REPORT BY THE GOVERNMENT ACTUARY ON THE
VALUATION AS AT 30 SEPTEMBER 1997
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. PROVISIONS 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 beneficiarya 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
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
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. CHANGES SINCE THE 1993 VALUATION
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
4. STATISTICS AND ACCOUNTS
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
|British Government Stock:||Fixed interest
| ||Index linked||90,758|
|Equities, including investment trusts||2,782,034|
|Cash and other assets||560,969|
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. FUNDING OBJECTIVE AND VALUATION METHOD
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. ACTUARIAL ASSUMPTIONS FOR THE VALUATION
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
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. RESULTS OF THE VALUATION
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 members||0|
|1939 Act widows||86|
|1948 Act former members and widows||160|
|1948 Act pre-1988 widows||1,040|
|1981 Act former members||335|
|1981 Act widows||359|
|Reserve for future administration expenses||265|
|Value of investments held at 30 September 1997 (see paragraph 6.4)||3,586|
|Excess of assets over liabilities||1,341|
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
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
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