominated director to the Methodist ministers’ pension board, said there was a divergence in ministers’ responses to the proposal, but many recognised the value of taking measures to sustain DB provision.
“It’s a hit, but it’s a hit that’s worth taking to help keep the scheme viable long-term,” said Bell.
Cost-saving measures
The latest proposal from the Methodist Council follows a suite of cost-saving measures consulted on with members back in 2010.
At that point the council proposed to:
increase the normal pension date for future service, to 68 from age 65;
reduce the rate at which pension accrues to active members for future service from 1/70 to 1/80 of ministers’ standard stipend from September 1 2010 onwards;
reduce the level of pension for ministers retiring early on the grounds of ill health.
Members of the scheme accepted changes to the benefit accrual rate and ill-health pension provision, but rejected a rise in the normal pension date on the grounds that it would “affect ministers too greatly”.
Bell said the latest proposal would have a much broader remit and affect the benefits of retired ministers.
“All the other changes… didn’t affect those who had already retired,” said Bell.
“This is different – it doubles the number of people affected. We have more retired members than we have active members – they will be concerned about the reduced indexation.”
Bryan Freake, national pensions officer for trade union Unite, said seeking to make changes to past-service benefits was “morally questionable”.
“At the moment we’re trying to get to grips with whether this is an interpretation of rules, in which case it could become a legal issue, or a wish to get employees’ consent to the change,” he said.
Freake said Unite would require a “great deal of persuasion” to accept any change that would impact accrued benefits.
Low-yield environment
Richard Gibson, associate at consultancy Barnett Waddingham, said it was “surprising” that the church was seeking an amendment to past-service benefits, but the move was in line with recent cost-saving moves seen in the private sector.
“What has driven this change is the low-yield environment and therefore the increased cost of the church’s contributions for future service,” he said.
“They’ve clearly tried to control the costs of benefits accruing before and did not make significant changes back in 2010 – perhaps they’ve been pushed into making more significant changes now.”
