The Scottish Parliament - Scottish Parliamentary Pension Scheme Committee report

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.

Membership:

David McLetchie
Alasdair Morgan (Convener)
Hugh O'Donnell
Peter Peacock (Deputy Convener)

Committee Clerking Team:

Clerk to the Committee
David Cullum

Senior Assistant Clerks
Ruth Cooper
Derek Stein

Support Manager
Stuart Todd

Scottish Parliamentary Pension Scheme

The Committee reports to the Parliament as follows—

EXECUTIVE SUMMARY

(i) This section of the report sets out the Committee’s recommendations. The reasons for the recommendations are provided in the detailed sections of the report.

(ii) Since 1999 there have been a number of significant legislative changes at a UK level which have affected all pension schemes. The Finance Act 2004 and the Pensions Act 2004 transformed the tax and legal environment in which pensions schemes operate in the UK, necessitating changes to the pension scheme rules.

(iii) There have also been a number of other general legislative changes since 1999 which affect occupational pension schemes, such as the Welfare Reform and Pensions Act 1999 which introduced pension sharing on divorce and the Civil Partnership Act 2004 which established the new status of a civil partner.

(iv) The Parliament agreed on 27 June 2007 that, as a result of these legislative changes, a Scottish Parliamentary Pension Scheme Committee should be established to develop proposals for new scheme rules for consideration by the Parliament.

(v) Changes proposed to members’ and officeholders’ pensions by the Committee are made at no additional cost to public funds. Members are given an opportunity to accrue pension rights more quickly but they must fully fund the additional cost.

(vi) The Committee’s recommendations for inclusion in a Committee Bill to replace the Scottish Parliamentary Pension Scheme rules and the Grants to Members and Officeholders Order are as follows–

Trustees and scheme administration

Recommendation 1. Trustees should be appointed to manage and administer the pension scheme. [paragraph 52]

Transfer of assets and liabilities
Recommendation 2. Theassets and liabilities of the scheme be transferred from the SPCB to the trustees subject to discussions on liabilities as outlined in paragraph 53. [paragraph 59]

Trustees
Recommendation 3. An appropriate number of trustees would be a maximum of six. [paragraph 62]

Recommendation 4. All trustees are appointed by the Parliament nominated in a motion put forward by the SPCB. [paragraph 63]

Recommendation 5. Trustees who are not scheme members may be remunerated. [paragraph 64]

Recommendation 6. Trustees may resign by notice to the other trustees and to the Presiding Officer. [paragraph 65]

Staff and professional advisers
Recommendation 7. Provision is made for the trustees to employ staff and advisers. [paragraph 67]

Future role of SPCB

Recommendation 8. The SPCB should set the “employer” contribution rate and pay the same from its budget but that in so doing consideration must be given to the recommendations of the scheme actuary and the views of the trustees. [paragraph 71]

Recommendation 9. Provision be made for future rule amendments to be made by resolution of the Parliament. [paragraph 73]

Scheme membership

Recommendation 10. Participating membership of the pension scheme no longer be available to those age 75 and over. [paragraph 76]

Recommendation 11. Non-salaried posts be removed from the pension rules. [paragraph 78]

Officeholders (including the Law Officers)

Recommendation 12. The benefits of non-MSP officeholders should be equalised with those of MSP members to remove the extent that the current rules treat non-MSP officeholders less favourably. [paragraph 80]

Special pension arrangements for the First Minister and Presiding Officer

Recommendation 13. The existing arrangements for the First Minister and Presiding Officer should be closed to any new incumbents and that the First Minister and Presiding Officer pension provisions should be the same as all other officeholders under the new scheme rules. [paragraph 89]

Pension entitlement

Recommendation 14. Members be given the option of accruing benefits in future at either 1/40th or 1/50th per year and that the additional cost of 1/40th accrual be fully met by an increase in the contribution rate of 5% to 11% applying to those members choosing to opt for 1/40th. [paragraph 94]

Recommendation 15. The current earnings cap be removed and that the scheme maximum pension be 2/3rds final member’s salary without any deduction for retained benefits. [paragraph 98]

Recommendation 16. The restriction preventing a serving MSP or officeholder from receiving their pension or lump sum benefits be retained, with the exception of those approaching 75 about whom we make later recommendations. [paragraph 99]

Commutation

Recommendation 17. The maximum commutation limit for the scheme should be 25% of pension as permitted by the Finance Act 2004. [paragraph 103]

Recommendation 18. Scheme participants should be able to commute part of their pension into a tax-free lump sum immediately before age 75 whilst still serving as an MSP or officeholder or both. [paragraph 105]

Recommendation 19. Provision is made to commute a trivial pension and to pay a tax-free lump sum. [paragraph 107]

Early retirement

Age discrimination
Recommendation 20. The current calculation table should not be included in the proposed bill. [paragraph 112]

Qualifying period
Recommendation 21. The qualifying period of 15 years for early retirement should be removed and early retirement should be made available for all ex-members aged 55 and over. [paragraph 116]

Update and costs
Recommendation 22. Members who are no longer serving MSPs or officeholders should be able to retire from age 55, subject to an actuarially neutral reduction of 4% to their pension for each year below age 65. [paragraph 127]

Preserving existing rights
Recommendation 23. Any greater rights to early retirement under the current rules should be preserved for existing members but only for service up to the end of the current Session. [paragraph 133]

Ill-health provision

Recommendation 24. The scheme adopts a two tier approach to ill-health pensions for serving members and officeholders, as detailed, and that periodic reviews should follow all ill-health pension awards. [paragraph 142]

Recommendation 25. Provision be made to allow those serving members and officeholders with a terminal illness who are not expected to survive for a year to be able to commute their pension entitlement for a lump sum. Survivor pensions will continue to be available following the death of such members. [paragraph 144]

Spouses, partners and children

Spouses and civil partners
Recommendation 26. Spouses’ and civil partners’ pensions should continue for life. [paragraph 158]

Recommendation 27. The discretion to withdraw all or part of a surviving spouse’s pension should not be included in the new rules and that no provision should be made to reduce a surviving spouse’s or civil partner’s pension where the participating member is much older than their partner. [paragraph 163]

Unmarried partners
Recommendation 28. Provision for unmarried partners’ pensions should be made in the new scheme. [paragraph 168]

Children
Recommendation 29. The age limit for a child’s pension should be increased from under 22 to under 23 and that the age limit of 22 for paying a pension to a surviving child who was dependant on the deceased due to physical or mental impairment should be removed. [paragraph 172]

Added years

Recommendation 30. The scheme should continue to allow members to purchase added years and that there be no age restriction beyond conformity with revenue limits of age 75. [paragraph 180]

Recommendation 31. The maximum member’s contribution should be increased to 20% of salary (mirroring the situation at the UK Parliament and the National Assembly for Wales). [paragraph 183]

Pension sharing

Recommendation 32. The scheme allows recipients of a pension credit to be given the choice of an external transfer or membership of the scheme. [paragraph 186]

Other areas

Five year guarantee
Recommendation 33. The rules should continue to allow payment of the current five year guaranteed amounts. [paragraph 192]

Lump Sum Death Benefits
Recommendation 34. The death in service lump sum benefit be four times salary. [paragraph 196]

Short Service Refunds
Recommendation 35. A refund of contributions should only be available within three months of joining the scheme. [paragraph 199]

AVCs
Recommendation 36. No new contracts for AVCs are made on behalf of scheme members. [paragraph 223]

