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Hypocrisy of MPs' fat pensions

Hypocrisy of MPs' fat pensions

The biggest pensions story in 2011 was the public sector pensions strike. But the most appalling aspect of this was that public sector workers are being told to take pension cuts from MPs who are still sitting on gold-plated pensions. This stinks of hypocrisy. This situation can only reinforce widespread scepticism about the notion that 'we are all in this together'.

Tom McPhail, head of pensions research at Hargreaves Lansdown, agrees with me, saying: "The MPs still haven't reformed their own pensions. This should have been done before they started on the rest of the public sector."

Here is what the MPs have (try not to get too jealous).

The Parliamentary Contributory Pension Fund is a funded, final salary pension scheme, the costs of which are met from members' contributions, investment returns and an exchequer contribution.

Members can opt to make contributions at one of three rates and pension benefits build up at different rates depending on the rate chosen.

Members contributing at the highest rate of 11.9 per cent salary a year accrue pension benefits at a rate of 1/40th of final salary for each year of service. So an MP serving the average term of office of 15 years, paying 11.9 per cent would accrue a pension of around £22,500 a year (just over 1/3rd of an MP's salary of £65,738).

Members contributing at 7.9 per cent have an accrual rate of 1/50th and those contributing at 5.9 per cent, 1/60th.

They are all great deals, particularly when you take into account the generous life assurance and pensions for surviving spouses that are included.

Rumblings over changes to this cosy set-up have been running for years. In opposition, both the Lib Dems and Conservatives called for the scheme to be reformed. In 2008, Ken Clarke recommended that defined contribution (where pension contributions are invested in the stock market and there is no link to salary) should be brought in for new MPs - and David Cameron was reported to agree with this.

However, following a paper in June 2009 on cost reductions to MPs' pensions and the subsequent consultation, in July 2010 the Senior Salaries Review Body (SSRB) recommended retaining a defined benefit (final salary) scheme for MPs, but based on career average earnings (rather than final salary) and with a higher retirement age.

Frustratingly, implementation of these recommendations was postponed until Lord Hutton's Independent Public Service Pensions Commission (set up in June 2010) could report.

Hutton reported and the rumblings continued, but without action: In the March 2011 Budget, chancellor George Osbourne argued for cuts to MPs pensions. In June 2011, David Cameron said MPs should face "exactly the same changes" to their pensions as those imposed on public sector workers. In early December 2011, justice secretary Ken Clarke told Question Time that MPs' pensions are unsustainable.

So exactly how and when is this bloated MPs' pension scheme going to be slimmed down? A first step has been taken in that MPs' expenses watchdog, the Independent Parliamentary Standards Authority (Ipsa), has now taken control of MPs' pensions. Even though Commons Leader Sir George Young said this is the 'final piece of the jigsaw' in removing MPs powers to vote on their own remuneration, the MPs' pension reform process is going to be painfully slow, with the jigsaw taking at least three more years to complete.

Ipsa has said it will take a "methodical and evidence-based approach" in looking at MPs' pay and pensions and will hold a public consultation on the issue in the spring, ahead of a final report by the end of 2012, with a view to introducing a new pension scheme for MPs by 2015. So we have more delays, despite the fact that a full consultation by the SSRB has already taken place.

This is just further procrastination, when cuts need to happen now.

My hardline preference would be to close the current final salary pension for MPs and replace it with a defined contribution pension scheme. This was recommended by the SSRB as the "simplest solution".

Let MPs have the 'freedom' to manage their own savings and investments, while facing a retirement subject to the unpredictability of income. Only then will private sector pensions truly be on the political agenda.

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By Moira O'Neill,
20 December 2011

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Moira O'Neill

Moira O'Neill is the Harold Wincott Personal Finance Journalist of the Year for 2012. She has been a finance journalist for 16 years and joined Investors Chronicle in 2008 where she leads the funds and personal finance coverage.

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