How the parliamentary pension scheme works
The pension scheme for Westminster MPs, the Parliamentary Contributory Pension Fund (PCPF) operates like most funded final salary arrangements by investing its members’ contributions and those from the Exchequer, which takes the place of an employer in an occupational scheme, in the financial markets.
Like other funds, it has a statement of investment principles and uses external managers, Cazenove Fund Management and Baring Asset Management, who run two multi asset mandates. The consultants are Hewitt Bacon & Woodrow.
And as with many other funds it has recorded a substantial deficit in recent years, which is not too surprising since it has a benchmark exposure of 80% to equities, split 50/50 between UK and overseas. The 15% fixed income content is all UK, with half in index linked issues; the balance of 5% is in property.
The pension is related to the length of time that MPs are in Parliament. For each year of service, a pension is accrued at 1/40th of the member’s total annual remuneration which currently is £56,358 for the financial year beginning 1 April 2003, but is not payable until age 65, nor can they draw their pensions until they cease to be MPs. The salary the pension is based on is that at the time they ceased being an MP. Early retirement (eg on grounds of ill-health) and late retirement are both possible.
So an MP with 10 years membership could expect to get one quarter of final salary in pension at age 65.
Membership of the scheme is voluntary, but not every MP may be eligible to join, as they may be limited by pension benefits that were accumulated elsewhere. As at December 2003, there were 686 active members, including peers who are ministers, and 203 deferred members.
As part of MPs’ package, the PCPF is subject to independent review by the Review Body on Senior Salaries (SSRB) every three years. In its most recent report in 2001, a number of its recommendations were adopted including increasing of the death-in-service benefits from three to four times annual salary and that non-concurrent service in the Scottish Parliament or the devolved assemblies for Wales and Northern Ireland should count towards the qualifying period for an early retirement pension.
At the time, Butterfill proposed an amendment to increase MP’s accrual rate from 1/50 to 1/40 of their final salary. The costing of such proposals is the task of the Government Actuary’s Department (GAD). In its most recent valuation of the fund in April 2002, GAD calculated that the faster accrual rate of 1/40 would cost an additional 4.6% of salary. The SSRB recommended that to fund the increase on the short term, the contribution paid by MPs would increase by just 3%, to 9% of salary. But future reviews would ensure that the full cost of such increases in the rate of accrual would be borne by MPs. The new rate and the other SSRB’s recommendations became effective mid-2002.
Those members that joined the scheme before then could opt to remain with the previous rate of contribution of 6% of salary at the rate of 1/50 of their final salary. On average, member contributions are 8.7% of salary.
Ministers have exactly the same pension arrangement as regular MPs. The only anomaly is that as ministers retire as regular MPs their final salary will not be their highest salary. This may mean that they reach the contribution ceiling of two thirds of final salary before they retire. Members of the House of Lords do not qualify as they do not receive a salary. The obvious exceptions are Lords who are also ministers.
Members benefit from tax relief at 40% on their contributions, and also pay a lower rate of national insurance contribution to their state pension.
GAD also recommended an increase in the level of Exchequer contributions from 7.9% to around 24%. The increase in the rate of contribution from the Exchequer is due almost entirely to a combination of the contribution holiday enjoyed by the Exchequer for the last 13 years and the poor returns from the stock market. The surplus has now been exhausted and the fund was in deficit by some £25m as at the date of the valuation in April 2002.
The most recent annual report and accounts for the fund for the period 2001-2002 showed that the value of the net assets of the fund recorded a decrease of some £17.7m on total assets of £267.2m.
GAD calculated that the underlying long-term cost of the scheme has risen from an average of 24.6% of salary at the time of the last valuation (April 1999) to 28% of salary.
The total cost of benefits payable increased from £9.4m in 2000-01 to £12.3m in 2001-02 due to the large number of MPs standing down at the June 2001 General Election. As at 31 March 2002 there were 493 retired members claiming pensions compared with 449 a year earlier. The number of widows and widowers claiming pensions declined slightly from 244 to 243 over the same period; they receive 5/8 of the full pension entitlement.
The SSRB is now collecting evidence for the next review, with results in May of this year.