By Pamela Atherton

As the nation frets about MPs’ expenses, the real free ride our MPs are getting is their pensions.

Remarkably little comment has been made about the super generosity of the MPs’ pension scheme, but then bath plugs, duckhouses and moats make for more entertaining copy than desperately dull pensions.

We are told that the annual cost to UK taxpayers of underwriting an MP’s pension is £13,000, but the real cost is £30,000, according to pensions economist, John Ralfe. So the £17,000 difference is yet another hidden perk that MPs have managed to keep largely under wraps until now.

In brief, an MP can expect roughly £1,500 worth of pension for every year they are an MP, compared to only £1,000 for each year worked by public sector workers earning £60,000. This means an MP has an index linked pension of £30,000 after just 20 years in Parliament.

So will anything be done about MPs’ pensions, once the furore over their expenses dies down?

Possibly, says pensions expert, Ros Altmann. After all, David Cameron has said he wants MPs to move to a defined contribution scheme, whereby MPs would receive a pension based on the level of their contributions, investment returns and prevailing annuity rates at the time they retire – just like the rest of us really.

Ms Altmann says: “If policymakers don’t face the same issues as ordinary people, how can they make coherent and fair pensions policy?”

Meanwhile, the costs associated with public sector pensions continue to soar as increasing longevity has forced a number of the public sector scehems to update their assumptions about how long their employees will live.

The NHS scheme now assumes that today’s employees will live beyond 90 and draw their pension for more than 30 years, costing the taxpayer an extra £12.5bn. Similarly, armed forces officers are expected to live until age 90.

Civil servants, the most feather bedded of the lot, and who contribute nothing to their own pensions (they only have to make contributions for spouses’ pensions), are now expected to spend a third of their life in retirement.

Clearly, a pension scheme which has to pay out for 30 years or more to former employees who have worked for 40 years is unsustainable. To date, reform to public sector pensions has consisted of mere tinkering at the edges, such an increase in the retirement age from 60 to 65 (but only for new recruits) and cost sharing mechanismss which will cap taxpayers’ costs if life expectancy continues to improve.

Given the furore over MPs’ expenses and the parlous state of the public finances, now would be a good time to introduce root and branch reform to the public sector in general and MPs’ pensions in particular.

Whether our elected representatives have the guts to do it, remains to be seem.

To find out more about pensions, take a look at the Defaqto guides:
http://www.defaqto.com/guides/pensions/saving-for-retirement
http://www.defaqto.com/guides/pensions/pension-rules

Michael Baxter is writing a book to be published in September

© Investment & Business News 2013