Attempts to reform the bloated MPs' pension scheme have been rumbling on for years. In a new consultation launched by the Independent Parliamentary Standards Authority (IPSA), MPs will be invited to sacrifice their gold-plated pensions in return for a higher annual salary, as part of a review of parliamentary pay and conditions.
MPs still enjoy a generous final-salary pension scheme, which allows them to build up an annual pot of £32,860 after 20 years.
This is expensive in comparison with other public service schemes because MPs accrue benefits at a faster rate and because the cost of providing those benefits to MPs is higher than the cost in other public service schemes.
In common with other public service pension schemes, the MPs' scheme also provides other benefits such as ill-health pensions, death in service payments and spouse and dependants' pensions. The levels of some of these benefits, for example the surviving spouse pensions, are slightly higher than those available in other public service schemes.
So why do MPs' pension reforms need to be delayed another three years? The IPSA consultation was expected in spring, so is already behind schedule. Plus, a previous consultation has already occurred - in July 2010, the Senior Salaries Review Body 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. Read my previous article: Hypocrisy of MPs' fat pensions.
The IPSA has put a deadline on the new settlement - the aim is that reform will come into effect with the election of the new Parliament in 2015. While this is in line with the date for implementation of public sector pensions reform - April 2015 - MPs' pensions should have been the first to be reformed.
So far, MPs have been cushioned from the pension changes affecting most private workers. Only when MPs are in the same boat as most of the country, and that means subject to taking on the risks of a defined-contribution pension scheme, will pensions be truly on the agenda. The true plight of most pension savers in this country is facing low rates, market risk and uncertainty.
An MP's basic salary is £65,738 gross and the pension scheme pays him a pension at age 65. If he contributes to the pension at the highest rate of 13.75 per cent of salary (£9,038.97), he gets a pension of more than £13,000 after just eight years of being an MP. Importantly, this is an inflation-protected pension that pays a 50 per cent spouse's pension in the event of the MP dying.
So I calculate that in return for a total contribution of £72,311, an MP gets a pension that would cost £371,428 on the open market (a 65-year old man wanting to purchase a joint life annuity with 3 per cent escalation can only achieve a rate of 3.5 per cent on his pension pot).
The MPs' pension should be set up against this type of calculation, not just against how generous it is in contrast to public sector pensions.
MPs' pension scheme - contribution and accrual rates
|Accrual rate||MP contribution rate||Annual Gross cost to MP||Annual accrued pensions|
Source: Independent Parliamentary Standards Authority
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