UK - The taxpayers' true bill for UK members of parliament's pensions is at least two and a half times higher than the cost currently quoted by official government papers, according to a new analysis.

John Ralfe, former head of pensions investments at the Boots pension scheme, makes the comments in his analysis of UK government pensions, adding that the scheme's asset allocation strategy is further risk.

Ralfe's study into the true financial status of pensions for 1,804 member MPs comes as a report is due by the Senior Salaries Review Body, suggesting salaries for members of the UK parliament should receive above-inflation pay rises.

His own analysis of current pensions data on the funded guarantee Parliamentary Contributory Pension Fund (PCPS) - which will be paid from government coffers should funds be needed - reveals whereas the 2005 PSPC Actuarial Valuation suggested the annual cost to taxpayers is £7.8m (€10m) or 18.1% of the amount paid, the true cost is in fact £20.5m or 48%, and the scheme has a true deficit of £200m compared with the reported £103m, because of differences to calculations used on this scheme compared with common practice on corporate entities.

More specifically, Ralfe said whereas the valuation is calculated by discounting payments at the expected return on assets equal to the AA-corporate bond rate, the actual cost is much higher because longevity assumptions are underestimated by 5% and the government bonds should be calculated to the index-linked gilt (ILG) rate - 0.5% lower than the FRS17 rate.

His study suggests calculations applied to the true value of MP pensions are in some part confused because while calculations have adopted FRS17/IAS19 calculations, this is not in fact necessary given they are government guaranteed while calculations methods have switched over time so it is unclear what process the government is seeking to apply to the 65%-funded scheme.

One additional concern he raises in his study of MP pensions' funding is the process under which asset allocation might be seen as risky compared with corporate schemes - even though equity holdings have been cut in recent years - because despite the mature status of the scheme, at least 60% of assets are in equities.

Instead, Ralfe believes on a 5% yield, just to meet the £12m annual pensions already being paid required the fund to hold £240m in bonds, rather than the £140m bonds and property it currently holds - therefore requiring a shift of £100m into bonds.

Moreover, were the PSPS required to meet the obligations corporate pension schemes face, the Pensions Regulator would be required to intervene and insist the funding level be raised from 65% because the asset allocation strategy does not match the maturing nature of the scheme.

"A bond basis for measuring pension liabilities and costs has also been encouraged by The Pensions Regulator's guidelines on funding levels, which required schemes to have a funding target no lower than FRS17/IAS19 - if the PCPF was a corporate scheme with its current (low) funding target, the Regulator could intervene," said Ralfe.

Ralfe has sought to highlight his findings as the Senior Salaries review is not expected to take pensions into account when details are published, making an above-inflation pay increase for MPs potentially more controversial - particularly as they receive 1/40th of final salary with just 20 years' contributions - when government officials are seeking to limit public sector pay increases elsewhere to inflation.

This is not the first time MP pensions have come under scrutiny in recent months as former UK Lord Chancellor Lord Falconer is believed to have clashed with prime minister Brown over his pensions entitlements. (See earlier IPE story: Ministers seeks improved pensions terms)

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