Written Ministerial Statement - Thursday 30 March 2006

Parliamentary Pensions - Scheme Valuation

Leader of the House of Commons and Lord Privy Seal (Mr. Geoff Hoon): The Parliamentary and Other Pensions Act 1987 requires the Government Actuary to make triennial reports on the financial position of the Parliamentary Contributory Pension Fund.  His latest report, dealing with the position of the Fund as at 1 April 2005, is published today and a copy of the report Parliamentary Contributory Pension Fund: Report by the Government Actuary on the Valuation as at 1 April 2005 [HC 979] has been laid before the House.  It includes his recommendation on the rate of Exchequer contributions to be made to the Fund, which the Act requires the Government to follow.  The new rate of Exchequer contribution will be implemented in accordance with the requirements of the Act from 1 April 2006.

The Government Actuary has assessed that the underlying cost of the benefits accruing under the Parliamentary pension scheme is lower than the cost assessed at the previous actuarial valuation in 2002 (27.4 per cent of the total pensionable payroll of scheme members compared with 28 per cent).  This is primarily because the Government Actuary has assumed, in the light of recent experience, that MPs will leave and retire at higher ages than was assumed previously.  Furthermore, the Exchequer share of the underlying cost has decreased due to higher contributions being paid by most of the scheme's members.  The Government Actuary expects members' contributions to total 9.3 per cent of the payroll, compared with 8.7 per cent at the 2002 valuation.  The Exchequer's share of the underlying cost has therefore fallen from 19.3 per cent of payroll to 18.1 per cent.

However, despite the fall in the underlying cost of accruing benefits and in the Exchequer share of that cost, the Government Actuary has recommended an increase in the level of Exchequer contributions to the Fund from the current level of 24 per cent of payroll to a new level of 26.8 per cent.   This is because there has been an increase in the deficit in the Fund (that is, a shortfall of assets to the estimated value of liabilities) since the Government Actuary's last valuation in 2002 from £25.2 million to £49.5 million.  (For the purposes of the actuarial valuation, the value of the Parliamentary Contributory Pension Fund's assets at 31 March 2005 was assessed as £278.6 million).

The deficit would have risen by around £7 million even if the experience of the scheme had developed entirely in line with the assumptions made at the 2002 valuation - because of the interest that is assumed to accrue on the deficit, and because the increase in Exchequer contributions following the previous valuation only took effect a year after the valuation date.  However, the deficit has increased further because the experience of the scheme has differed from what the Government Actuary assumed at the 2002 valuation, and also because the Government Actuary has changed his assumptions about what will happen in the future.

The main area where the experience of the scheme has differed from what the Government Actuary assumed is in relation to investment returns, which were lower than expected.  In common with most other pension funds and other investors in equity shares, the Fund experienced negative investment returns in the first year covered by the Government Actuary's report and positive returns in the subsequent two years.  Although the investment returns over the three years as a whole were positive, they were lower than had been assumed.  Overall, divergence of the scheme's experience from the Government Actuary's assumptions made at the 2002 valuation contributed around £5 million to the increased deficit.

The main area where the Government Actuary has changed his assumptions about what will happen in the future is in relation to the longevity of members.  Again, in common with other pension funds, the Fund has been affected by the fact that people are living longer.  The Government Actuary has assumed that the life expectancy of a 65-year old man has increased by 2 years to 19.5 years.  Overall, changes in the Government Actuary's assumptions contributed around £13 million to the increased deficit.

The contributions by the Exchequer to the Fund have fluctuated over the years, and the Exchequer has benefited in the past from the fact that the Fund has been in surplus and that lower contributions have been paid as a result.  The level of Exchequer contributions over the period 1989 to 2003 varied between 4.4 per cent and 9.6 per cent of payroll, representing a saving of between 6.6 per cent and 11 per cent of payroll over the Exchequer's share of the underlying cost of the accruing benefits.

Separately from his report on the actuarial valuation, the Government Actuary has estimated that the capitalised value as at 1 April 2005 of the saving to the Exchequer over the period 1989 to 2003 (that is, the difference between the actual level of the Exchequer contribution and the Exchequer share of the underlying cost of the accruing benefits) is £50 million.

The Government will be drawing the increased Exchequer contribution to the Fund to the attention of the Senior Salaries Review Body (SSRB) when it next commissions the SSRB to make recommendations on the pension element of the Parliamentary remuneration package.

The increase of 2.8 per cent in the Exchequer contribution may be broken down as follows:

Lower ongoing cost of benefit accrual as a result of                 -0.6 per cent
changes to actuarial assumptions

Higher contributions from scheme members                            -0.6 per cent

Higher deficit contributions as a result of
divergence of experience from 2002 valuation assumptions     +1.5 per cent

Higher deficit contributions as a result of
changes to actuarial assumptions                                           +2.5 per cent

Click here for the Q & A Briefing Pack - MS Word Document & PDF Document.