John Ralfe is an independent pensions consultant.
Writing for the Times he exposed the stonking generous inflation-linked defined benefit pensions for MPs.
“The Independent Parliamentary Standards Authority has just awarded MPs an annual pay rise, boosting their headline salary to £82,000. The prime minister, the leader of the opposition, ministers and some others are paid more. Many people think that this isn’t enough and many more think that it’s far too much. But in thinking about MPs’ pay, don’t forget their generous inflation-linked defined benefit pensions.
“The latest published accounts for the MPs’ pension scheme — March 2018 — show an official cost to taxpayers of 12.9 per cent of salary, after 10.6 per cent contributions from MPs. This means that their new pay and pension is £92,500 — £82,000 salary and £10,500 pension.
“But the small print in the accounts shows the true cost to taxpayers, using the IAS19 AA corporate bond rate, required for all private sector pensions. Surprise, surprise, the annual cost is not 12.9 per cent of salary but a whopping 39.4 per cent, so MPs’ new pay and pension is really £114,300 — £82,000 salary and £32,300 pension — much, much higher than the official amount.
“Most public sector pensions, including for the NHS, teachers, civil servants and the armed forces, are unfunded, with pensions paid from annual taxation. But the MPs’ pension scheme is funded, like private sector schemes, with £671 million assets at March 2018, including, astonishingly, £80 million of junk bonds.
Is there a deficit in the scheme?
“The latest valuation by the government actuary, in April 2017, shows £598 million of liabilities against £665 million of assets — a healthy £67 million surplus. Not only is there no need for any deficit contributions but the surplus is being used to reduce annual cash contributions. But footnotes in the scheme accounts show £941 million IAS19 liabilities at April 2017 — a £276 million deficit, not a £67 million surplus.
“The actuarial value of MPs’ pension liabilities is entirely made up and manages to magically shrink the IAS19 liabilities by more than a third. This is not a small technical difference of opinion but a grotesque order of magnitude. If this was a private sector scheme, subject to the Pension Regulator’s authority, the regulator would have refused to approve the valuation point blank.
“To plug the £276 million deficit over seven years — the average recovery period for private sector schemes – means taxpayers putting in £40 million a year. Paying this, plus the real annual cost of new pension promises, would lead to a public demand to close the scheme.
“The Cabinet Office, IPSA, the government actuary and the scheme trustees are all to blame for understating annual costs, the deficit and the annual cash contributions needed. But it is certainly convenient for MPs and ministers, who continue to get generous defined benefit pensions without voters even really noticing, let alone objecting.
“As long ago as 2013 the Tory MP Harriett Baldwin, a former minister, argued that MPs should move from defined benefit to defined contribution pensions, and she is spot on. Despite turkeys and Christmas, MPs should vote to close their defined benefit pension scheme and move to a defined contribution pension. Taxpayers would still be on the hook to pay the huge deficit.
“As well as making pension costs crystal clear, living in the real world of a defined contribution pension, not a gold-plated defined benefit pension guaranteed by taxpayers, would help MPs to understand their constituents’ pension worries. Perhaps the new leader of the Labour Party, whoever that may be, will champion this reform?”