The £1.8bn (€2.1bn) Church of England Funded Pensions Scheme (CEFPS) has announced a significantly reduced funding deficit of £50m, compared with £236m at the last valuation, after changing its valuation method for liabilities.

The funding position has improved further since the valuation was completed.

The scheme previously used the “gilts plus” method, basing the discount rate for future pension payments on the yield from gilts plus a margin representing factors such as asset outperformance and the need for prudence.

It has now switched to the asset-led funding method, basing the discount rate on the long-term return from its portfolio less a prudent “haircut”.

The non-contributory defined benefit (DB) scheme provides funded benefits for service by Church of England clergy from 1 January 1998. Still open to new members, it has more than 20,000 participants, of whom around one-half are retired.

Benefits relating to service before 1998 are paid by the Church Commissioners.

The scheme is included in the £2.4bn portfolio of the Church of England Pensions Board (CEPB), which runs assets on behalf of three church pension schemes.

At the end of 2018, around 87% of CEFPS assets were in a return-seeking pool, with the remaining in a liability-driven portfolio, including UK government bonds.

The pension scheme’s return-seeking pool delivered a 7.9% pa return for the 15 years to 31 December 2018.

At that date, the asset allocation of the return-seeking strategy was 65% invested in public equities (with a long-term target allocation of 35%), 11.4% in property, 10.1% in infrastructure equity and 4.9% in private loans.

There was also a small amount in private equity (with a long-term target of 7%) and 3.6% in emerging market debt.

However, illiquid assets will form a large part of the portfolio (around 65%) in five years’ time.

“The change in discount rate has been highly transformatory to the funding levels of the CEFPS, as higher discount rates have lowered the valuation of liabilities”

Pierre Jameson, chief investment officer for CEPB

Aaron Punwani, partner at LCP and scheme actuary to the CEFPS, said the CEFPS was in an unusual position, as a large scheme that is open to new members and with a policy of investing a higher proportion of its assets in long-dated illiquid investments and less in gilts than the typical scheme.

Punwani said: “This lends itself to using the asset-led funding method, whereby the investment return assumptions are driven from the yields on the investments the scheme expects to hold over the long term, rather than purely from gilt yields. This closer alignment between the investment strategy and the actuarial valuation should result in a more stable funding position over time.”

Pierre Jameson, chief investment officer for CEPB, said: “The change in discount rate has been highly transformatory to the funding levels of the CEFPS, as higher discount rates have lowered the valuation of liabilities.”

Contributions on behalf of members are made by the fund’s “supporters” (the Church’s dioceses and the Church Commissioners for England).

Following a consultation with supporters, contribution levels will be held at 39.9%, instead of rising to 50% had the valuation methodology remained unchanged. The deficit is expected to be cleared by 2023.

Jameson said: “The supporters are very much in favour of the change in valuation methodology because it provides a significant dampening of volatility.”

He added: “We feel this is a ground-breaking innovation for the pensions industry but it has always been within the guidance of the regulator, who has been consulted throughout the valuation process. Many UK DB schemes are now in run-off, but because we still have new money coming in, it is appropriate for us.”

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