How MPs are gambling with your pension

Is the answer to the problem of underinvestment in UK companies really down the back of the pension sofa?

Chancellor Jeremy Hunt certainly thinks so, and he wants UK pension schemes to invest more in UK equities to kick-start an investment splurge.

He wants to boost private pensions by “over £1,000 a year” by getting all defined contribution ( DC) pension schemes to put 5pc into private equity, venture capital and start-ups. But most of any extra performance gains will be lost to very high fees. Pension savers could easily be worse off, after fees, than sticking with low-cost equities.

Mr Hunt also wants defined benefit ( DB) pension schemes to invest more in UK equities. But it turns out that Mr Hunt’s own pension scheme – the Parliamentary Contributory Pension Fund (PCPF) – is not a good example.

Unlike other “unfunded” public sector schemes which pay pensions from annual taxation, the PCPF is “funded”, like private sector schemes.

In March 2022, it had £ 832m of assets, an average of £400,000 for each of its 2,075 members. But the PCPF’s annual report shows just 1.7pc of assets (£14m) are held in UK equities, with 60pc in overseas equities.

To add insult to Mr Hunt’s injury, in 2021 UK equities made up 12pc of assets and overseas equities only 50pc – the PCPF trustees switched from UK equities to overseas equities as part of its “strong environmental, social and governance focus”.

But how much do the pension promises being made to MPs cost taxpayers every year? The 2022 PCPF accounts show a cost of 12.9pc of salary, after MPs’ own contributions, taking annual pay and pension to £98,000 – £87,000 salary and £11,000 pension. But the real cost to taxpayers, calculated in the same way as all private sector schemes, is buried in the footnotes. The annual bill, the cost of meeting new pension promises made during the year, is an eye-watering 54pc of an MP’s salary. So an MP’s annual pay and pension is really £ 133,000 – £ 87,000 salary and £46,000 pension.

Taxpayers should also be relieved that the “official“funding level showed a £192m surplus in April 2022.

Not quite so fast. The footnotes show a deficit of over £200m – again calculated in the same way as all private sector schemes – almost £400m worse than the official position.

Understating annual pension costs, and overstating the funding position, is outrageous, and plays right into the “snouts-in-the-trough” view of MPs.

Talk of guaranteed, inflation-linked DB pensions for MPs will stick in the throats of millions in the private sector with DC pensions, and no guarantees, especially those on the minimum 3pc employer contributions.

In 2013, Harriet Baldwin, PCPF trustee and chairman of the Treasury select committee, argued that MPs should move from DB to DC pensions like “the majority of private sector pension schemes”.

She is spot- on. As well as reducing cost and risk for taxpayers, this would help to reform other public sector pensions. And a DC pension would certainly help MPs understand their constituents’ pension worries.