Responding to the consultation on MPs’ pay and pensions being conducted by the Independent Parliamentary Standards Authority (IPSA), the Association of Consulting Actuaries (ACA) welcomes the fact that IPSA are considering a type of ‘risk sharing’ pension scheme for MPs rather than simply follow the ‘lower cost’ type of defined benefit scheme being applied across much of the public sector. The reform of MPs’ pensions is considering ways in which the cost of funding MPs’ pensions can be reduced. Presently the MPs’ final salary scheme is in deficit and needs contributions of over 30% of payroll, of which around 20% comes from taxpayers. Over 90% of MPs have opted to earn a pension based on 1/40th of their final salary, although the MPs’ personal contribution for this pension is 13.75% of pay. The MPs’ scheme far surpasses that available to most private sector employees.
Andrew Vaughan, Chairman of the ACA, commented:
“The Government is keen to facilitate a pension regime that encourages cost and risk sharing schemes. It seems to us that if some sort of risk sharing design was introduced for MPs then that might pave the way for other employers to do the same. Cash balance plans keep the pre-retirement investment risks with the employer – in this case the taxpayer – but transfer the post-retirement investment and longevity risk (the risk of members living longer than expected) to the member. Hence, risks are ‘shared’ between the employer and member, unlike defined benefit schemes, where nearly all these risks rest with the employer.
“Our concern is that the consultation document, whilst recognising that cash balance plans are a possibility, may not help due to the benefit comparisons that are included in the document. However a modified cash balance plan (see endnote)[i] may be more attractive for MPs and so increase the likelihood of such schemes being introduced more widely in the UK if the MPs were to take the lead,” says Andrew Vaughan.
Whilst the ACA calls for cash balance to be seriously considered, on the basis that the major public service schemes are moving to a ‘lower cost’ career average formula (with pension age linked to State Pension Age), it seems likely something similar for MPs will be the outcome of the IPSA review. If this happens then, within the proposed MPs scheme cost envelope of 24.5% contributions, there are a number of ways this could be designed to suit MPs’ typical tenure.
The ACA notes that the career average structures, as proposed for the major public service schemes, remain 100% defined benefit schemes with the taxpayer potentially bearing some of the risk that actual costs are significantly more than initially envisaged. With MPs currently earning around £66,000 and potentially more depending on the outcome of the review of MPs’ pay and pensions the ACA feels that risk sharing designs are more appropriate for MPs than for public sector employees, where Lord Hutton concluded many were not in a financial position to bear such risks.
The ACA supports MPs having flexibility in their provision. The ACA says, ‘there may be some MPs who would welcome flexibility, particularly those who may have built up significant pensions before becoming MPs and where the main MPs’ scheme design may result in breaching annual tax and lifetime allowance limits. An option for lower contributions may mean some MPs could continue to remain in the scheme and be covered for death in service and ill health retirement benefits without breaching the various allowances.’
On pension contribution levels, historically the major public service schemes (with the exception of the civil service schemes and the armed forces) have set member contributions to be around 1/3rd of the total expected pension cost so that the employer pays twice what the scheme member has to pay. However, in the proposed new Local Government Scheme (LGPS) the member contribution for those earning between £60,000 and £85,000 is 9.9% which is close to 50% of the LGPS total pension cost envelope of 19.5%, so MPs might be expected to pay contributions at this kind of percentage says the ACA.
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