Scottish Parliamentary Pensions Bill: Financial Memorandum
Item 4 is evidence on the financial memorandum to the Scottish Parliamentary Pensions Bill. We agreed to adopt level 2 scrutiny for the bill, so we have a written submission from the SPCB and we are taking evidence from Alasdair Morgan, who is the member in charge of the bill on behalf of the Scottish Parliamentary Pension Scheme Committee. With Alasdair is David Cullum, head of the non-Executive bills unit. I welcome you both to the committee. I believe Mr Morgan would like to make an initial statement.
Thank you, convener. It is an unusual experience for me to be at this end of the Finance Committee table. As you said, as convener of the Scottish Parliamentary Pension Scheme Committee, I am the member in charge of the bill. A draft of the bill was annexed to the committee's report, which was approved by Parliament earlier this year.
The background is that the members and office-holders pension scheme is a contributory funded scheme that is governed by a Westminster transitional order that was made in 1999. It was always envisaged that we would prepare our own rules; indeed, the Scotland Act 1998 made provision for that. In addition, since 1999, significant developments have affected pensions, and it is now essential to make certain changes, particularly to ensure continued compliance with the tax regime for registered pension schemes.
We also considered developments such as the status of civil partnerships, pension sharing on divorce, equality issues, minimum pension age changes and maximum age issues. Like other committees, we conducted a consultation exercise and took evidence from interested parties and professionals, including trustees of our sister pension schemes at Westminster and in Cardiff.
Let me turn to the costs and the financial memorandum, which is the subject of your inquiries today. The principal changes that the committee considered were all costed for us by the Government Actuary's Department—for which we are grateful—in advance of our taking decisions on them, and all the costs were based on information derived from the existing membership of the scheme. We considered all the information before taking our decisions.
Thereafter, we gave GAD an advanced version of the bill and asked it to cost the scheme relative to the existing scheme. GAD's advice was that, overall, the proposed changes to members' and office-holders' pensions by the committee could be made at no additional cost to public funds. Extra costs for certain benefits would be counterbalanced by savings as a result of other changes. As a committee, we maintained a close eye on the cost implications. For example, while members will, under the bill, be given an opportunity to accrue pension rights more quickly, they will have to fund fully the additional cost.
The second aspect of the committee's work was to consider the existing grants scheme in relation to ill-health awards, as well as grants for those members who are not returned after elections, and similar arrangements for office-holders. Again, we considered several possible permutations before settling on the proposals in the bill. It is not possible to quantify the cost implications of the new proposals exactly—election results are among the relevant variables—but as is stated in the table at paragraph 612 of the financial memorandum, the costs are unlikely to fall over the longer period, and may rise, depending on members' length of service.
At this point, let me indicate an unfortunate error in the memorandum at paragraph 594, which indicates that the cost in session 1 would have been lower if the proposals in the bill had been in force. In fact, the new proposals contain the same minimum provision that applied to all those who retired in 2003, so the figure in paragraph 594 should be exactly the same as the figure in paragraph 593, with consequential changes to paragraph 597. I apologise for the error.
Another proposed change is a move away from the SPCB managing the fund to the appointment of fund trustees. That might result in an increase in administrative costs, principally because of the new provision that allows for professional trustees to be remunerated, and also because of other changes to the trustees' remit, for example allowing them to require further medical examinations of those who receive certain benefits. Against that, there may be some savings to the fund if, for example, the results of medical examinations disclose some recovery through the new flexibility that the rules provide in relation to ill-health pensions. Other savings could accrue through an enhanced ability of the trustees to seek tenders for certain services, such as audit and actuarial reports, which is not available at present.
Another potential area of administrative increase relates to legal advice to the trustees. Given that in evidence to us the SPCB acknowledged a potential conflict of interest in carrying out its twin role as both fund manager and the body that provides the employer contributions, it is arguable that the existing arrangement for legal advice would have to alter in any event.
Costs are difficult to quantify. Members will notice that paragraph 613 of the financial memorandum acknowledges that, by giving a figure that varies by plus or minus 25 per cent. The figure in paragraph 614 for the investment costs that are paid to the scheme's fund managers relates only to new income that is invested. In addition, similar year-on-year charges are levied. The total charge each year is based on the total amount that is invested on our behalf. In the previous financial year, that amount was £115,000.
