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SP Paper 161 FI/S3/08/R4

4th Report, 2008 (Session 3)

Report on the Financial Memorandum of the Scottish Parliamentary Pensions Bill

Remit and membership

Remit:

1. The remit of the Finance Committee is to consider and report on-

(a) any report or other document laid before the Parliament by members of the Scottish Executive containing proposals for, or budgets of, public expenditure or proposals for the making of a tax-varying resolution, taking into account any report or recommendations concerning such documents made to them by any other committee with power to consider such documents or any part of them;

(b) any report made by a committee setting out proposals concerning public expenditure;

(c) Budget Bills; and

(d) any other matter relating to or affecting the expenditure of the Scottish Administration or other expenditure payable out of the Scottish Consolidated Fund.

2. The Committee may also consider and, where it sees fit, report to the Parliament on the timetable for the Stages of Budget Bills and on the handling of financial business.

3. In these Rules, "public expenditure" means expenditure of the Scottish Administration, other expenditure payable out of the Scottish Consolidated Fund and any other expenditure met out of taxes, charges and other public revenue.

(Standing Orders of the Scottish Parliament, Rule 6.6)

Membership:

Jackie Baillie (Deputy Convener)
Derek Brownlee
Joe Fitzpatrick
James Kelly
Alex Neil
Jeremy Purvis
Andrew Welsh (Convener)
David Whitton

Committee Clerking Team:

Clerk to the Committee
Susan Duffy

Senior Assistant Clerk
Mark Brough

Assistant Clerk
Allan Campbell

Committee Assistant
Stuart McLean

Report on the Financial Memorandum of the Scottish Parliamentary Pensions Bill

The Committee reports to the Parliament as follows—

Background

1. The Scottish Parliamentary Pensions Bill is a Committee Bill which was introduced on 22 September 2008 by Alasdair Morgan MSP on behalf of the Scottish Parliamentary Pension Scheme Committee (“SPPS Committee”).

2. The SPPS Committee was established to “inquire into and report with recommendations for a Committee Bill on a replacement for the Scottish Parliamentary Pension Scheme rules and the Grants to Members and Officeholders Order”.  It published its report on 29 May 2008 and this was subsequently debated by the Parliament on 26 June 2008. 

3. Under Rule 9.15.8 of Standing Orders, the Finance Committee must report directly to the Parliament on the Bill’s Financial Memorandum as a Committee bill is not referred to a lead committee and a report on the Bill’s general principles is not required. 

The Bill

4. The Scottish Parliamentary Pension Scheme for MSPs and office-holders was established in May 1999 by the Scotland Act 1998 (Transitory and Transitional Provisions) (Scottish Parliamentary Pension Scheme) Order 1999 (“the 1999 pensions order”).  This order also established a separate pension scheme for the First Minister and Presiding Officer.  In addition, The Scotland Act 1998 (Transitory and Transitional Provisions) (Grants to Members and Officeholders) Order 1999 enabled the Parliament to pay resettlement and ill-health grants.

5. There have been a number of significant legislative changes at a UK level affecting all pension schemes (eg, the transformation of the legal environment for pension schemes through the Finance Act 2004 and Pensions Act 2004) and a number of general legislative changes affecting all pension schemes (such as pension sharing on divorce, payment of partner pensions to civil partners, new simplified tax regime and relaxation of some of the existing tax limits). 

6. The SPCB agreed on 13 June 2007 that the pension scheme rules needed to be amended to take account of these changes.  The Parliament then agreed on 27 June 2007 that the SPPS Committee should be established to develop proposals for an amended scheme which would assess the legislative changes and other options for change.

7. A number of changes have been proposed to the Scottish Parliamentary Pension Scheme (“the SPPS”) to comply with UK legislative changes.  Other changes are broadly as outlined below.
General

8. The scheme will be managed by Trustees rather than the SPCB.

Pension accrual rate

9. Pension currently accrues at 1/50th of final salary for each year of reckonable service and members’ contributions are 6% of salary.  The accrual rate can be altered to 1/40th of final salary and those who opt for this rate will be required to pay an increased contribution of 11% of salary.  Additional service as a result of transfers into the pension scheme and from the purchase of added years will be calculated with reference to the higher accrual rate of 1/40th.

10. The Bill closes for future incumbents the special pension arrangements for the First Minister and Presiding Officer whereby a pension of 50% of officeholder salary is payable from the day after ceasing to hold office, irrespective of age or length of service.  For the future, pension provisions for these offices will be the same as for all other officeholders.