Grants

Resettlement grants
Recommendation 37. The amount of resettlement grant payable be maintained at the equivalent to six months’ salary for each MSP up to the current maximum entitlement; the amount payable to increase from the minimum by one month for each full year of service as an MSP beyond six years. [paragraph 241]

Ill-health grants
Recommendation 38. In future the qualification for the grant be linked to the grounds for an award of an ill-health retirement pension. The amount payable as an ill-health retirement grant would continue to be equivalent to the resettlement grant. [paragraph 244]

Officeholders
Recommendation 39. The period which must elapse after holding any of the officeholder posts before the officeholder grant is payable should be extended to three months. [paragraph 246]

Recommendation 40. The offices of Leader of a Non-Executive Party and the Chief Business Manager of a registered political party with at least 10 MSPs should not be included in the replacement for the Order. [paragraph 247]

Recommendation 41. An officeholder severance grant should be payable to a First Minister and a Presiding Officer who would not qualify for the previous special pension arrangements for these offices. [paragraph 248]

Conclusions and recommendations for a Committee Bill

Recommendation 42. The Parliament agrees to this proposal for a Committee bill as set out in the annexed draft bill under Rule 9.15 of Standing Orders. [paragraph 262]

INTRODUCTION

Proposal

1. The purpose of this report is to make a proposal for a Committee bill on a replacement for the Scottish Parliamentary Pension Scheme rules and the Grants to Members and Officeholders Order (“Grants Order”) under Rule 9.15 of Standing Orders.

Mechanism for changing scheme rules

2. Under section 81(5) of the Scotland Act 1998 provision for the payment of pensions is either by resolution or an Act of the Scottish Parliament. Replacing the current pension schemes by resolution is not possible given some of the changes required and the legal status of the schemes established by the Transitional Order¹. Primary legislation is therefore required to update the current rules and the Parliament’s Committee bill procedure seems the most appropriate route.

Establishment of the Committee

3. The Scottish Parliamentary Corporate Body (“SPCB”) agreed on 13 June 2007 that as a result of UK legislative changes it was necessary to amend the scheme rules. The SPCB asked the Parliamentary Bureau to consider the matter and it proposed that a bill Committee be established to develop proposals for a Committee bill for consideration by the Parliament. The Parliamentary Bureau recommendation and the Committee remit were agreed by the Parliament on 27 June 2007 and revised on 28 November 2007.

Committee bill procedure

4. A Committee may make a proposal for a bill in the form of a report to the Parliament. The report must be clear that a Committee bill is being proposed, why the bill is necessary and it may be accompanied by a draft bill.

If the Parliament agrees to the proposal a bill can be introduced by the Convener of the Committee who becomes the “member in charge”. The bill is referred to the Finance Committee for a report on the financial memorandum and to the Subordinate Legislation Committee if appropriate. Once those committees have reported, a Stage 1 debate takes place. At Stage 2 the bill is referred to a lead committee in the same way as other bills. No members of the original committee may be members of the lead committee. Stage 3 is the same as for other public bills.

BACKGROUND

Establishment of the schemes

6. In 1998 the Senior Salaries Review Board (“SSRB”) was asked to make recommendations on appropriate pension arrangements for MSPs and officeholders.²

7. Its priority was to arrive at arrangements which would conform to current good practice and take account of the uncertainties of parliamentary life. The SSRB concluded that the Parliamentary Contributory Pension Scheme (“PCPS”), the occupational pension scheme for the UK Parliament MPs and officeholders, should be taken as the model scheme. Based on this recommendation, a scheme for MSPs and officeholders (“MSP and officeholder pension scheme”) was established on 6 May 1999 by a UK Parliament Transitional Order under the Scotland Act³ (“the Transitional Order”). The Transitional Order also establishes the separate pension scheme for the First Minister and Presiding Officer (“FM/PO scheme”), which was based on the arrangements made by the UK Parliament for the Prime Minister, Speaker and Lord Chancellor.

8. The SPCB is responsible for the management and administration of the MSP and officeholder pension scheme.

9. Throughout this report references to the “pension scheme” are, unless the context requires otherwise, to the MSP and officeholder pension scheme.

Funding of the scheme

10. Unlike some statutory public service schemes but similar to other parliamentary and local government schemes, the Scottish Parliamentary Pension Scheme (“SPPS”) is a funded scheme. Pension benefits payable are therefore fully paid from the contributions paid into the scheme fund. Pensions under the FM/PO scheme are paid directly from the Scottish Consolidated Fund (“SCF”).

11. The pension scheme is an occupational pension scheme. MSPs and officeholders pay contributions at the rate of 6% of their annual salary. The Government Actuary’s Department (“GAD”) is required by the Transitional Order to report on the financial position of the Scottish Parliamentary Contributory Pension Fund (“SPCPF”) every three years, and the SPCB follows its recommendations on the level of contributions to be met from the SCF. An annual contribution rate is recommended by GAD and is currently 20.3% of salary which is also paid into the SPCPF by the SPCB.

Grants to Members and officeholders

12. The SSRB report in November 1998 also covered resettlement grants, ill-health retirement grants and severance arrangements and recommended the Scottish Parliament have similar provision to those at the UK Parliament. The current Grants Order follows those recommendations and was also made as an Order under the Scotland Act 1998.⁴

LEGISLATIVE CHANGES

13. Since 1999 there have been a number of significant legislative changes at a UK level which have affected all pension schemes. The Finance Act 2004 and the Pensions Act 2004 transformed the legal environment in which pension schemes operate in the UK, necessitating changes to the pension scheme rules.

14. There have been a number of general legislative changes which affect occupational pension schemes⁵ and the major ones can be summarised as follows—

the Welfare Reform and Pensions Act 1999 which introduced pension sharing on divorce, where ex-spouses can get membership of a scheme in their own right or a transfer value from the scheme;
the new status of civil partner introduced by the Civil Partnership Act 2004;
amendments to pension law made by the Pensions Act 2004; and
new taxation rules introduced from 6 April 2006 under the Finance Act 2004.

15. The Finance Act 2004 sets out a new, simplified tax regime for registered pension schemes. Historically, tax approved pension schemes have had to comply with tax rules in order to benefit from tax advantages, for example an exemption from tax on the pension fund’s investment income and from capital gains; tax relief on member and employer contributions, and tax-free lump sums on retirement (although pensions in payment are subject to income tax).

16. The Finance Act 2004 replaced the eight then existing taxation regimes with a single set of rules, introduced on 6 April 2006. While there was a relaxation of some of the tax limits previously imposed, the general principle remains that for a scheme to benefit from the preferential tax treatment it should remain within the tax rules⁶.

17. The Transitional Order must be read subject to the general transitional arrangements made under the Finance Act 2004. These arrangements are expected to expire in April 2011 and, if not replaced, would create uncertainty about how parts of the Transitional Order comply with tax rules.

COMMITTEE APPROACH

18. The Committee carefully considered the position of elected Members and, in particular, the lack of long-term job security flowing from the uncertainty of re-election. The Committee is aware that concern has been expressed about Members’ prospects for re-employment as a result of losing a seat at the election, (sometimes due to a lower position on a regional list), party de-selection, boundary changes or not standing for re-election. Although there are exceptions, the period of service of an elected politician is relatively short; in most cases, it is not a lifetime career. Absence from the job market for a period of time and changing professional skills can make for a difficult transition on leaving Parliament.

