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UK considers switch to DC for ministerial pensions (amended)

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  • UK considers switch to DC for ministerial pensions (amended)

UK - Gordon Brown has ordered a review of  final salary parliamentary pension arrangements which could see ministers moved into a defined contribution scheme.

The Government Actuary's Department (GAD) has advised the government that its share of the pension benefit costs is likely to exceed a set level.

The last review of parliamentary pay, pensions and allowances was published by the Senior Salaries Review Body (SSRB) in January 2008 when the report recommended a "major review" of parliamentary pensions if it became likely that unless action was taken the Exchequer share of the cost of accruing pension benefits would rise above 20% of payroll of scheme members.

In a letter to Bill Cockburn, chairman of the SSRB, the prime minister suggested the GAD had advised the government this cost would pass the 20% mark, which "effectively triggers the need for the review".

"I trust that in the course of its review the SSRB will consider the full range of options for reducing the Exchequer contribution, including, but not restricted to, increases in the pension age, changes in the provisions for retirement on the grounds of ill health, increases in member contributions, changes in the accrual rate, changes in the maximum level of benefits that can be built up and the merits of defined-contribution (DC) structures," he added.

In the terms of reference included with the letter, the SSRB is requested to conduct a "fundamental review of the pension provision for members of the House of Commons, ministers and other Parliamentary office holders", and to recommend pension arrangements for these groups that are "sustainable, appropriate to their circumstances, and fair to both them and to the taxpayer".

The SSRB is also directed to pay particular attention to certain issues when developing its recommendations, including the GAD valuation of the Parliamentary Contributory Pension Fund (PCPF), expected to be completed in March 2009; interaction with other benefits to which MPs and ministers are entitled and the earlier SSRB to limit government responsibility to 20% of payroll.

The terms of reference claimed the SSRB should "have regard to" the "special circumstances" of parliamentary life and the uncertainty of careers, and as such should evaluate the appropriate balance of contributions and benefits for different ages and work patterns, and the potential value of DC and career average schemes used in "comparable employment" in the private sector and rest of the public sector in the context of ongoing reforms.

The letter follows an earlier review of parliamentary pay and pensions completed by Sir John Baker in June last year, which the government commissioned in May to gather recommendations for an independent method of determining MPs' pay and pensions without the need for MPs to vote on it, after it admitted "recent GAD advice" suggested the 20% cap on government expenditure to MPs pensions "had already been reached".

However Baker's report concluded that the issue of pension is "complicated" and the best solution "would be for the Independent Body [the SSRB] to continue to consider MPs' pension arrangements bearing in mind the unusual career pattern of MPs and the evolution of pensions in the public sector and wider economy".

A review of MPs pensions and the possibility of switching to a DC arrangement was also proposed by the Conservative opposition party in January 2008, ahead of the SSRB report, as David Cameron, the leader of the party, claimed it was time to "recognise that a very generous final salary scheme going into the future is not appropriate". (See earlier IPE article: MP seeks closure on pensions 'apartheid)

Latest figures available for the PCPF, from the 2006/07 annual report, showed the fund had net assets of £379.1m (€423.7m) at 31 March 2007, and had investments in fixed-interest and index linked securities, equities, derivatives and pooled investment vehicles.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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