Parliamentary Contributory Members' Fund - Report by the Government Actuary on the Valuation of the Fund as at 30 September 1997 - Report




  1.1  Subsection (5) of Section 3 of the House of Commons Members' Fund Act 1939 requires an investigation into the general financial position of the Fund to be made at intervals of not more than five years: I have been asked to carry out an actuarial valuation as at 30 September 1997, which is four years after the previous valuation. The previous investigation related to the position as at 30 September 1993 and I now submit my report on the investigation as at 30 September 1997. This report is addressed to the Trustees of the Fund. It has been prepared in accordance with the requirements of Guidance Note No. 9 (version 6.0) issued by the Institute and Faculty of Actuaries except that a discontinuance valuation has not been done because it is not appropriate in the context of the scheme.


  2.1  The Fund was set up by the House of Commons Members' Fund Act 1939 which provides for discretionary grants to be made by the Trustees to ex-members who have attained 60 years of age, to their widows, and to orphan children under 16 years of age. A subsequent Act of 1948 which was amended in 1991 (see paragraph 2.3 below), provides for the Trustees to authorise grants to any former Members or their dependants having regard to their circumstances.

  2.2  The House of Commons Members' Fund and Parliamentary Pensions Act 1981 introduced a further category of award payable as of right to former Members, or their dependants, who satisfy certain conditions. To be eligible for an award under this pension, former Members must normally have attained the age of 65 and have served as a Member for at least 10 years, with no service after 15 October 1964. The 1981 Act gave the Trustees discretion to make awards in cases where former Members had less than 10 years' service, if the Fund could support this. In the light of my predecessor's advice concerning the financial implications of varying levels of take up of awards granted, the Trustees used this discretion to make awards in cases where former Members had nine years' of service.

  2.3  Section 7 of the Ministerial and other Pensions and Salaries Act 1991 amended the 1948 Act as follows:

    (a)  It widened the powers of the Trustees to make payments under the 1948 Act. Instead of making payments for the purpose of alleviating special hardship the Trustees may now have regard to the circumstances of the person to whom payments are to be made.

    (b)  It is no longer a requirement for payments under the 1939 and 1948 Acts that the former Member must have served for at least 10 years.

  2.4  The Trustees used these powers to make payments to a new class of beneficiary—a widows or widowers of members serving in the Parliamentary Contributory Pension Fund before 6 April 1988 (the "pre-1988 widows"). The payments from the Members' Fund were such as to increase the total pension to the widow from one-half of the relevant Member's pension to five-eighths.

  2.5  In recent years the amount of grants have been increased on each 1 April. These increases have been similar to those awarded each year under the Pensions (Increase) Acts. At the date of the valuation, the fixed amounts payable under the 1981 Act were £2,244.84 a year for a former member and £1,403.52 a year for widows and widowers. An award payable under the legislative provisions other than the 1981 Act has no specific limit.

  2.6  Income to the Fund is derived partly from statutory contributions from Members under the 1939 Act, which since 1961 have been £24 a year, and partly from Grants in Aid. The amount of the grant is determined by the Treasury under the Members' Fund Act 1957 "having regard to the amount for the time being of the payments to be made out of the fund and of the income of the fund from other sources".


  3.1  There have been no amendments to the legislation governing the scheme since the last valuation, and no material changes in the Trustees' policy in granting awards. The amount of Grant in Aid payable from the Exchequer has not changed since the last valuation and remains at £215,000 a year.


  4.1  Appendix A summarises the changes in the numbers of beneficiaries during the period under review. During the inter-valuation period, there were 68 deaths and other cessations. The reduction in expenditure resulting from the cessation of pensions was partly offset by 17 new awards. Some were to widows of former members but others were completely new awards. The total numbers receiving payments decreased from 223 to 172 over the four-year period, and such a decrease is not unexpected, since retirement income is now mainly provided through membership of the Parliamentary Contributory Pension Fund. In total, the 172 awards in payment at the valuation date gave rise to a total annual payment of £239,152. In addition, one widow was eligible for an award of £3,601.08 pa under the 1939 Act, but was not claiming her entitlement. The liability for her has been included in the valuation.

  4.2  The income and expenditure of the Fund from 1 October 1993 to 30 September 1997 is summarised in Appendix B. During this period the amount of the Fund, as shown in the accounts, increased considerably from £2,550,067 to £3,706,126, in spite of the fact that expenditure slightly exceeded income from Members' contributions and Grants in Aid. The growth in the Fund was mainly attributable to investment income and the increase in asset values. The assets held at the valuation date were as follows:

British Government Stock:Fixed interest 272,365
 Index linked90,758
Equities, including investment trusts2,782,034
Cash and other assets560,969

  The income, expenditure figures and the assets are summarised from the annual accounts prepared by the Trustees and audited by the Comptroller and Auditor General. I have relied on the audited accounts as proof of the existence of the assets.

  4.3  Since the valuation date of 30 September 1997, retrospective increases to grants have been paid from the Fund, (reflecting changes in the Retail Prices Index from 1995 to 1997). These increases amounted to about £20,000. Thus, for the purpose of the valuation, the market value of assets has been reduced by £20,000 to take account of these backdated payments. The market value of assets has therefore been taken as £3.686 million.

  4.4  As the number of new beneficiaries declines, it will become less necessary for Grants in Aid to be maintained at the present level, and it would be expected that some assets should be sold in forthcoming years. In these circumstances it may not be appropriate for such a high proportion of the investment portfolio to be invested in equity type assets whose capital value can fluctuate considerably. This point is discussed further in paragraph 8.2.


