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Parliamentary Pensions

The Government are committed to providing public service pension schemes that are affordable and sustainable in the long term, consistent with the principle of fairness for all taxpayers and between generations. The Parliamentary and other Pensions Act 1987 requires the Government Actuary to make triennial reports on the financial position of the Parliamentary Contributory Pension Fund (PCPF). His latest report, dealing with the position of the fund as at 1 April 2008, is published today and a copy of the report "Parliamentary Contributory Pension Fund Valuation as at 1 April 2008: Report by the Government Actuary" [HC345] has been laid before the House. It includes his recommendation on the Exchequer contribution to be made to the fund, which the Act requires the Government to follow. The House resolved on 24 January 2008 to endorse in principle recommendations contained in the report of the Review Body on Senior Salaries (SSRB) on parliamentary pay, pensions and allowances (Cm 7270-I) which capped the Exchequer contribution to the cost of accrual of benefits for MPs and advised that there should be a major review of the fund should it become likely that the Exchequer contribution rises to more than 20 per cent. of payroll. Both of these recommendations exclude payments to amortise the accumulated deficit identified in the 2005 valuation of the fund. Following a warning from the Government Actuary that the Exchequer contribution was likely to rise beyond 20 per cent. of payroll, in line with the recommendation made by the SSRB and endorsed by the House, the Prime Minister on 13 February 2009 asked the SSRB to conduct a fundamental review of the pension provision for MPs, Ministers and other parliamentary office holders. The Prime Minister has asked the SSRB to consider the full range of options for reducing the Exchequer contribution and to consider, among other things, the merits of defined contribution or money purchase arrangements. We expect the SSRB to report later this year. In the report published today, the Government Actuary has assessed that, since the last actuarial valuation in 2005, the underlying cost of benefits accruing under the parliamentary pension scheme has increased from 27.4 per cent. of the pensionable payroll of scheme members to 32.2 per cent. The main reason for the increase in cost is the fact that people are living longer, and pensions are therefore payable for longer. In common with the approach taken in many other pension schemes, the Government Actuary has changed his assumptions about how long people will live in the future. The Government Actuary has also assessed that the deficit in the fund (that is, the shortfall of assets to the estimated value of liabilities) and the contributions to amortise the deficit (that is, contributions to pay off the deficit over a period of 15 years) remain broadly the same as at the last valuation. Better investment returns and lower salary growth during the period 1 April 2005 to 31 March 2008 than had been assumed have been offset by the fact that the Government Actuary has assumed that people will live longer in the future. As a result, the deficit has increased from £49.5 million to £50.9 million. The Government Actuary has recommended that the Exchequer contribution should be at the rate of 31.6 per cent. of payroll from 1 April 2009 "adjusted to take account of any increase in members' contributions and/or benefit reductions which the Government announce as a consequence of cost-sharing or cost-capping". There are different ways in which the Exchequer contribution as recommended by the SSRB and endorsed by the House could be restricted. We shall be consulting the Trustees of the Parliamentary Contributory Pension Fund and the House of Commons on proposed changes. The Government's preferred option to achieve the cap on the Exchequer contribution includes an increase in member contribution rates from 10 to 11.9 per cent. of salary (for an accrual rate of 1/40th), and from 6 to 7.9 per cent. (for 1/50th). This would mean that an MP on the 1/40th accrual rate would pay a net increase of around £60 per month on top of the current contribution of £316 per month. This means that the total annual contribution based on 2009-10 salary would be around £4,625. A member on the lower accrual rate would also pay a net additional contribution of around £60 per month. In addition we intend further to extend the cap on MPs' accrual, which is set at two thirds of final salary, to include MPs over age 65 who joined the scheme before 1 June 1989. Both changes would need to be backdated to 1 April 2009. Taken together these measures would mean that the Exchequer contribution remained within the cap recommended by the SSRB and endorsed by the House.