Select Committee on House of Commons Members' Fund Report


  6.1  In order to compare the value of the liabilities, comprising future outgo on grants awarded to beneficiaries, 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.

  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. I have assumed that this practice will continue in the future and that grants will increase annually in line with the increase in retail 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.

  6.3  For the current assessment, I have adopted a market-related approach such that the interest rate used to discount the liabilities falling due in future years is the real yield available in the open market, on the reporting date, on investment in a medium-dated index-linked gilt portfolio. Accordingly, a discount rate of 1.5% a year net of price inflation has been used to value the Fund's liabilities. For consistency with the approach taken to valuing the liabilities, it is appropriate to take the assets into account at their market value.

  6.4  It is 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. The longevity of the Fund's beneficiaries is the main demographic assumption. The evidence suggests that the longevity of the UK population has increased materially in recent years, and more quickly than had previously been anticipated by demographers and actuaries. However, there is no consensus about the likely rate of future improvement in mortality. I have taken account of recent evidence in setting appropriate mortality assumptions for this report.

  6.5  Over the two years leading up to the reporting date, administration expenses have averaged around £65,000 a year (the costs in 2003-04 were significantly higher but this is understood to have been exceptional). Taking account of the outstanding term of the liabilities, I have included a reserve of £800,000 to cover the future administration costs in respect of the Fund's existing liabilities. This reserve is a provision for the purposes of this actuarial investigation. It should not be taken as a formal estimate or quotation of the cost of an external administrator carrying out the administration work.

previous page contents next page

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

© Parliamentary copyright 2007
Prepared 29 October 2007