Early Retirement and ill-health pensions

11. Currently, a member is entitled to an early retirement pension from age 50 if they have 15 years’ service.  Under the Finance Act 2004, the minimum age at which someone can retire early will be increased to 55 from April 2010.  Therefore, the minimum age for early retirement will be increased in the SPPS but the service qualification will be abolished.  The value of early retirement pensions will be reduced by 4% for each year that the individual is retiring before reaching age 65.

12. There will be two categories of ill-health early retirement, referred to as “serious ill-health pension” and “ordinary ill-health pension”.  In the case of a serious ill-health pension, a person must have a condition which is expected to be permanent and which would prevent the individual from doing any “gainful work” now and in the future.  The reckonable service used to calculate this pension is increased by the amount of service that the individual would have completed by age 65.

13. However, for a member who is an “office-holder” (The Presiding Officer, a Deputy Presiding Officer, a Scottish Minister (which includes the First Minister, Deputy First Minister, the Lord Advocate and the Solicitor General) or junior Scottish Minister), service as an office-holder will not be enhanced.  Instead the ill-health pension will be calculated on actual service but will not be actuarially reduced because it is being paid earlier than age 65.  This pension would then be paid in addition to any MSP ill-health pension to which the member would be entitled.

14. In the case of an “ordinary ill-health pension”, the individual must have a condition which would prevent them adequately performing the duties of an MSP now and in the future.  Unlike “serious ill-health pension”, the condition does not need to be one that would prevent the individual for undertaking any work.  This pension is based on the member’s actual service (ie, it is not enhanced like the serious ill-health pension) but it is not actuarially reduced because it is being paid earlier than age 65. 

15. The Fund trustees can require an applicant for an ill-health pension or an individual whose entitlement is being reviewed to undergo a medical examination. 

Partner’s pension


16. Currently a pension paid to a member’s spouse or civil partner ceases on re-marriage or cohabitation with another person.  This will no longer be the case and such pensions will be payable for life.

Lump sum death-in-serivce

17. The death-in-service lump sum is increased from three times to four times salary.

Grants

18. In addition to the relevant pension provisions, there are three grants payable to members on leaving office.  They are:

  • a resettlement grant payable to an MSP who, at an election, either does not stand for re-election or does stand but is not re-elected.  This is not payable to an MSP who voluntarily resigns during the course of a parliamentary session.  Currently the amount paid is a minimum grant of 50% of salary with increases beyond the minimum at the rate of one month per completed year of service from 6 years up to a maximum of 12 years service.  However, the table used in calculating this grant has reference to a person’s age.  As it was believed this was discriminatory, this has been removed and calculation will now be based on solely on length of service.  The amount of the grant remains unchanged.

  • An ill-health retirement grant payable to an MSP who resigns during the parliamentary session because of ill-health before reaching age 65.  If an MSP stands down after an election for ill-health, a resettlement grant will be payable instead. The amount of any ill-health retirement grant is equal to that which would have been payable as a resettlement grant.  In the future, qualification for this grant will be linked to the grounds for awarding an ill-health retirement pension.

  • An office-holder resettlement grant.  This is payable when an office-holder (Presiding Officer, a Deputy Presiding Officer, Scottish Minister (which includes the First Minister, Deputy First Minister, the Lord Advocate and the Solicitor General) or junior Scottish Minister) ceases to hold office.  Currently eligibility for this grant depends on the office-holder not having held another office within three weeks of leaving office.  This Bill extends the period that must elapse after holding office from three weeks to three months.  For all office-holders, bar the First Minister and Presiding Officer, the grant is one-quarter of the additional annual salary that was being paid to the office-holder.  As the special arrangements for the First Minister and Presiding Officer are closed to future incumbents, those future incumbents will now be entitled to an office-holder resettlement grant of a minimum of 50% of the additional annual salary that was being paid with increases beyond the minimum at the rate of one month per completed year of service in that post from 7 years up to a maximum of 12 years. 

Costs

19. The SPPS is a funded scheme and therefore, pension benefits under the Scheme are paid for from the contributions (both SPCB and member) which are paid into the pension fund.  The separate scheme for the First Minister and Presiding Officer which will be closed to future incumbents, was paid directly from the Scottish Consolidated Fund.  The resettlement grants are paid for by the SPCB from its annual budget.

