Church of Scotland investments crash by more than £89m

The credit crunch has led to a crash in the value of Church of Scotland investments by more than £89m in the space of one year. Such is the looming financial crisis facing the Kirk that as well as cutting ministers stipends or the number of minsters, it is considering abandoning parishes altogether.

The Herald revealed last week that a shortfall in income would lead to reserve coffers, standing at £59m, running dry by 2018 and that one of its investment funds alone had dropped in value by 27%.

But detailed analysis of the Kirk’s accounts has revealed wider problems, with the total value of losses at £66m from three investment funds totalling £296m. More than £23m has been lost from the church’s pension fund, currently valued at £236m.

The other losses come from the three main investment funds, the Growth Fund, the Deposit Fund and the Income Fund, which are invested in by congregations and central funding councils such as the Ministries Council, which pays ministers, for extra income.

In one example, the Ministries Council alone lost about £15m after its investments through the Kirk trusts lost their value, while the General Trustees, which provides grant assistance to congregations as part of its remit, lost £23m. These figures are included in the overall losses.

The Kirk’s Investors’ Trust report revealed: “The failure to protect shareholders of domestic US mortgage financiers Fannie Mae and Freddie Mac, the abandonment of the Lehman Brothers and the exposure of the bogus hedge fund operated by Bernard Madoff have accelerated the dash for cash.

“The resultant declines in asset values, debt reduction and asset sales have reinforced each other in a depressing downward spiral.”

While many of the investments are long term and will not be cashed in now, there will be tangible losses on the income they generate.

Others such as those in the pension fund are expected to have an impact on pension contributions.

The losses put the Church on a potentially precarious footing as it examines its funding in time for the annual General Assembly in 2010.

The Kirk will look at ways to better balance congregational income and outgoings as it currently has to annually boost funds to pay ministers by around £5m, and if this is not changed its reserves will be empty by 2018.

A special commission is also examining the way some well-attended congregations subsidise others who are less so in a move that will question one of the key tenets of the Kirk.

Known as the Third Declaratory Article, it is the principle that the Kirk is a territorial ministry and therefore it must provide pastoral care as a duty to the whole of Scotland.

Under scrutiny is the choice to continue the subsidy or to “walk away” from areas such as rural parishes that cannot fund themselves through the congregation and “only go where there is sufficient demand”.

Currently 408 charges (35% of the total) help pay for the remaining 745 others and many consider this unfair.

Iain Grimmond, General Treasurer of the Church of Scotland, explained: “The commission might come back and say yes, national Church and territorial ministry, or they may come back and say no we can’t afford to do this, we need to…only go where there is sufficient demand.”

But he added: “One of the guiding principles of the Church of Scotland is the territorial ministry and we would only walk away…after very, very serious consideration.

” That will be a big decision. There are far bigger factors in that discussion than finance.”

Mr Grimmond added that it won’t be known until the end of the year by how much pension contributions could rise.”

He said: “The assets went down like everybody else’s as they are in equities. In 2007 we were almost square (in the pension fund), but at the end of 2008, not surprisingly, the deficits opened up again.”

There is also expected to be losses at congregational level from investments.

Mr Grimmond added: “Almost all of these investments are held for the long term and we are more concerned about the income.

“We should be able to ride out these fluctuations in capital value.”

Income and expenses
Total three main investment funds: £296m, down by £66m.

Growth Fund for long term capital growth and annual income. It is largely invested in UK and overseas equities. Major holdings include Vodafone where it has shares valued at £8.1m, more than £8m worth of shares and £6.7m worth of shares in GlaxoSmith- Kline. Dropped by £58m to £171m.

Income Fund aims to provide a consistent high income. It is predominantly invested in UK bonds. Major holdings include Baillie Gifford (£4.3m), HS BC Holdings (£1.3m) but also Tesco (£1.4m). Dropped more than £8m to £28.9m.

Deposit Fund aims to provide a high rate of interest. Funds are invested in short term deposits in banks and building societies. Earned £901,000, finishing at a total of £96m this year.

Pension fund: Operated separately from the three other main funds. Its investment assets are mainly in equity shares and bonds. Its deficit stands at £23.19m, leaving a total of £236m. However a further evaluation will be made at the end of this year.

Investments: Individual stock selection is up to the expert investors but with ethical constraints so they can’t invest in companies which have more than 15% of their turnover deriving from gambling, alcohol, armaments or tobacco.

Income versus outgoings:

Income: from congregations £43.67m; external sources like social services £57.74m; from investments £4.69m; deficit of £8.96m-plus from reserves. Total £115

Expenditure: payments to ministers £50.4m; mission and renewal funds £64.6m including £51m for social care. Total £115m