The Association of Consulting Actuaries (ACA) has called for ‘risk sharing’ for MP pensions reforms in its response to the Independent Parliamentary Standards Authority (IPSA) consultation into MPs' pay and pensions.

The IPSA consultation paper Reviewing MPs’ Pay and Pensions, which closed on 7 December, explores views from the public, MPs and other interested parties for IPSA to find a long-term, sustainable solution to the issue of how best to remunerate MPs for their work as opposed to the current system whereby MPs decide their own pay and pension arrangements.

The current career average proposal for the major public service schemes remains 100 per cent DB with the taxpayer potentially bearing some of the risk that actual costs are significantly more than initially envisaged. As MPs currently earn around £66,000, and potentially more depending on the outcome of the review of MPs’ pay and pensions, the ACA stated that risk sharing designs are more appropriate for MPs than for public sector employees, where Lord Hutton concluded many were not in a financial position to bear such risks.

ACA chairman Andrew Vaughan explained: “It seems to us that if some sort of risk sharing design was introduced for MPs then that might pave the way for other employers to do the same. Cash balance plans keep the pre-retirement investment risks with the employer – in this case the taxpayer – but transfer the post-retirement investment and longevity risk to the member. Hence, risks are ‘shared’ between the employer and member, unlike defined benefit schemes, where nearly all these risks rest with the employer.

“Our concern is that the consultation document, whilst recognising that cash balance plans are a possibility, may not help due to the benefit comparisons that are included in the document. However, a modified cash balance plan may be more attractive for MPs and so increase the likelihood of such schemes being introduced more widely in the UK if the MPs were to take the lead.”

Following this consultation, IPSA will report on the findings and set out the way forward in early January 2013. There will be a further consultation on detailed proposals in the spring of 2013, and the results of this will be announced later in the year, with an aim to implement the new remuneration package for MPs immediately after the next general election, which is expected in 2015.

According to the ACA, a cash balance arrangement seems likely to be the outcome of the IPSA review. In the interim, a 1.85 per cent increase in MPs’ pension contributions has been implemented by IPSA.

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