Select Committee on Treasury Minutes of Evidence

Further memorandum from HM Treasury


  At the Treasury Committee's hearing on 18 July on the Spending Review, the Chancellor undertook to provide a note about the position of the taxpayer in relation to the changes which are being made to the benefits payable under the Parliamentary Pension Fund (PCPF).

  There are two main changes affecting the costs of the scheme. First, an increase in the level of the one-off sum payable on the death of a member. This was recommended by the Senior Salaries Review Body as an improvement to be implemented at Exchequer cost and the Government accepted this recommendation. The other main change to scheme benefits is an optional increase in the rate of accrual of pension benefits from 1150th to 1140th of final salary coupled with a higher member contribution: 9 per cent of salary; compared to the existing level of 6 per cent of salary. This change applies to service from 16 July 2002 only. Members can also opt to continue to receive pension accrual at 1150th of final salary and to continue to pay contributions of 6 per cent of salary. A further option is to backdate the improved accrual (and increased contribution) to 5 July 2001, the date of the Commons vote.

  The Government's policy is not to make changes to PCPF benefits at the taxpayers cost unless these have been recommended by the review body. Where the review body does make such recommendations these are judged carefully to take account of their affordability and their consistency with our general policy on occupational pensions and public service pensions in particular. Although the Government was able to accept the recommendations for an increase in death benefit at Exchequer cost, it was not able to accept the parallel recommendation from the review body for the Exchequer to bear the costs of removing the scheme rule for cessation of survivor pensions on the remarriage or cohabitation of the surviving spouse. Where other public service schemes have introduced that improvement in benefits it has always been done only at a cost to members and not to their employers.

  We believe that the trustees of the PCPF are currently working on a package of proposals for the removal of this rule from the PCPF and for the introduction to the scheme of pensions for unmarried partners as well as spouses of members. The review body recommended that consideration should be given to the introduction of unmarried partner pensions, but not at Exchequer cost. The Government will consider this package of proposals carefully in due course.

  The most significant change to the scheme rules is the introduction of the option for members to achieve a faster rate of accrual of pensions in return for a higher member contribution. In July 2001 the House resolved that, contrary to the original recommendations of the review body, the accrual rate of the PCPF should be raised from 1150th to 1140th of final salary across the board, at taxpayer cost. The Government rejected this. It did not consider that the additional cost to the taxpayer could be justified and particularly so when the review body, having carefully considered all of the arguments in favour of such a change, had recommended clearly against it. But it has no objection in principle to benefits being improved in the PCPF or any other public service pension scheme where the incremental costs are being borne by members rather than the taxpayer.

  The increase in the accrual rate of the PCPF sought by members is therefore being introduced, following further advice from the review body, as an option associated with a higher rate of member contribution. For those opting for the faster accrual rate the increase in member contributions from 6 per cent to 9 per cent will be significant. However, it would not alone completely cover the costs of the faster accrual. The Government has therefore accepted advice from the review body that it will be possible for them to take into account the residual incremental cost of the faster accrual rate when making recommendations about future levels of pay and allowances for members of the scheme.

  The actuarial estimate of the costs of increasing the accrual rate is about 5 per cent of pay. The residual which is not covered by the increase in member contributions for those taking up the faster accrual option is therefore around 2 per cent of pay. If all active members of the scheme were to exercise the option for faster accrual, then the Exchequer contribution would have to be about 2 percentage points of pay higher than it would otherwise have been, to balance the fund on an ongoing basis. However, we are content with the undertaking from the SSRB that they will be able to make recommendations on pay and allowances for members of the House in the future which will have the effect of offsetting and fully absorbing this cost.

  In this way the Government has been able to maintain its principle that the taxpayer should not be expected to carry the costs of changes to the Parliamentary Pension Scheme which have not been recommended by the SSRB.

  I hope that the Committee finds this explanation helpful.

11 October 2002

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