20. In common with all other pension schemes, the SPPS is valued by an actuary every three years and as part of this valuation, the actuary recommends the rate of contributions that needs to be paid by the SPCB.  In 2005, that rate of contribution was set at 20.3% (with member contributions in addition of 6%).  The Government Actuary’s Department (GAD) has costed the changes to the SPPS being proposed by this Bill and concluded that “the expected cost of the SPPS under the new rules will not be materially different from the cost of the SPPS assessed under the existing rules.”1 

Costs on the Scottish Parliament

21. The Financial Memorandum states that the principal changes to the SPPS have been costed and are shown in the following table2:

Ill-health benefits

Anticipated saving dependent on the numbers involved of around 0.3%.

Surviving partners Anticipated increase in costs of between 0.8% and 1.2%.
Lump sum death
benefits
Increased cost if re-insurance continues from 0.5% to 0.67%.
Changes to early retirement provision Early retirement will in future be cost neutral on the fund.  The changes made are expected to produce savings equivalent to the additional costs shown above for the changes to surviving partners and children of between 0.8% and 1.2%. 

22. The Financial Memorandum states that all changes are included in the overall valuation of the scheme which currently costs the SPCB £1.583 million in contributions.  The next scheme valuation is due this year.

23. The SPCB has to fund the resettlement, ill-health and office-holders grants from its annual budget.  In addition, the SPCB will in future have to fund the new First Minister/Presiding Officer resettlement grant. The table below shows some potential costs with margins of uncertainty

Area of cost Cost Margin of uncertainty
Schedule 2 Grants Resettlement Variable depending upon uptake.  2007 figure was £1.11m Difficult to project forward, unlikely to fall over the longer period, may rise depending upon length of service of members.
Ill-health Demand led payments, three in nine years to date. Dependent on numbers applying and their circumstances.
Officeholder resettlement £149,720.50 every fourth year. This figure should be a maximum amount after an election.  Other years will be dependent on numbers qualifying which depends upon ministerial reshuffles
FM/PO resettlement grant £59,504 every four years. Will vary as salary varies.  Also as posts become vacant.

24. GAD has advised that the full additional cost of members transferring to the new accrual rate of 1/40th of salary will be met by the increase in member contribution from 6% to 11% of salary.

Costs on the Pension Fund

25. Administration costs in relation to the SPPS are chargeable against the fund.  As the Bill would transfer the running of the Scheme from the SPCB to Fund Trustees, then there could be an increase in costs.  To avoid the perception of a conflict of interest, the Fund Trustees will require to take separate legal advice from the SPCB.  Trustees’ expenses and any remuneration will need to be paid by the Fund and there may be other new costs eg, indemnity insurance and medical examination of pensioners in receipt of ill-health pensions.  The Financial Memorandum states (paragraph 613) that “overall costs [are] difficult to quantify…The actual costs may fluctuate from the figure shown by 25% plus or minus.”  However, the only figures which are given are comparative costs of legal advice for the UK Parliament Pension Scheme and the National Assembly for Wales Scheme (£40,000 and £25,000 per annum respectively).

Costs on the Scottish Consolidated Fund

26. The First Minister/Presiding Officer pensions are currently paid from the Scottish Consolidated Fund.  As this pension scheme will be closed to future incumbents, the FM estimates that the Scottish Consolidated Fund will save £950,000 every four years.  However, the cost of First Minister/Presiding Officer pensions in the future will be borne by the SPPS (and therefore by the SPCB as part of its contribution to the Scheme) and the SPCB will pay any resettlement grant that is due.

Costs on the Scottish Administration

27. It is stated there are nil costs on the Scottish Administration with the possibility of minor administrative savings because the SCPB will pay pensions due to First Ministers in the future.

Costs to others

28. Members of the SPPS who do not opt out of the increased accrual rate will have to pay a 5% increase in their contributions.

Summary of evidence

29. The Committee received a written submission from the SPCB, which is attached as annexe A to this report, and took evidence from Alasdair Morgan at its meeting on 7 October 2008.  The Official Report of the evidence session can be found on the Parliament’s website, at:
http://www.scottish.parliament.uk/s3/committees/finance/or-08/fi08-2301.htm

30. In evidence, Alasdair Morgan indicated that there was an error in the Financial Memorandum.  In paragraph 594, it is stated that the cost of the resettlement grant at the end of Session 1 would have been £417,976 had the new provisions proposed by the Bill been in place.  In fact the cost would have been exactly the same as the actual cost at end of Session 1 (£626,964) as the new proposals contain the same minimum provision that applied to those members who retired in 2003.  Therefore the sentence in paragraph 597 which states “using the provisions in the Bill produces a ‘saving’ at the end of the first Session of £208,988”3 is incorrect as is the sentence which says “had the new rules been in place from 1999, there would have been an overall reduction in the amount of grant paid of £138,200”4.  This should in fact read “there would have been an overall increase….of £70,788”.

