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Paying for the good life

One of the requirements of membership of the Salvation Army, the quasi-military Christian mission created by William Booth in 1865, is that members abstain from alcohol and avoid tobacco.
This has created an unusual situation for the actuaries of the Salvation Army’s UK pension schemes, who have to take account of longevity in their calculations. Many pensioners are living to a ripe old age, and currently five pensioners of the Salvation Army Officers Pension Fund are aged over 100.
Major George Dickens, who manages the Salvation Army’s pension funds in the UK, says the longer life expectancy is perhaps inevitable. “Generally speaking, Salvation Army officers lead good, healthy lives, and they do tend to live longer. So we’ve got quite a high percentage of elderly pensioners.”
Dickens is responsible for the three pension funds operated by the Salvation Army in the UK: a defined benefit (DB) scheme for officers or ministers; a DB scheme for employees; and a defined contribution (DC) ‘stakeholder’ scheme.
The officers’ scheme is the largest with 1,600 active members and 1,400 pensioners. The employee’s scheme has 1,000 active members and 400 pensioners, with the classic DB benefit structure of one-eightieth pension for each year of service.
The DC scheme has only 45 members, a number which is not expected to grow significantly. “We offer it to a very limited number of people who don’t fall into either of the officer or employee categories. It’s mainly for ministers that are in training and not receiving pay,” says Dickens. “We would like to possibly incorporate it into one of the other main schemes, but at the moment the rules don’t allow it.”
The officer’s scheme currently has around £65m (E94m) assets under management, while the employee’s schemes have around £25m in assets. These are managed by, respectively, Deutsche Asset Management and F&C Asset Management.
Both managers run balanced mandates with a heavy bias to equities. Until 2002 the allocation to equities in the officers’ scheme was around 80% with two-thirds invested in domestic equities and managed funds and the remaining third in foreign managed funds.
Following a triennial valuation, the equity allocation has been reduced to around 65%. “Our actuaries and consultants have realised that the time has come to rebalance the portfolio. They have recommended a plan and we have put into place a new benchmark,” says Dickens.
Dickens says the pension schemes have taken the view that no sharp changes in strategy are necessary. “With these things a cautious steady approach is
far better than a sudden swing from one thing
into another. It costs you money every time
you change. People say you will lose money if
you don’t change but you will lose money if you do.
“So we’ve moved the benchmark over a period of time. If you’re changing a benchmark a few percentages over six months the managers can do that within the normal operation of their business. It gives them a chance to look for the best bargains and to get the most out of any sales. But if you ask them to change the whole lot in six months they’re bound to lose money.
Mandates do not come up for renewal automatically, says Dickens. “We haven’t fixed a review period because with most mandates you’re looking at figures for at least three years, and mostly five years, to really see where things are going.
“Obviously there are always questions asked at certain times, when some investment managers are doing better than others. The advisers have looked carefully at whether our managers are complying with our mandates and our benchmarks.”
Dickens says that currently the investment
managers are having varied levels of success. “One has been satisfactory in terms of the
performance against the benchmark, whilst the other has been struggling.
“From our point of view, quite a lot of the reason for this is because we set out investment guidelines as a
socially responsible institution (SRI),” says Dickens.
“Because we are a teetotal organisation we don’t encourage the breweries, the tobacco industry, the armament industry and pornography. We are not alone in this. In today’s climate there are many other charities and public bodies that feel the need of these restrictions.”
Dickens agrees that SRI guidelines can restrict the range of available
securities but suggests that there are still plenty to choose from:
“Even within the FTSE 100 there is a sufficient number of companies who are socially responsible to provide a good investment choice.”
To be able to put the SRI guidelines on a more scientific grounding, the Salvation Army is currently in discussions with EIRIS, a UK-based European provider of independent research into the social, environmental and ethical performance of companies.
Dickens says that advice from EIRIS will “give us guidance when talking to the investment managers, if we see that they are investing in something that we wouldn’t be happy with, or if they say they can’t find sufficient good stocks”.
The Salvation Army faces the same pressures as other UK pension funds to reduce its deficits. “Like other pension funds we have got deficits. If there are any pension funds out there that say they haven’t got deficits then they must be very fortunate. However, I don’t think our deficits are insurmountable,” says Dickens.
The main pressure on the Salvation Army pension schemes is likely to be regulatory, in particular the provisions of the UK’s new Pensions Act.
The problem here is that the Salvation Army Officers Pension Fund is not a typical occupational scheme. It was created by an act of the UK Parliament in 1963 and is treated for tax purposes as a charity.
Dickens explains: “Ministers of religion are not employees. Therefore, to set up an employees pension scheme was very difficult. We were advised by our legal advisers – and obviously the Charity Commission accepted this – to set it up the scheme as a charity for taxation purposes via the Salvation Army Act 1963. The scheme is exempt from various parts of pensions legislation. For example, the former minimum funding requirement of the 1996 Pensions Act did not apply to the scheme.
There are disadvantages. “The main drawback is that we cannot change the rules very easily,” says Dickens. The latest Pensions Act, when the regulations are in place, may bring extra conmplications to the working of the officers scheme as well as changes to the employees scheme.
But this is all part of the job. The Salvation Army has been described as ‘Christianity with its sleeves rolled up’. If this is so, then perhaps the pensions department can be seen as the Salvation Army with its sleeves rolled up.

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