British miss gravy train
The Parliamentary Contributory Pension Fund (PCPF) was first introduced to provide pension benefits for Members of Parliament (MPs) in 1965. The PCPF is a funded scheme which invests contributions from the exchequer and members.
The Parliamentary Contributory Pension Fund (PCPF) has come in for considerable criticism, largely on account of its perceived over-generosity. At a time when a large number of companies are abandoning guaranteed final salary schemes in favour of defined contribution schemes MPs are not only retaining their final salary schemes but enjoy a level of benefit provision which many consider high in relation to other schemes in the public and private sector.
So how does the MPs scheme compare with other schemes in the public sector? Is the criticism justified? We only have to look as far as the judges to find a far more generous scheme. To begin with, the judges’ scheme is a non-contributory scheme with the government contributing some 29% of salary. After 20 years’ service, judges can draw a pension equal to half of pensionable salary. This means that for each year of service they receive pension worth 1/40 of their final salary. Furthermore, on retirement they are entitled to a lump sum equivalent to 2.25 times their pension.
While MPs enjoy the same rate of accrual, they have to make one of the highest levels of contribution, some 9%, to pay for it. Additionally, while they receive a lump sum, their annual pension entitlement will be reduced accordingly, which does not apply to the judges’ scheme.
Only police officers make a higher contribution, at 11% of salary which funds approximately 30% of the scheme. However, as police officers are entitled to early retirement at 55 on full pension, they receive far more benefit than other public sector employees. Teachers contribute 6% with 13.5% being paid by the employer. Their rate of accrual is 1/80, and they also receive a lump sum equivalent to three times their annual pension.
The PCPF is also deemed generous in comparison with schemes in the private sector, where rates of accrual average 1/60. However, as Sir John Butterfill MP, chairman of the trustees of the pension fund, points out, “there are very few executive schemes in the private sector that are not more generous. There is a high proportion that is on 1/30 or better for senior executives. Furthermore, the level of the MP’s contribution as has always been significantly higher than most in the private sector.”
Defending the parliamentary scheme, Cath Unsworth, national pensions officer at the GMB, the UK’s fourth-largest union, points out that “if you add in the unapproved schemes and executive schemes to which directors often get over and above the approved scheme we would not be far off the 1/40 which the parliamentarians get. A rate of 1/50 is high for an approved scheme but the vast majority of executives will also have benefits within a non-approved scheme.”
Butterfill adds: “Furthermore, we have carried out research to compare our scheme with others which finds that ours is the least generous scheme in the EU.”
The PCPF is subject to review by the Review Body for Senior Salaries (SSRB). The reviews are carried out every three years, most recently in March 2001, when Butterfill proposed an amendment to the recommendations, to increase the rate of accrual to 1/40. The change finally came into force in mid-2002.
“One of the reasons that the SSRB allowed us to improve our rate of accrual is that the service of MPs is shortening quite considerably”, argues Butterfill; “a few years ago it used to be an average of about 20 years. But the electorate has become much more volatile and the average term of service is now about 9.5 years.”
Then there is the issue of re-employment when the MP leaves office. “Another difficulty for members is that if they return to what they were doing before entering office they might find themselves five or 10 years out of date, particularly in professions such as law, medicine and accountancy.”
But then isn’t it the case that many MPs obtain lucrative directorships when they leave office? No longer, it would seem, as Butterfill explains: “there used to be a time when if you had been an MP you would be offered a non-executive directorship. That doesn’t happen any more – companies don’t like having MPs on their boards, unless the MP concerned has attained high office such as Chancellor of the Exchequer.”
Not all members can join the scheme. The reason for this is that they may have accrued benefits from other schemes which already place them at the benefit ceiling of two thirds of final salary which applies to the PCPF. “The problem for a lot of members is that they were earning more before they became MPs and their eligibility is therefore limited by their final salary here,” says Butterfill.
According to a statement published last year, the fund had a deficit of £25m as at 1 April 2002. So has the fund been mismanaged? “Not at all”, says Butterfill. “The deficit came about through the fall in the stock market which every fund experienced. The total value of our fund fell from around £300m to £260m, while the stock market fell by up to 25% in just one year. So our fund has performed well in relation to that. With the recovery in the stock market, additional contributions may not be necessary.”
The PCPF is a funded scheme as opposed to a “pay as you go” scheme in which the Exchequer meets the obligations on an on-going basis. “The advantage of a funded scheme is that it is totally transparent”, argues Butterfill. “With our scheme you know exactly how much the government is paying in or not paying in every year. With pay-as-you-go schemes there is no way of finding out the total cost of the scheme.”
Occupational pension schemes in the UK are regulated by the Occupational Pensions Regulatory Authority (OPRA). The Parliamentary scheme is exempt from this body as it was set up under a separate Act of Parliament. “As the trustees of the parliamentary scheme are open to scrutiny we manage our scheme exactly as if it were subject to regulation,” says Butterfill.
But would it not be more efficient to move to a single regulator? “The scheme has been amended so many times that we would need a new act”, he continues. “But there’s no point because we are completely open to public scrutiny. The parliamentary scheme is probably the most scrutinised scheme in the country.”
It has also been suggested that MPs should not be allowed to vote on their own pay and conditions. “We have to vote on all public sector schemes — we are Parliament”, argues Butterfill. “We have moved MPs’ pay, pensions and other benefits to the SSRB. We simply rubber-stamp its recommendations. We do not, contrary to public opinion, make our own decisions on this.
“For example, the SSRB said we could increase the accrual rate provided we as MPs funded it. So the cost of the accrual rate as calculated by the GAD is 100%-borne by MPs. This matter has been mischievously reported. The money from the Exchequer would have been put there whether or not we had increased the accrual rate to make up for the money that they had not put in in previous years.”
He adds: “Until the last recession we were pegged to a grade of civil servants which was then abolished at the time of the last recession. We would have got a much better pension if we had remained pegged to the civil service pension.”
The concern from a public relations – and some would argue a moral – standpoint is the low level of provision on a national level. Unsworth at the GMB argues that “the key word is comparison.We have no problem at all with an accrual rate of 1/40. What worries us is that MPs and Lords are exactly the people that could ensure that all British workers have access to good quality occupational pension schemes yet they haven’t taken any concrete steps so far to reverse the situation where only half of all UK workers have access to any form of occupational pension scheme.”
So accusations of feather-bedding on the part of MPs in respect of their pension arrangements would appear largely unfounded. Many senior jobs in the public and private sector have better pension deals, not to mention better overall levels of pay.
The PCPF is undoubtedly a generous scheme when compared with most other occupational pension schemes. But perhaps we should not be comparing the job of MP with most other occupations.