Select Committee on Public Accounts First Report


1.  INTRODUCTION


  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 2000. The previous investigation related to the position as at 30 September 1997 and I now submit my report on the investigation as at 30 September 2000. This report is addressed to the Trustees of the Fund.

  1.2  I have been informed that a fundamental review is being conducted to consider the most effective means of providing support to former Members of Parliament and their dependants, and I understand that the outcome of this review could have significant implications for the operation of the Fund. This report on the Fund is based on the legislation currently applicable to the Fund, and does not take into account possible changes resulting from the review.

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 provision, former Members must normally have attained the age of 65, with no service after 15 October 1964. I understand that there are no more possible beneficiaries in this category who are not already in receipt of an award.

  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 -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 level of grants has 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 in Aid 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 1997 VALUATION

  3.1  There have been no amendments to the legislation governing the scheme since the last valuation. The amount of Grant in Aid payable from the Exchequer has not changed since the last valuation and remains at £215,000 a year. Three such payments were made by the Exchequer during the period covered by this valuation.

  3.2  We understand that there has been a change in the Trustees' policy in granting awards. No new awards of regular payments have been made since the last valuation and none are expected to be made in future. If this practice continues indefinitely, the Fund would eventually have no beneficiaries in receipt of regular payments, although it will be some decades before this position is reached.

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 37 deaths and other cessations. The reduction in expenditure resulting from the cessation of pensions was partly offset by 6 new awards to widows of former members. The total numbers receiving payments decreased from 172 to 141 over the three-year period, and such a decrease is not unexpected, since retirement income for Members of the House of Commons is now mainly provided through membership of the Parliamentary Contributory Pension Fund. In total, the 141 awards in payment at the valuation date gave rise to an aggregate annual payment of £206,561. The widow who was eligible for an award, but was not claiming her entitlement at the last valuation, is now in receipt of her award.

  4.2  The income and expenditure of the Fund from 1 October 1997 to 30 September 2000 is summarised in Appendix B. During this period the amount of the Fund, as shown in the accounts, increased from £3,706,126 to £4,762,596. The growth in the Fund was mainly attributable to investment income and the increase in asset values, since Grants in Aid and Member Contributions were very nearly sufficient to meet all expenditure on benefits.

  4.3  The assets held at the valuation date were as follows:

Market value at
30 September 2000
£

British Government Stock 350,834
Equities and other stocks 4,179,787
Cash and other net assets 231,975

4,762,596


  The income/expenditure figures and 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. It is likely that the market value of the assets has fallen to some extent in the period since 30 September 2000.

  4.4  The composition of the investment portfolio is about 88% in equities and corporate and overseas bonds, with only 12% in gilts and cash. The outstanding liabilities of the Fund comprise regular payments to beneficiaries with a relatively high average age and, if no new awards of this type are to be made, the average term of liabilities will become increasingly short. In these circumstances, it may become necessary for some assets to be sold in forthcoming years, particularly if Grants in Aid were discontinued, and 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, assuming that the Fund continues in its present form.

  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 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. In making these estimates I have adopted the same rates of mortality as were assumed for the 1997 valuation. 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 3Ö per cent per year. This net yield is the same as was assumed for the 1997 valuation.

  6.3  When valuing the assets, account must be taken of the expected income from those assets (i.e. 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. If Grants in Aid are reduced or terminated, it may soon become necessary to realise some of the investments. 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 3Ö per cent a year, i.e. the same rate as used for valuing the liabilities, I have made a deduction from the market value of £970,000. The assets have therefore been valued at £3.793 million.

  6.5  Over the period since the last valuation administration expenses have averaged around £21,000 a year. Taking account of the outstanding term of the 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.


 
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Prepared 21 March 2002