19. The Committee accordingly had to bear in mind the characteristic uncertainty of long-term employment and the associated earnings vulnerability of elected Members. This view was reinforced by Sir John Butterfill MP, where he referred, in oral evidence to “the uncertainties that exist in the profession.”⁷

20. From the outset the Committee has been clear that its overriding aim is to provide a modern equality-proofed range of benefits both now and in the future. A Scottish Parliament pension scheme must strike an equitable and proportionate balance between the level of benefits provided to members and the actual cost of their provision to public funds.

21. In taking forward the remit, the Committee was keen to hear from all existing scheme members including former MSPs. The consultation paper⁸ invited comments on the principal matters identified for consideration. Finally the Committee has benefited from advice and evidence from a range of pension experts in particular GAD, Scottish Public Pensions Agency (“SPPA”) and the chairmen of the pension trustees at the UK Parliament and the National Assembly for Wales. The Committee is indebted to all who have provided comment and advice.

22. The report covers the evidence the Committee has received and includes its recommendations for the principal changes in the rules of the pension scheme. Attached at Annexe B is the draft bill containing proposed new rules for the pension scheme.

CONSULTATION

23. On 17 October 2007 the Committee published a consultation document and invited comment from MSPs, former MSPs and interested outside bodies on issues to be considered when developing proposals for a replacement for the SPPS and Grants Order. To make it easier for respondents the consultation response form was set out in questionnaire style with background information for each issue. The consultation paper was also made available on the Scottish Parliament website. The closing date for responses was 17 January 2008.

24. The consultation paper sought views on the following areas.

Mandatory changes

25. These are changes required as a result of legislative changes. Flowing from these are a number of options linked to the principal required change.

Pension sharing on divorce
26. The Welfare Reform and Pensions Act 1999 gave powers to courts to split pension benefits on divorce or annulment proceedings. These powers were extended by the Civil Partnership Act 2004 to the dissolution of civil partnerships. Presently, the SPPS has no rules covering pension sharing but would have to comply with any pension sharing order.

Age 75
27. As a result of the taxation changes in the Finance Act 2004, from 6 April 2006 scheme members are prevented on reaching age 75 from receiving a tax-free lump sum on retiral, receiving tax relief on contributions or payment of a tax-free lump sum after death in service.

Minimum pension age 55
28. The new tax legislation also increased the minimum age for taking early retirement benefits from 50 to 55.

Discretionary changes

29. The Finance Act 2004 allows for discretionary changes within the tax rules. Discretionary changes include areas where the new taxation regime allows more flexibility in areas such as—

Contribution limits
Maximum pension available
Amount of tax-free lump sum on retirement
Amount of death in service gratuity
Children’s pension provision
Additional voluntary contributions and added years
Trivial commutation of pension benefits
Ill-health provisions.

30. Each area is considered later in the report.

Age and other equality issues

Early retirement
31. The Committee examined the age equality issues around the early retirement provisions in the pension scheme. Similar rules in other schemes have been judged to be prima facie discriminatory. In particular, the Committee examined the rules which, by combining age and service, in some instances gives an older person higher benefits than a younger person with more service. Similar issues arise within the rules of the Grants Order.

Refund of contributions
32. In defined circumstances contributions paid by members may be refunded. The Committee considered the age restriction in the current rules to receive a refund which is 65 for men and 60 for women.

Loss of surviving spouse pension on re-marriage or cohabitation
33. The Civil Partnership Act 2004 introduced the new status of civil partner when same sex couples form a legal civil partnership. Occupational pension schemes are required to make provision for civil partners to receive the same pension benefits as spouses. The SPPS rules currently remove the pension for a surviving spouse or civil partner where that person subsequently marries, cohabits or enters into a civil partnership. Consideration is given to whether the pensioner should continue to be penalised for such future relationships.

Unmarried partners
34. Paragraph 15(3) of Schedule 28 to the Finance Act 2004 gives discretion to make provision for unmarried partners’ pensions. The Committee noted that both the UK Parliament and the National Assembly for Wales had already made provision for this along with a number of other public sector pension schemes.

Other possible changes

Scheme administration
35. Currently the SPCB is responsible for the management and administration of the pension scheme. The SPCB operates as both “scheme sponsor” and “manager of the fund”. The Committee sought views on whether a separate body of trustees dedicated to the management of the SPCPF should be appointed.

Accrual rate
36. The Committee noted that both the UK Parliament and the National Assembly for Wales members have a choice of pension accrual of either 1/50th or 1/40th whereas the SPPS has one accrual rate of 1/50th. Views on whether a similar option should be available to members of the scheme and how it should be funded were sought.

37. Other areas for possible change identified were—

Maximum salary applying for pension provision
Officeholders pension arrangement
Lord Advocate and the Solicitor General for Scotland pension provision
First Minister and Presiding Officer pension provision
Mechanism to make future scheme rule changes.

38. Each area is considered later in the report.

Grants Order

39. The consultation also sought views on each aspect of the current Grants Order.

Responses received

40. A total of 16 responses were received which are reproduced in Volume 2.

EVIDENCE TAKING

41. To encourage further discussion and comment on the consultation paper, the Committee held a lunchtime drop-in session on 12 December 2007 for MSPs at which background information on the pension scheme rules was explained.

42. In addition to its consultation paper and the lunchtime drop-in session the Committee took oral evidence from SPPA, Chairman of the Trustees of the Westminster Parliamentary Contributory Pension Fund, Chairman of the Trustees of the National Assembly for Wales Pension Scheme, GAD and SPCB.

43. The evidence taking meetings were held on 26 February, 11 March and 25 March 2008.

44. Extracts from the minutes of the meetings at which the proposals for a Bill were considered are attached at Annexe A. There is an electronic link from the contents page to the oral evidence from these witnesses.

Cost

45. Throughout its initial work the Committee has been conscious that changes to the Transitional Order will affect funding arrangements for the SPCPF. In order to assist consideration of changes where they might prove significant, where it is possible to cost the effect on the SPCPF, this is provided. These costs have been provided by GAD.

Draft Bill

46. At its meetings throughout this process, the Committee has taken the opportunity to evaluate both oral and written evidence presented to it. The following section of the report contains the outcome of those deliberations and sets out details of the Committee’s proposals. These should be read in conjunction with the draft Scottish Parliamentary Pension Bill which is contained in Annexe B of this report. That draft will form the basis of any Bill introduced into Parliament in the event that the proposal for a Committee Bill is agreed. Changes to that draft prior to introduction can only be minor or technical with a view to improving the drafting.

TRUSTEES AND SCHEME ADMINISTRATION

Trustees

47. The consultation paper at Part 6 sets out the current administrative arrangements for management of the scheme. Under Part B of the Transitional Order, the SPCB is responsible for the management and administration of the SPCPF. Other UK Parliamentary and Assembly schemes have a separate body dedicated to the management of their members’ pension schemes, which avoids the perception of any conflict of interest and allows trustees dedicated time to consider pensions matters.

48. As the SPCB operates both in the “employer”⁹ role providing “employer” or “scheme sponsor” contributions and as administrator of the SPCPF, the Committee considered whether changes to the rules of the scheme should be proposed, avoiding the need for the SPCB to consider the differing financial implications for each side. Most who responded to the question agreed that a separate board of trustees should be appointed.