  5.1  The funding objective is that there should be sufficient assets at the valuation date to meet the future liabilities in respect of awards made up to that date, including future awards to the widows and widowers of former Members receiving payments at that date.

  5.2  The valuation method is to compare the capitalised value of future liabilities with the value of the assets at the valuation date. A number of assumptions, as to the future interest rates, mortality rates and rates of increase in benefits, have to be made for this calculation, as described in section 6 below.


  6.1  In order to compare the value of the liabilities, comprising future outgo on grants awarded, with the value of assets, comprising future contributions and investment income (and other proceeds) from the assets held in the Fund, it is necessary to discount these items at interest. In making these estimates I have adopted rather lighter rates of mortality than were assumed for former Members and their widows for the 1993 valuation. This reflects improvements in mortality which have been observed in pension schemes generally. It has been assumed that all awards will continue for life and that, on the death of a married former Member, an allowance will be paid to a surviving spouse.

  6.2  As the level of grants is reviewed annually, provision must be made for future increases. In recent years the annual increases have been similar to those awarded each year under the Pensions (Increase) Acts. Although there is no statutory link, I have assumed that this practice will continue in the future and that grants will increase annually in line with the increase in prices. There is a broad correlation between the levels of interest rates and inflation, and the difference between them is more important than their absolute value when valuing liabilities linked to price inflation. I have assumed that, during the period over which the Fund will be paying grants, the yield on investments will exceed the increase in the level of grants by 3.5 per cent per year. This net yield is the same as was assumed for the 1993 valuation.

  6.3  When valuing the assets, account must be taken of the expected income from those assets (ie from interest and dividend income and from the realisation of investments upon sale or maturity) and how this income compares with the emerging level of expenditure. As mentioned in the previous two valuations, the Fund has now reached the stage where current income from Members' contributions and investments is insufficient to meet expenditure on awards granted and expenses charged to the Fund. If Grants in Aid are reduced or terminated, it may soon become necessary to realise some of the investments, which is normal for a fund in this position. With this prospect it is appropriate to value assets at market value by taking the value of the Fund as shown in the accounts, but making a precautionary deduction to cover the possibility that assets may have to be sold at a time of high dividend yields.

  6.4  This risk of assets having to be sold when equity markets are depressed could be reduced (or eliminated) by switching a substantial tranche of investments into index-linked gilts (see paragraph 8.2). On the basis of the value which would be put on the resulting gilt portfolio if it were valued at 3.5 per cent a year, ie the same rate as used for valuing the liabilities, I have made a deduction from the market value of £100,000. The assets have therefore been valued at £3.586 million.

  6.5  Over the period since the last valuation administration expenses have averaged around £17,700 a year. Taking account of the outstanding term of liabilities, I have included a reserve of £265,000 to cover future costs. This figure is a provision for the purpose of this valuation report. It should not be taken as a formal estimate or quotation of the cost of an external administrator carrying out the administration work.


  7.1  The liabilities and assets of the Fund have been valued on the actuarial assumptions described in section 6 above. The results of this valuation are set out below:

Valuation Statement as at 30 September 1993

Capitalised value of benefits to: 
1939 Act former members0
1939 Act widows86
1948 Act former members and widows160
1948 Act pre-1988 widows1,040
1981 Act former members335
1981 Act widows359
Reserve for future administration expenses265
Total liabilities2,245
Value of investments held at 30 September 1997 (see paragraph 6.4)3,586
Excess of assets over liabilities1,341

  This statement excludes income amounting to about £15,600 a year from Members' contributions payable after 30 September 1997. It also makes no allowance for Grants in Aid made after that date.

  7.2  The £1,341,000 excess of assets compares with a balance of liabilities of £189,000 in the 1993 report. Over the inter-valuation period, income amounting to about £920,000 has been received from Grants in Aid and contributions paid by Members. There was also growth in the income from investments. The saving from higher than expected net cessations of awards, together with the continued level of the Grant in Aid and the favourable investment experience has led to a surplus in the scheme. This surplus is equivalent to just less than 60 per cent of the value of the liabilities.


  8.1  In my judgement, the assets held at 30 September 1997 were likely to be more than sufficient to meet the liabilities in respect of existing commitments, including future awards to surviving spouses of former members receiving benefit. If the number of new awards is likely to be quite low, consideration could be given to reducing the level of the Grant in Aid.

  8.2  In paragraph 4.4, I indicated that some consideration should be given to the nature of the investment portfolio that is appropriate for a fund where assets could, in the near future, have to be realised to meet liabilities. If a large proportion of the fund is invested in equities, there could be a problem if assets have to be sold at a time when market values are low. If it is intended to continue to increase benefits broadly in line with changes in the Retail Price Index, then the liabilities are effectively linked to the movement in the RPI. A measure of protection against adverse investment experience could be achieved by holding index-linked gilts as a significant proportion of the portfolio. This would have the effect of limiting potential losses, while leaving some scope for the equity holdings to deliver better-than-expected returns.

  8.3  I will be pleased to advise further on an appropriate holding of gilts in relation to the expected run-off of liabilities, and to assess what future contributions might be appropriate for varying assumptions about the level of new awards.

C D Daykin, CB FIA

6 July 1999

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 1999
Prepared 10 November 1999