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
11 October 2002