49. The Committee took evidence from the chairmen of the pension trustees both at the UK Parliament and in the National Assembly for Wales, Mike Pringle MSP (the pension portfolio member of the SPCB), and also received some helpful evidence on the issue from GAD. Sir John Butterfill MP told us that the main duty of the trustees at Westminster—

“is a fiduciary duty to protect the interests of our beneficiaries. We have a secondary duty to consult the scheme sponsor—which, in our case, is the Treasury—and take account of its concerns. In exercising those duties, we have to manage the finances as well as they can be managed, and ensure that the scheme is administered properly.”¹⁰

50. This is analogous with the role of the SPCB which is—

“responsible for the proper running of the scheme, including funding and collection of contributions; investment of assets; payment of benefits; administration of the scheme; acting in the best interests of scheme members as a whole; ensuring that members' benefits are secure; and complying with overriding pensions legislation.”¹¹

51. In evidence Mike Pringle MSP, on behalf of the SPCB, accepted that—

“There is a potential conflict of interests—or perhaps a perception of such a conflict—for the SPCB, in that it is responsible for funding the pension scheme through the provision of employer pension contributions while it also has a fiduciary duty to act in the best interests of scheme members as a whole. Appointing a board of trustees to act in the interests of scheme members could remove that potential conflict of interests.”¹²

52. The Committee agrees that separation of the roles between the “employer/scheme sponsor” function and the scheme manager function would remove any perception of a conflict of interest and considers that separation would be in the best interests of scheme members. The Committee recommends that trustees should be appointed to manage and administer the pension scheme.

Transfer of assets and liabilities

53. The Committee has considered whether there should be a clean break of responsibilities and liabilities at such time as trustees are appointed. On taking office the trustees should assume responsibility for all existing assets and these should be transferred to the trustees. The Committee is grateful to the SPCB for its acknowledgement that consideration needs to be given to the position of any scheme responsibilities and liabilities when the trustees take up office.¹³

54. Trustees will require to take on responsibility for payment of pensions but the Committee is not convinced it is appropriate for them to assume responsibility for any current funding deficits. The Committee heard evidence from a number of witnesses in relation to scheme funding positions and, in particular, cost sharing provisions and noted that no such provisions are in place at present in the other parliamentary and assembly pension schemes. The Committee also notes the acceptance by SSRB and the UK Government that liability for existing funding deficits at Westminster should be excluded from future cost sharing arrangements.¹⁴

55. The Committee recognises that if the cost of the scheme to the “employer/scheme sponsor” rises materially then consideration may require to be given to sharing the additional costs involved, or that benefits might require to be reduced. The scheme is not currently in such a position and, while it has been suggested by the SSRB, there are currently no proposals before the UK Parliament or the National Assembly for Wales in relation to cost sharing. The Committee considered that this is a matter for future consideration, in the first instance between the “employer/scheme sponsor” and the scheme trustees.

56. Cost sharing and other possible funding approaches could be discussed under the future funding arrangements which are set out below (at Setting the “employer contribution rate”) involving the SPCB as the scheme sponsor. The Committee do, however, suggest that if cost sharing is to be introduced in the future, in line with the approach recommended by the SSRB to the UK Parliament, any existing scheme funding deficits identified prior to its introduction should be excluded from the cost sharing arrangements. Such deficits would represent historic costs under earlier funding arrangements and it may not be equitable to place these past burdens on current contributing members. While this would be a matter for future funding negotiations between the scheme sponsor and the trustees, the Committee considers that this principle should be borne in mind in any negotiations.

57. As regards responsibility for any current funding deficits when the trustees take over, the Committee notes that there is a triennial valuation of the Fund as at 6 April 2008 currently being conducted in terms of the existing scheme rules. The Committee expects that valuation to be concluded in time for the SPCB to set a contribution rate in the current financial year, 2008/09. If there is any deficit in that valuation, it is expected that the contribution rate set under the existing rules would include an element designed to pay off that deficit. If the trustees can be expected to assume responsibility some time in 2009, then they should have comfort that the existing contribution rate set for 2008/09 would be expected to meet the scheme funding obligations as identified in 2008.

58. If, after the trustees take over, they consider that the contribution rate is not sufficient to meet the scheme funding obligations, they can instruct another valuation at any time and are entitled to advise the SPCB that the rate of contributions should be increased. Ultimately, however, it is for the SPCB as scheme sponsor to determine at what rate the contributions are set.

59. The Committee recommends that the assets and liabilities of the scheme be transferred from the SPCB to the trustees subject to discussions on liabilities, as outlined in paragraph 53.

Numbers, nomination, appointment and resignation of trustees

60. The Committee heard evidence that the pension scheme at the National Assembly for Wales has five trustees (of which four are Assembly Members) and understands that provision is made in the rules at the UK Parliament for up to 10 trustees. The UK Parliament recent rule changes require at least one and up to two trustees to be pensioners of the scheme and a former Member of Parliament has become a trustee.¹⁵ All other trustees are serving members. The SPCB has five MSP members, all of whom are responsible for all aspects of its work, including administration of the pension scheme.

61.Responses to the consultation question¹⁶ on the appropriate number of trustees varied between five and 11, with those who commented suggesting that there should be at least one pensioner member.

62. The Committee recommends that having regard to the size of the scheme and the current membership composition¹⁷ that an appropriate number of trustees would be a maximum of six. The Committee agreed that current, deferred and pensioner members will each have contributions to make as trustees but given the relative youth and membership size of the scheme, the Committee makes no recommendations requiring places to be reserved for specific categories of membership. The Committee suggests three members should be required to form a quorum.

63. The Committee recommends that all trustees are appointed by the Parliament nominated in a motion put forward by the SPCB. The Committee does not envisage any active role for the SPCB in selecting or nominating trustees, its function being to put forward nominations received for consideration. However, to try and provide a balance, the draft rules we have prepared suggest that the SPCB in putting forward nominations uses every reasonable endeavour to ensure that at least one scheme member and one pensioner member are appointed.¹⁸ In future years the Committee envisages that the trustees will be closely involved in identifying suitable candidates from within or outwith the Parliament.

64. The Committee agreed with the SPCB that the inclusion of a professional trustee would “bring to the board professional pension knowledge in what is an extremely complex area.”¹⁹The proposal makes no restriction on who may be appointed, leaving it open to the Parliament to include one or more professional trustees if suitable nominations emerge. To facilitate such a nomination the Committee recommends that trustees who are not scheme members may be remunerated.

65. The Committee recommends that trustees may resign by notice to the other trustees and to the Presiding Officer. To avoid any issues affecting the balance of trustees, those who change their status (e.g. from scheme member to pensioner) will automatically cease to be a trustee six months thereafter unless Parliament resolves otherwise.

Staff and professional advisers

66. From the evidence the Committee received it became clear that running a pension scheme is a complex and important task. The trustees at the UK Parliament and at the National Assembly for Wales each employ external professional advisers to support them in relation to investment, fund management and legal advice, as well as professional actuaries. The SPCB indicated that to ensure the effective management of the scheme it too employs professional support. Mike Pringle MSP, on behalf of the SPCB, indicated that—

“Baillie Gifford is the investment fund manager, and the Scottish Public Pensions Agency provides a pension administration service. The Government Actuary’s Department provides the actuarial services, and the SPCB's directorate of legal services provides legal advice, using outsourcing firms for specialist pension advice when necessary. Audit Scotland is the external auditor.”²⁰

67. Pension law requires the appointment of a scheme actuary, external auditors and fund managers. The Committee recommends that provision is also made in the draft Bill for the trustees to employ staff and advisers. Given that the current rules provide for the expenses of managing the fund, including staff costs, the Committee does not envisage that this will lead to any significant cost increases.