Finally, changes to the pension benefits for the First Minister and the Presiding Officer are proposed. The existing arrangements are not repeated in the bill. Based on past experience, GAD advises that that will result in a saving to the public purse of about £950,000 every four years. New employer contribution costs relating to membership of the office-holders portion of the scheme and new grant arrangements must be deducted from that figure. We estimate that the net saving to the public purse is in the order of £800,000 every four years.
Changes have to be made to the pension scheme. The bill represents a cost-neutral position and makes required legislative changes.
Thank you. I invite questions from members.
I seek clarification on two points. First, can you confirm that the total contribution of those who opt for the accrual rate of one fortieth of final salary will be 11 per cent of salary and that their contribution will not rise by 11 per cent to 16 per cent?
The contribution will increase by 5 per cent. The actuary told us that that figure would be required to fund the increase fully.
Secondly, will the resettlement grant be a maximum of 18 months' worth of salary for someone who has served 12 years or more?
No—the maximum will be 100 per cent and the minimum will be 50 per cent of salary. The figures are the same as the current minimum and maximum, but they are arrived at in a different way, so not everyone will receive the same amount. The maximum is still 100 per cent.
Okay.
My question relates to the new rules for early retirement. The financial memorandum states that those rules, when implemented, will produce savings. On what assumptions is that assertion based?
Currently, early retirement is governed by a fairly complex table. The percentage abatement of a member's future pension depends on years of service and age. That arrangement could not be allowed to stand, because it was age discriminatory, so we had to come up with a new way of dealing with early retirement. The table also allowed for early retirement down to the age of 50, which will shortly become illegal—the age must be raised to 55.
We decided to move to the fairest way of addressing the issue—actuarial reduction for every year early that a member decides to take their pension. That approach has no cost to the scheme. The actuary advised us that it would save us cash. Under the existing scheme, someone who has 15 years of service and is aged 50 can take their pension with a 61 per cent reduction. Not many people take their pension in that way; most people who retire early do so when the scheme is favourable to them. They buy into the favourable bits of the table and avoid the unfavourable bits. Because the new scheme will be totally actuarially neutral, there will be no way for members to bet against it to win some money. In layman's terms, that is why we think that we will save some cash under the new rules.
I have a question about administration costs. Paragraph 613 of the financial memorandum states that costs may fluctuate by plus or minus 25 per cent from the figure shown. I think that the statement applies to legal costs, but I am not sure whether you have accounted for remuneration of trustees and the cost of medical examinations, which are part and parcel of what we would term administration costs.
That has been allowed for in the administration costs. However, legal costs are likely to be one of the biggest variables, given that in some years no such costs might be incurred, whereas in others there might be significant costs. In any event, the sums involved might not be very large, so the percentage upwards or downwards might be significant.
David Cullum (Scottish Parliament Directorate of Clerking and Reporting):
On the other part of the question, at the moment we do not know what the costs for trustees will be. As trustees can be remunerated only if they have never been a member of the pension scheme, they will be professional people such as lawyers and bankers. We do not know what they will charge but, in any case, the figure will have to be put before Parliament alongside their nomination.
That said, given what happens at Westminster, there might be an offset in our approach. Whenever trustees meet at Westminster, they invite along their bankers, lawyers and investment analysts to provide advice at the going rate. As a result, if they are there for four hours, they charge for four hours. If the board of trustees contains legal representation, there might not be any need to bring lawyers along to meetings.
We do not really know what the ill-health costs will amount to, although we know that a medical report from a doctor, for example, costs roughly £150 to £200. That said, in the nine going on 10 years that the Parliament has been in operation, there have been only two ill-health retirements from the scheme. The changes to the scheme rules might prove to be beneficial. The scheme's funding might also be affected by the requirement for a medical examination.
So the matter can be accommodated in the percentage fluctuation that is set out in the financial memorandum.
Indeed.
Members have no further questions. Do the witnesses wish to make any final comments?
Although I hesitate to call a document of the size of the financial memorandum self-explanatory, I think that, in essence, it is.
Thank you very much for your attendance and evidence.
Meeting suspended.
On resuming—