11th July 2013
As part of the proposed increase in salary, MPs’ pensions will get less generous but are the changes enough asks Mindful Money editor John Lappin.
Will MPs dare to give themselves a pay rise in this economic climate? Well, despite incurring the wrath of just about everyone except perhaps investment bankers (who face a little bit of heat on the pay issue themselves) they just might. Of course, technically it is out of their hands.
As the Herald reports today, the Independent Parliamentary Standards Authority will recommend a substantial rise of around 11% to £74,000 a year from 2015 in return partly for changes to pensions and benefits. It is unclear whether the Prime Minister and other party leaders who say they oppose a rise, will intervene to prevent this. And to be fair, even many rank and file MPs are deeply unhappy with the recommendations.
But what exactly is this pensions trade off?
Well, as part of the proposal, MPs will move to a career average pension system rather than the more generous final salary one.
This means that pension benefits will accrue at 1/51 of salary per year, rather than 1/40.
It is a big change and actually a substantial reduction so should we feel a little bit sorry for the politicians? Well to receive their pension benefits, MPs will have to contribute a little bit less for their pension benefits at 9.2 per cent of salary rather than the current 13.75 per cent.
But this send a very inconsistent message. At the moment, there is a huge argument going on in the country between those who receive the mostly private sector defined contribution pension and those who receive the mostly public sector defined benefit pension.
The system actually varies between, for example, teachers and council workers and NHS employees. Some schemes have ring fenced funding or at least some ring fenced funding to back them up. Some do not. There are also different levels of contributions required depending on the role and the sector.
But when teachers saw their pensions changed at the start of this Parliament, they moved to a less generous pension settlement and they were asked to contribute more not less.
And while many will argue teachers are still getting a good deal, teachers themselves will be contrasting this with the deal oe table to MPs.
And yet, this is not the only inconsistency. The Government is in the midst of bringing in a new workplace pension reform. It will require a minimum of 4% contribution from workers, 3% from employers and 1% in relief. Bluntly 8% is just not enough and with defined contribution as Mindful Money readers surely know already – there is no guaranteed amount – it is what you build up plus investment returns. Then you have to find ways to turn it into an income often meaning you are at the mercy of what you can secure as an annuity unless you have a big enough pot of money for draw down.
So in the next few years, we are going to hear politicians make the case to the general public (remember them MPs) that they should be contributing more to their workplace and mostly DC pensions when they will be contributing less and to a DB scheme.
So here is a wild suggestion, which handily comes about as MPs finalise their thinking on the latest pensions bill.
They should move to a defined contribution system with a public contribution at the level of say a good employer might put in, MPs can then decide how much above 4% they want to put in, and the resulting pension would depend on their investment returns and indeed how well they invested their money too.
That would mean MPs were in the same pension system as the rest of the country and not in their own pensions ivory tower. And no, it shouldn’t be part of pay rise deal, well not unless everyone else in the country was getting a pay rise too.