Accounting and investments

68. Pension law requires the keeping of proper accounts and their annual auditing as well as for a scheme actuary to be appointed, who will need to report on the fund’s performance at intervals of no more than three years. The draft bill further provides that all reports received by the trustees would require to be laid before Parliament and would therefore be available to the members.

Future role of SPCB

69. In relation to any future role for the SPCB the Committee asked Mike Pringle MSP, on behalf of the SPCB, for views and he indicated that—

“If we move to a board of trustees, the SPCB will, or could, continue to be responsible for providing the funding for the employer pension contributions. The SPCB provides a payroll service for members. We would anticipate it having some continued involvement in deducting members' contributions and remitting them to the pension fund trustees. The SPCB might also continue to provide a parallel service to pay pensions, so a service-level agreement might be required between the SPCB and the trustees. The SPCB would be happy to put forward trustee nominations. Depending on any arrangements that the SPCB reaches with the Scottish Government, there might need to be a role for one of those bodies in determining the scheme sponsor contributions and whether to accept GAD or other actuarial recommendations in full.”²¹

Setting the “employer contribution rate”
70. It is the last point, determining the scheme sponsor or “employer” contribution rate, which is of interest in particular. At the UK Parliament the role is undertaken by the Treasury after discussion with the trustees. The National Assembly for Wales is required to contribute an amount in accordance with the scheme actuary’s recommendation.²²

71. Consideration needs to be given to the amount to be paid in effect from public funds before the scheme actuary’s recommendation is implemented. The Committee suggests retaining the involvement of the SPCB. The contribution will form part of the SPCB budget and be subject to scrutiny in the same way as the remainder of its budget. Ultimately approval is given to the budget by Parliament. The Committee recommends that the SPCB should set the “employer” contribution rate and pay the same from its budget but that in so doing consideration must be given to the recommendations of the scheme actuary and the views of the trustees.

Future scheme rule changes
72. One final role the Committee envisages for the SPCB is to bring before Parliament any future proposals to amend the scheme rules. Pension law is an area subject to frequent change and it is necessary that a mechanism be established to make alterations required by the general law without resorting to primary legislation. Amendments to the rules may also be required in the light of experience of their operation or for general policy reasons. In line with other public service occupational pension schemes, we think the amendment power should be available to make necessary retrospective changes. Deferred members, pensioners and current members (in respect of rights already accrued) would have protection against any detrimental changes (as afforded by section 262 of the Pensions Act 2004 or similar arrangements).

73. The Committee has given some thought as to how such changes may operate and considers that similar provisions as provided in relation to changes consequential to the Interests of Members of the Scottish Parliament Act 2006 should be made in Standing Orders. While a matter for the Standards, Procedures and Public Appointments Committee to determine, the Committee would expect that provision be included in Standing Orders for consultation with all members and for the role of the trustees. Changes may emanate from the SPCB but more likely it will be the trustees who make recommendations. However, the Committee considers that the SPCB is the appropriate body to bring proposals before Parliament. There may also be an ongoing need to amend the rules applying to pensions under existing Part S of the Transitional Order²³ including any that become payable in the future to surviving dependants. Any changes required are likely to reflect changes being made to the MSP pension rules as a result of revisions to pension law. For that reason we suggest that an identical modification provision be made to cover the pension scheme for the First Minister and Presiding Officer. The Committee recommends that provision be made for future rule amendments to be made by resolution of the Parliament.

SCHEME MEMBERSHIP

74. Any person serving as a Member of the Scottish Parliament is entitled to be a member of the MSP and officeholder pension scheme. Membership is further extended to those holding the offices of Lord Advocate and Solicitor General for Scotland in the event that they are not serving MSPs. All are automatically entered into the scheme unless they opt out in writing.

75. In the consultation the Committee sought views as to the approach that should be taken in relation to those over 75. Changes made in the Finance Act 2004 remove the tax benefits²⁴ which apply to scheme members over age 75. The differing approaches taken at the National Assembly for Wales where membership is not permitted and the UK Parliament where membership may continue subject to tax liability and other changes were highlighted.

76. Given the tax changes in the Finance Act the Committee recommends that participating membership of the pension scheme no longer be available to those age 75 and over. As an additional consequence no death in service benefit will be available from the scheme to those over 75.

77. Under the rules of the pension scheme, serving MSPs and officeholders, even if they are no longer participating members of the pension scheme, cannot receive pension benefits until they stand down. For those serving members approaching age 75 the Committee makes separate recommendations at page 25 of the report.

78. In addition to membership as an MSP, those holding certain offices are also eligible to join the pension scheme in their capacity as officeholders. Additional pension benefits accrue to such persons who join the scheme and make contributions during their tenure in office. Two of the offices listed in the current rules are non-salaried²⁵ and as such do not qualify for membership. The Committee recommends that the non-salaried posts be removed from the pension rules.

OFFICEHOLDERS (INCLUDING THE LAW OFFICERS)

79. The current rules allow officeholders to be members of the pension scheme, in their capacity as an MSP or as an officeholder (e.g. to date the Law Officers have not been MSPs but are, however, members of the scheme) or both. Members’ contributions are made at the same rate (6%) on the officeholder salary as are paid on the MSP salary and scheme benefits are the same as apply to MSPs.

80. The Committee considers that there seems no reason why such officeholders should not be treated in the same way as MSP members of the pension scheme, therefore, it recommends equalising the benefits of non MSP officeholders to remove the extent that the current rules treat them less favourably. This will allow those officeholders to purchase added years and to receive an enhanced pension on an in-service ill-health retirement. It will also allow pensions for their beneficiaries, following the officeholder’s death, to be calculated on the same basis as for MSPs’ beneficiaries.

Special Pension arrangements for the First Minister and Presiding Officer

81. The First Minister and Presiding Officer pension arrangements (“FM/PO scheme”), which were set up by analogy to the corresponding offices at the UK Parliament (Prime Minister and Speaker of the House), are also included in the Transitional Order. However, the FM/PO scheme, in Part S of the Transitional Order, is separate from the main MSP and officeholder pension scheme. Its benefits are unfunded and paid for directly from the Scottish Consolidated Fund.

82. Under Part S of the SPPS Order the First Minister and Presiding Officer are entitled to an annual pension equivalent to 50% of officeholder salary, payable from the day after ceasing to hold office, irrespective of their age or length of service in the post. No “employee” or “employer” contributions are payable in respect of the First Minister and Presiding Officer pensions. Their pensions are suspended for any period that they subsequently hold another qualifying officeholder position (ministerial or law officer post). There is also provision for survivors’ and children’s pensions.

83. Both officeholders are entitled to an MSP’s pension on the MSP part of their salary at the same rates and on the same conditions as other MSP members of the pension scheme.

84. The consultation sought views on the pension arrangements for the First Minister and Presiding Officer. A majority expressed the view that there should be a minimum qualifying period of one year that had to be served before becoming eligible for the First Minister or Presiding Officer pension and the majority said that entitlement should accrue over a period of at least four years. On withdrawing a former First Minister’s or Presiding Officer’s pension if they subsequently became an officeholder, eight out of 14 consultees who expressed a view said there were no reasons for withdrawing the pension. Of the 12 who expressed a view on a former First Minister or Presiding Officer being allowed to rejoin the scheme as an officeholder the majority had no objections to allowing this to happen.

