The news that broke early in February that the size of public service pensions had rocketed, gave no comfort to the private sector, which has seen its retirement benefits decimated by falling global investment markets.

The pension pots of civil servants jumped by £4.5 billion in 2007-08, up £1 billion on the previous year, without much accounting explanation. Indeed, few of the 577,000 civil service workforce contribute more than 3.5 per cent of their salary towards their pension.

Parliamentary privilege
But it is not just the Whitehall mandarins who receive generous pension entitlements. The process extends to our elected politicians as well, although parliamentarians have not received public pensions until comparatively recently.

A Members’ Fund was first established in 1939. This was a benevolent fund, to assist former MPs and their dependants who were in financial need, as there were no occupational pension arrangements at that time.

Its original purpose was to provide former MPs with benefits in lieu of a pension. Further Acts were passed in 1948, 1981 and 1991 to allow former MPs and their dependants to apply for assistance.Today, it is funded by a monthly £2 contribution per MP and by a Treasury annual grant of £215,000. Managed by six trustees – all serving MPs – awards are made to former MPs, or their widow/widowers, who served for ten years or more before October 1964, when the main pension fund started.

Hardship awards can be made, including to partners of former MPs who qualify for a half rate, rather than a 5/8ths pension, under the new regulations.

Defining the benefits
Since 1964, the Parliamentary Contributory Pension Fund (PCPF) has been the main source of public help for MPs in retirement. This is a defined benefit pension scheme, meaning the benefits are based on length of membership and salary. It is contracted out from the State Second Pension (S2P), which means reduced national insurance contributions are made, but, as a result, no benefits are earned under S2P.

However, the PCPF guarantees benefits will at least equal, and normally be better than, a pension provided by the State Second Pension. MPs have a choice on joining the Fund of paying either six or ten per cent of pensionable salary, building up at rates of 1/50th and 1/40th of annual salary respectively.

Full tax relief is given for those under 75 years of age. On retirement, a former MP receives:

● a pension for life or
● a tax-free cash sum (usually up to 25 per cent of the capital value) and reduced   pension for life. 

There is also a pension for any dependants of the MPs when they die plus annual increases to the pension. If an MP dies while still elected, a lump sum benefit of four times his or her annual salary, together with pension benefits for dependants, is provided.

Early exits
The Fund is set up and run under its own Act of Parliament and regulations. Those who leave the Commons before the Fund’s normal retirement age of 65 years can either keep their pension there or transfer it to another pension scheme.

If elected for less than two years – and there have been examples of some only serving months – there is the added option of taking a refund of contributions less statutory deductions.

It is also possible to boost the pension by buying added years or paying additional voluntary contributions (AVCs). Similarly, MPs can transfer previous pension benefits into the Fund.

The Exchequer contributes the balance of cost of providing the promised benefits, together with the costs of running the Fund. Its contribution rate is based on advice given by the Fund’s actuary, who is an independent professional adviser.

Despite the professional help of some top investment advisers, the return on assets was negative for the year to March 31 2008 at - 3.6 per cent, although this was 0.4 per cent ahead of the Fund’s benchmark return.

‘This resulted in a decrease in the Fund’s assets of £9.3 million,’ says Sir John Butterfill MP, chairman of the trustees.

Strategic considerations
Independent actuaries Hymans Robertson advise the trustees on investment. They are one of the longest established independent UK consulting and actuarial firms. In 2003, the 80 per cent allocation to equities was cut and set by 2006 at 66 per cent with the balance in bonds (including property and other assets).

More recently, property and hedge funds have been selected as alternatives to bonds. Another strategy review will take place this year. Over the three years to March 31 2008, investments grew by 9.3 per cent (the benchmark is 9.2 per cent).

The managers employed include Barclays Global Investors, Liontrust and MFS International. Last May, Morgan Stanley were appointed as a Real Estate Investment Trust (REIT) manager and in October, Marvin & Palmer started to manage an emerging market portfolio.

Key statistics
Although the benefits are good, Butterfill insists that ‘they are certainly not a king’s ransom’. In reality, they are similar to a number of schemes in the public sector.

For example, the annual review of the scheme reveals that:

• the average annual pension (excluding widow/widower’s pensions) is £18,000, as estimated by the Government Actuary’s Department, up from £15,700 in 2005
• the average annual pension built up by current MPs is £21,500, up from £20,100 in 2005.

The last triennial valuation by the Government Actuary increased the Exchequer contribution to the equivalent of 26.8 per cent of salaries of MPs and office holders.

About £49.5 million of this (equivalent to 8.7 per cent of MPs’ salaries) was necessary because of a funding deficit. The remaining 18.1 per cent contribution is broadly in line with both the private sector (15 to 20 per cent) and public sector (there was around 19 per cent contribution by the Exchequer to the Civil Service Pension Fund).

Most MPs pay in ten per cent of their salary. If they serve 20 years, they will receive a pension of 50 per cent – 20 out of 40 years (20/40) – of their salary. This is actually a higher contribution than most employees (six per cent), and substantially above most executives of private sector companies.

Those Parliamentarians who had a career before the Commons may not receive a full pension entitlement, as their pension is often restricted by the maximum limit of 2/3rds of pay – inclusive of other pensions – to a pension of 1/60th of pay for each year as an MP.

However, the fact remains that MPs continue to enjoy a defined benefit or ‘final salary’ pension scheme at a time when most of those pension’s scheme members outside parliament or the public sector are part of less secure defined contribution or ‘money purchase’ schemes.

Indeed, George Osborne, Shadow Chancellor, considers the whole scheme too generous and wants the final salary arrangement closed as a precursor to wider reforms. He wants new MPs to accept a defined contributions scheme which would ‘send a powerful message about our willingness to tackle public sector pension reform’. And Osborne admits that he has opted for the less generous of the two-tier pension structure.

The road to Europe
But, as we are all well aware, UK politicians no longer have to confine their horizons to Westminster. 78 of the 785 MEPs are elected from the UK.

Traditionally,MEPs earn the same salary as their respective national MPs but this produces enormous imbalances at Brussels, with, for example, Italian MEPs earning four times as much as their Spanish counterparts. So this changes from 2009, with €7,000 (around £6,800 at current rates) paid monthly to all MEPs. From the start of the new European Parliament in July 2009, former MEPs will be entitled to a retirement pension from 63 years.

For each year served, this equates to 3.5 per cent of salary, irrespective of any other pension. This scheme is noncontributory (i.e. they don’t have to pay in to benefit). And if an MEP becomes incapacitated during their term in office, an invalidity pension is paid.

Devolutionary matters
Looking at other parts of the UK, members of the Scottish Parliament contribute six per cent of their annual £55,381 salary towards their pension. Their fund has fallen from £20.9 million in 2007 to £16.6 million, according to figures released under the Freedom of Information Act by The Daily Telegraph.

The scheme was set up on the basis of 1/50th final salary for each year elected, but MSPs have voted the option to increase pensions by 25 per cent to 1/40th for every year served.

This is also a final salary pension scheme, which is inflation-proofed. If an MSP dies in service, the scheme pays the greater of three times final salary or accumulated contributions plus compound interest. This led Mark Wallace, on behalf of the Taxpayers’ Alliance, to observe that ‘With the financial crisis, there is a danger that ordinary families will face an even bigger bill for MSP’s pensions.'

Conal Gregory was the Conservative MP for York from 1983 to 1992