31. Alasdair Morgan also confirmed that the figure in paragraph 614 of the Financial Memorandum relating to investment costs paid to the scheme’s fund manager relates only to new income that is invested and that similar year-on-year charges are levied in addition.  The total charge each year is based on the total amount that is invested and that in the previous financial year, this amounted to £115,000.

32. The Financial Memorandum states that the new rules on early retirement will produce savings and the member in charge was asked what assumptions underpinned that statement.  Alasdair Morgan confirmed that the age at which early retirement could be taken had to be raised to 55 and that the calculation of ‘pension abatement’ (ie, application of an actuarial reduction to the amount of the pension) was dependent on length of service and age which was discriminatory and therefore, also had to be changed.  Early retirement pensions will therefore be actuarially reduced for each year that the pension is being taken early and “that approach has no cost to the scheme.  The actuary advised us that it would save us cash.”5

33. The member in charge was also asked whether the statement in paragraph 613 of the Financial Memorandum that administrative costs could fluctuate by plus or minus 25 per cent included remuneration of trustees and medical examinations.  It was confirmed that the cost of trustee remuneration was unknown but that “the figure will have to be put before Parliament alongside their nomination.”6

34. It was also stated that while a medical report can cost approximately £150-£200, the potential cost of medical examinations is unknown as it is entirely dependent on the number of people who might apply for ill-health retirement.  However, it was confirmed that the issue could be accommodated in the 25 per cent fluctuation in the Financial Memorandum.

35. Alasdair Morgan confirmed that GAD had been given an advance version of the Bill and that their advice was that overall the proposed changes could be made at no additional cost to public funds.  Given these assurances that the changes will be cost neutral, the Committee is content with the Financial Memorandum.

Annexe A – written evidence

Written Submission from the SPCB

Thank you for your letter to Paul Grice relating to the Finance Committee’s consideration of the Financial Memorandum produced to accompany the Scottish Parliamentary Pensions Bill.

Attached is a response to the questionnaire which accompanied that letter.  If you have any further questions please let me know.

Questionnaire

This questionnaire is being sent to those organisations that have an interest in, or which may be affected by, the Financial Memorandum for the Scottish Parliamentary Pensions Bill.  In addition to the questions below, please add any other comments you may have which would assist the Committee’s scrutiny.   

Consultation
1. Did you take part in the consultation exercise for the Bill, if applicable, and if so did you comment on the financial assumptions made?  

No. However, Mike Pringle MSP and Ian Leitch, Director of Resources & Governance attended the Pensions Bill Committee on 25/3/08 and gave evidence. 

2. Do you believe your comments on the financial assumptions have been accurately reflected in the Financial Memorandum?

Yes

3. Did you have sufficient time to contribute to the consultation exercise? 

Yes

Costs
4. If the Bill has any financial implications for your organisation, do you believe that these have been accurately reflected in the Financial Memorandum?  If not, please provide details.  

Yes

5. Are you content that your organisation can meet the financial costs associated with the Bill?  If not, how do you think these costs should be met?  

Yes. The SPCB will include the agreed funding costs for the Members’ Pension Scheme in its budget submission, as at present.

6. Does the Financial Memorandum accurately reflect the margins of uncertainty associated with the estimates and the timescales over which such costs would be expected to arise?

Yes

Wider Issues
7. If the Bill is part of a wider policy initiative, do you believe that these associated costs are accurately reflected in the Financial Memorandum?  

N/A

8. Do you believe that there may be future costs associated with the Bill, for example through subordinate legislation or more developed guidance?  If so, is it possible to quantify these costs? 

No

SPCB
October 2008


Footnotes:

1 Scottish Parliamentary Pension Scheme Bill, Financial Memorandum paragraph 573

2Scottish Parliamentary Pension Scheme Bill, Financial Memorandum paragraph 572

3 Scottish Parliamentary Pensions Bill, Financial Memorandum

4Scottish Parliamentary Pensions Bill, Financial Memorandum

5Scottish Parliament Finance Committee, Official Report, 7 October 2008, Col 735

6 Scottish Parliament Finance Committee, Official Report, 7 October 2008, Col 735