85. The SSRB report²⁶ was published following the conclusion of the Committee consultation on 16 January 2008. SSRB commented that the special pension arrangements that existed for the Prime Minister, Speaker of the House of Commons and Lord Chancellor were originally intended to ensure that former holders of these offices should not need to seek further employment, and that the Lord Chancellor should not have to return to legal practice. However, in the modern age future employment opportunities had changed significantly and the SSRB concluded that the special arrangements are no longer justified for future incumbents of these posts. It therefore recommended that the special pension arrangements that exist for the Prime Minister, Lord Chancellor and Speaker of the House of Commons should not be extended to new incumbents but instead the officeholders would be covered by the PCPF. Although the Government agreed with the SSRB’s recommendations for the Prime Minister and Lord Chancellor, it indicated that it did not propose to implement this recommendation with respect to future Commons Speakers, considering the position of the Speaker to be substantially different to that of a Prime Minister or Lord Chancellor.²⁷

86. Following publication of the SSRB report and subsequent UK Parliament debate the Committee heard evidence from Mike Pringle MSP, on behalf of the SPCB, who said—

“The SPCB inherited responsibility for those arrangements in 1999. As such, we have no strong views on the policy on those pensions and would rather leave that to the committee to determine. However, the scheme was established as analogous to the arrangements for the Prime Minister and the Speaker at the UK Parliament. If those arrangements are changing, now is the time to change the scheme here and to revisit its purpose.”²⁸

87. The Committee also heard evidence from GAD, on the cost of these provisions²⁹ —

“We were asked to provide costs for that, on the basis of the First Minister and the Presiding Officer continuing in their roles for a four-year parliamentary session. On current pay levels, the net saving from a change from the current position to the position that you describe would be round about £700,000 for the First Minister and about £270,000 for the Presiding Officer.”³⁰

Similar costs would be saved for each First Minister and Presiding Officer subsequently elected after such a rule change.

88. The Committee noted that the First Minister and Presiding Officer pension arrangements are analogous to the arrangements for the Prime Minister and the Speaker at the UK Parliament. The Committee also noted the SSRB’s comments on the reasons for the special pension arrangements and its recommendations for future incumbents of these posts. The Committee was aware from previous discussions that the equivalent posts in the National Assembly for Wales and the Northern Ireland Assembly were different from the UK Parliament and the Scottish Parliament in that they had the same pension provisions as all other officeholders. Having taken all the above factors into account the Committee agreed that the special pension arrangements for both the First Minister and Presiding Officer should be removed for new incumbents and that they should have access to the same pension arrangements as other officeholders. The Committee noted the substantial savings to the public fund that could be achieved by removing the special pension arrangements for the First Minister and Presiding Officer.

89. The Committee recommends that the existing arrangements for the First Minister and Presiding Officer should be closed to any new incumbents and that the First Minister and Presiding Officer pension provisions should be the same as for all other officeholders under the new scheme rules.

PENSION ENTITLEMENT

90. MSPs who pay their contributions become members of the pension scheme. They are entitled to a pension payable from age 65 based on their MSP salary at the time of their retirement. The basic amount they are entitled to as a member of the pension scheme under the current rules is 1/50th of their MSP salary at the time of their retirement for each year of membership.

91. Holders of a qualifying office³¹ are also entitled to join the pension scheme and accrue pension based on their length of service in post and their officeholder salary.³² The Lord Advocate and Solicitor General for Scotland are entitled to become members of the pension scheme even if not also MSPs. Pension accrues at 1/50th for each year office is held and is payable in addition to any accrued MSP pension.

92. Serving members or officeholders are not entitled to receive their pension even if they have reached the normal scheme retirement age of 65. They can remain scheme members and continue to accrue further pensionable service.

93. In the consultation the Committee noted that members of the PCPF and the National Assembly of Wales scheme both had an option to accrue service at the rate of 1/40th per year in return for paying a higher contribution to the fund. Most of those who responded to the question supported a similar option being made available to MSPs and agreed that the additional cost of this be fully met by increased member contributions.

94. GAD advised us that the additional cost involved would be equivalent to a contribution of 5% salary and clarified that this was a higher rate than the equivalent cost at the UK Parliament for reasons which were explained in evidence.³³ The Committee recommends that members be given the option of accruing benefits in future at either 1/40th or 1/50th per year and that the additional cost of 1/40th accrual be fully met by an increase in the contribution rate of 5% to 11% applying to those members choosing to opt for 1/40th.

95. Changes to tax rules³⁴ removed the previous “earnings cap”³⁵ maximums for both contributions to and pensions payable from tax approved schemes. The annual and lifetime allowances³⁶ are now the only current tax restrictions. The scheme, like other tax approved schemes, included maximum limits with reference to the “earnings cap”. It also had an alternative limit for pensions payable (which in practice always proved lower) of 2/3rds of the individual’s actual salary.

96. The Committee considered whether there is any need for a restriction on the amount of pension payable from the fund. The majority of consultation responses suggested that the existing limit of 2/3rds final remuneration be retained. Evidence from GAD recommended that a maximum of 2/3rds of salary be retained to limit fund liability.³⁷

97. Given that the annual allowance is in place, the Committee sees no reason to restrict the maximum contribution figure by way of an “earnings cap.”³⁸ All members will require to pay contributions on the full amount of salary.

98. The existing scheme rules include a retained benefit³⁹ restriction which was a requirement of every tax approved scheme under the pre-6 April 2006 taxation rules. The Committee heard evidence from the Chairman of Trustees of the PCPF that its scheme maximum pension was 2/3rds final member’s salary including any retained benefits. The Committee also heard that the cost to the PCPF to remove the retained benefit⁴⁰ reduction would be equivalent to an increase in contribution of 0.4% or 0.5%.⁴¹ GAD confirmed in evidence that removal of the existing retained benefit restriction would not affect Scottish Parliamentary contribution rates.⁴² Responses to the consultation favoured removal. The Committee recommends that the current earnings cap be removed and that the scheme maximum pension be 2/3rds final member’s salary without any deduction for retained benefits.

99. The Committee also recommends that the restriction preventing a serving MSP or officeholder from receiving their pension or lump sum benefits be retained, with the exception of those approaching 75 about whom we make special recommendations in the next section of our report.

Commutation

100. Part G and Schedule 3 of the Transitional Order set out the rules for commuting part of a pension into a tax-free lump sum. The amount payable is based on service and allows for part of the annual pension entitlement to be exchanged for a tax-free lump sum up to a maximum of 1½ times member’s final salary.

101. The rules for commuting part of a pension have changed under the Finance Act 2004⁴³ to allow up to a maximum of 25% of the pension entitlement to be exchanged for a tax-free lump sum. The new rules allow greater scope for commutation and could increase the maximum sum available by between 50% and 75% in certain circumstances.

102. In the consultation the vast majority of consultees who expressed a view on this matter agreed that the lump sum limit should be increased in line with the Finance Act 2004. The Committee also heard evidence from GAD, that increasing the maximum commutation limit to 25% of pension would be broadly cost neutral to the scheme—

“It would be intended to be cost neutral, or as near to that as we could make it in terms of the factors that would be used to convert pension to lump sum. As with any option, there is always a risk of possible selection. Converting pension to lump sum is a good idea for pensioners who are in poor health, because they are not likely to live as long as the average. Practice has shown that a very high proportion of the membership takes up the lump sum option because of the tax advantages. The scope for selection is therefore fairly limited, and we regard the measure as pretty well cost neutral.”⁴⁴

103. The Committee recommends that the maximum commutation limit for the scheme should be 25% of pension as permitted by the Finance Act 2004.

104. Similar to the restrictions on pensions for those aged 75 and over, the Finance Act 2004 restricts the payment of a tax-free lump sum to anyone who retires at age 75 or over. In the consultation the Committee noted that the PCPF rules were amended to allow MPs to take their lump sum benefits prior to reaching age 75 and have their remaining pension abated (i.e. suspended) until they retire. The consultation therefore sought views on the treatment of tax-free lump sums. Respondents generally suggested that a tax-free lump sum should be allowed for serving MSPs prior to their reaching age 75.

105. The Committee recommends that scheme participants should be able to commute part of their pension into a tax-free lump sum immediately before age 75 whilst still serving as an MSP or officeholder or both.

106. To avoid pension schemes having to pay small pensions the Finance Act 2004⁴⁵ increased the level of pension that can be commuted on triviality grounds to 1% of the lifetime allowance (currently equal to a pension of £825 per annum). There is no provision under the current rules to commute a pension on triviality grounds, therefore the consultation sought views on this and an overwhelming majority were in favour of allowing a trivial commutation lump sum.

107. The Committee recommends that provision is made to commute a trivial pension and to pay a tax-free lump sum.

EARLY RETIREMENT

Age discrimination

108. At present, a former MSP who has 15 years of service and who is aged between 50 and 65 may apply for an early retirement pension. The amount of pension immediately payable is reduced by factors which when introduced in 1999 were an improvement on what would have been an actuarially neutral abatement in accordance with the table in Schedule 4 to the current rules. This table takes into account both the age of the member and their length of service and applies a percentage reduction to a member’s pension based on both of these figures.

109. The Committee considered that the use of this table could be seen to be discriminatory and is at the very least inequitable, given that, for example, a 63 year old with 16 years of service would get a higher pension than a 57 year old with 19 years of service. The Committee noted that the UK Parliament has removed this type of calculation from its scheme rules. Instead, MPs elected after 4 November 2004 who have 15 years of service will receive an early retirement pension based on actuarially neutral factors.⁴⁶

110. In addition, the legal climate on age discrimination in employment has changed significantly in recent years. The High Court in England and Wales took the view that the rule of 85,⁴⁷ a similar type of pension rule to that currently adopted for early retirement by the SPPS, was prima facie discriminatory on the grounds of age.⁴⁸ In 2006, the Scottish Local Government Pension Scheme was amended to remove the rule of 85 in order to prevent a breach of the EC Directive (2000/78/EC) on equal treatment in employment and occupation. The then Scottish Executive considered that retaining this rule would breach the terms of the Directive.

111. The Committee, therefore, asked in its consultation paper⁴⁹ whether the provisions in the current scheme rules should be phased out. Of the eight consultees who expressed a view, five agreed that they should be phased out; two considered that they should not be phased out and one felt that it depended on the length of service involved.

112. Given the possible discrimination inherent in existing rules, together with the reform of similar rules in the UK Parliament and the National Assembly for Wales, the Committee recommends that the current calculation table should not be included in the proposed bill.

Qualifying period

113. The Westminster scheme has removed its qualifying period of 15 years of service before a member is eligible for early retirement⁵⁰ and the National Assembly for Wales does not apply the rule either. Public sector schemes do not operate a qualifying period other than a minimum two year employment requirement for membership of a pension scheme.

114. It emerged during the seminar held for MSPs on 12 December 2007 that some members with less than 15 years service were unaware that they were not entitled to early retirement pension if unsuccessful at an election when close to retirement age. In addition, 11 out of the 16 respondents to the consultation considered that members who wish to stand down or who are not re-elected should be allowed to receive their benefits early.

115. The Committee considers that the current 15 year qualification period is unnecessarily prohibitive and it agreed with the views of those who responded to the consultation paper. The Committee believes that this provision is out of date and agreed with the view of Grant Ballantine of GAD that—

“the rationale was to provide individuals who had given long service to Parliament with a favourable option of going early with an extra pension, but I do not think that the rationale for that facility exists nowadays.”⁵¹

116. The Committee, therefore, recommends that the qualifying period of 15 years for early retirement should be removed and early retirement should be made available for all ex-members aged 55 and over.

Long term stability of the fund

117. In order to value the SPPS, the actuary must make an assessment of the future expenditure on benefits for members of the scheme compared to future income from contributions and their investment. Financial assumptions should represent a long-term view of expected future conditions because the scheme can expect to make payments and receive income for a considerable time into the future.

118. The Committee noted that the triennial report on the pension fund undertaken by GAD is used to check whether the actuarial assumptions made in relation to the pension scheme remain valid. In evidence GAD explained that one critical factor in these scheme assumptions is the discount rate, which is applied to calculate the net present value of the future liabilities of the fund. General investment performance and the longevity assumptions made for the scheme are also significant.⁵²

119. Demographic assumptions are used to consider factors such as mortality, retirement and withdrawal. The most recent calculations for the scheme conducted by GAD⁵³ anticipate that the average number of years that a pensioner will live beyond normal retirement at age 65 will be 19.5 years for men and 22.6 years for women. GAD also stated in its report that pensions payable to current contributors will continue much further into the future than those currently in payment.

120. The Committee acknowledges the particular uncertainty faced by MSPs and the fact that they may retire early not by personal choice but by circumstance. As the consultation paper highlighted, there are a number of reasons why an MSP may cease to be an MSP. A member may not be re-elected, with the possibility of a lower position on a regional list having a bearing on this, or a member may be required to stand down due to de-selection or boundary changes.

121. The Committee therefore, whilst supporting the policy of encouraging members to continue to work and contribute to the SPPS, also considers that it is fair to provide members aged over 55 with an option to take their pension early should they cease to be an MSP. We are mindful of our overriding aim that the scheme must strike an equitable and proportionate balance between the levels of benefits provided and the actual cost of their provision to members and to public funds. One respondent stated in written evidence—

“Some may never find another job and, in fairness, should be able to apply for a reduced pension.”

Uptake and costs

122. The Committee is also aware of the potential for an increase in uptake of early retirement should this option become more widely available. Easing the eligibility criteria through removing the 15 year rule would open up the option to many more members than previously. GAD noted that one of the great advantages of a defined benefits pension provision is that “there is a pooling of risk, but it should be done in a way that prevents individuals from getting an obvious hit against the scheme.”⁵⁴ Evidence at Westminster suggests however, that members of Parliament tend to work beyond retirement age. GAD stated, “Because the Westminster scheme has existed for quite some time, we have good evidence that a significant proportion of members of Parliament work beyond the normal retirement age of 65, or 60, on unreduced benefits with 20 years of service”.⁵⁵

123. The Committee considered at length what, if any, reductions should apply to the pension payable in the event that payments commence before the scheme retirement age of 65, bearing in mind that the minimum pension age under the Finance Act 2004 is 55. Through evidence heard and the detailed costings of possible options provided by GAD, the Committee examined the range of factors which influence the need for and cost of early retirement options.

124. Following advice from GAD the Committee established that an actuarially neutral reduction, i.e. one that did not have a cost to the pension scheme, would be a 4% reduction for each year below normal retirement age. This calculation takes into account the proposed removal of the 15 year qualifying period for early retirement. This would mean, for example, that a member who retired at age 60 would have a total reduction to their pension of 20%. The equivalent changes that have been made at the UK Parliament have been based on the different conditions of its scheme.⁵⁶

125. In evidence, the SPPA explained that most public sector schemes allow for voluntary early retirement. Benefits under these schemes are actuarially reduced by roughly 5% for each year that is taken early and the amount calculated at retiral is applicable for life. Due to recent changes in pensions legislation, from 2010 the minimum pension age will rise from 50 to 55 for all members of the SPPS.

126. The Committee accepts the principle that members of the scheme, on ceasing to be MSPs and officeholders, should be able to access the full value of their pension funds from age 55 onwards. However it also considers that payment of pension prior to the scheme retirement age of 65 should be available on a basis that is equitable to all scheme members and that an appropriate reduction in the amount of pension payable should apply.

127. The Committee therefore recommends that members who are no longer serving MSPs or officeholders should be able to retire from age 55, subject to an actuarially neutral reduction of 4% to their pension for each year below age 65.

Preserving existing rights

128. The Committee also considered whether for existing scheme members there is a need to maintain existing rights to access early retirement provisions. Given the current qualification requirements (age 50/55 and 15 years service) only three members have an existing entitlement in the current session. Each has UK Parliament qualifying service. The Committee considered that such individuals will have accrued rights under the existing rules and that these rights should therefore be protected.

129. The Committee further considered whether other existing members would have justifiable expectations of qualifying under the existing rules in future sessions. Could existing members without accrued rights expect to qualify by accruing sufficient service after being returned for future sessions?

130. In making this decision the Committee accepts the principle that expectations of future service do not give rise to a requirement that the scheme protects future rights which are not yet accrued. Nevertheless, we have considered the desirability of transitional arrangements to preserve expectations of existing members.

131. In considering this the Committee noted that if rights under the current rules continued to accrue for all existing members to the end of Session 4 then a further eight members would accrue a greater benefit in comparison to their prospective entitlement under the proposed replacement rules. While a number of members could potentially have 15 years service by the end of Session 4, most are either below the minimum retirement age of 55, aged over 65 or the benefit in the recommended replacement rules is higher than the current rules provide.

132. Therefore the Committee considers a proportionate transitional arrangement is for all existing members to be able to count further service in the current Session towards the early retirement rights in the current rules. Any non-concurrent service accrued at the House of Commons or the European Parliament would be included in this calculation.

133. The Committee recommends that any greater rights to early retirement under the current rules be preserved for existing members but only for service up to the end of the current Session.

Ill-Health Provision

134. The current rules provide for the pension that would be payable at age 65 to be payable before normal retirement age if an MSP member is unable to adequately perform their duties because of illness. The Committee was advised in evidence by the SPCB that three ill-health pensions are in payment.⁵⁷

135. As a minimum, changes to the current rules are required to align the ill-health payments with the permitted ill-health payments under the Finance 2004 Act.⁵⁸ For example the new test applied for ill-health retirement requires evidence that the member is and will continue to be incapable of carrying out their occupation.

136. The consultation sought views on this and other possible changes to the ill-health provisions. Principally we suggested a two tier system of benefits payable depending upon the severity of the illness. The consultation also sought views on introducing a review process following an award of ill-health pension. The majority of respondents were in favour of adopting such provisions.

137. Evidence from the SPPA⁵⁹ indicated that other schemes have moved to a two tier system of benefits related to the severity and effect of the illness, although as yet the schemes it administers had not introduced a facility to review. The National Assembly of Wales, which has introduced a two tier system, has included provisions to allow ill-health pensions to be subject to periodic review. Reviews involve medical evidence to confirm continuing incapability.⁶⁰

138. The Committee was advised by the Chairman of the PCPF Trustees that they were engaged in discussions with the Leader of the House and Cabinet Office in relation to introducing similar rules. These have been estimated to produce scheme savings.⁶¹ The saving estimated for the SPCPF should a similar scheme be introduced was estimated by GAD at 0.3% of salaries.⁶²

139. The Committee noted the evidence received and agreed that the amount of benefit payable should be linked to the degree of ill-health being suffered. It considers that there should be two levels of pension payable. A stringent test should be applicable for severe ill-health pensions, requiring that the member’s ill-health must be such as to prevent the member from performing the duties of any paid occupation, not just performing the duties of an MSP. The pension received following this test would be the same as provided under current rules i.e. enhanced to that payable at age 65. In addition to those who qualify under this test there should be a new lesser category of ill-health benefit for those who are assessed as unable to adequately carry out their duties as an MSP but who could carry out other employment of a different nature. Under this category, members would receive an ill-health pension based on their years of service with no enhancement but without any reduction for early payment.

140. The Committee also considers that provision should be introduced to allow the trustees to require periodical assessment of a person’s condition to confirm that they continue to qualify for any ill-health benefit.

141. The Committee also considers that enhancement to ill-health benefits should in future be available to participating officeholders who are not MSPs. On the grounds of equity in cases of severe ill-health, the Committee considers that the increase in benefit available to participating officeholders who are not MSPs should be the same as for MSPs. Accordingly the salary used to multiply the years of enhanced service should be limited to the salary of an ordinary MSP.

142. The Committee therefore recommends that the scheme adopts a two tier approach to ill-health pensions for serving members and officeholders, as detailed, and that periodic reviews should follow all ill-health pension awards.

143. The Committee also sought views on providing a new benefit for those in serious ill-health not expected to live for more than a year. In such cases the pension may, under the Finance Act rules, be fully commuted for a lump sum. All bar one respondent agreed with this suggestion.

144. The Committee also recommends that provision be made to allow those serving members and officeholders with a terminal illness who are not expected to survive for a year to be able to commute their pension entitlement for a lump sum. Survivor pensions will continue to be available following the death of such members.

145. The Committee considers that this new proposed provision for serious ill-health lump sums be equivalent to five years of the pension they would have received if they had qualified for a severe ill-health pension while in service.

146. The Committee considered whether there should be any restriction on benefit in circumstances where pre-existing health conditions are known to the member. The Committee was not persuaded that there was any evidence to justify any restriction at present. However, mindful of the evidence received from GAD about pooling of risks and preventing “individuals from getting an obvious hit against the scheme”⁶³ the Committee considers that the trustees keep a close watch on ill-health retirement and whether there is any need for restrictions in the future.

Ill-health pension for former members or officeholders

147. The effect of the separate rules regarding application and calculation of ill-health pension for former members and officeholders or those who have a prior period of reckonable service as a participating member should be largely retained. (These are contained in Article J2 of the Transitional Order.) The ill-health pension payable to a former member will continue to be immediate payment of the amount of deferred pension that would have been payable had they reached age 65. The requirement in future will be in line with the test for sitting MSPs that they are unable to perform any gainful employment; the current rules require that their retirement from gainful work was a direct consequence of their ill-health.

Medical evidence

148. All applications for ill-health related pensions will require to be accompanied by medical evidence from a medical practitioner that the applicant is and will continue to be incapable of carrying on their or any other occupation because of physical or mental impairment.

149. The trustees will be able to require a further medical examination by a medical practitioner nominated by them to assist them in determining an application. The Committee received evidence recommending that such a doctor should have qualifications in occupational health⁶⁴ and be accredited specialists therein. We note this for consideration by the future scheme administrators in any appointment that they may make.

150. On any subsequent review the trustees will be able to assess the current condition and determine any change by seeking further medical evidence.

Link to early retirement criteria

151. In reaching proposals on ill-health retirement the Committee also considered whether there was a possible link between the availability of early retirement on advantageous or other terms and the number of ill-health retirements. The Committee is keen to avoid any unintended consequences arising from its recommendations which might impact on costs to the SPCPF.

152. The SPPA advised that it holds no data on the issue⁶⁵ and suggested that it would be “hard to found that on evidence.”⁶⁶ Sir John Butterfill MP also indicated that there is no relationship between the two⁶⁷ but indicated that “the scheme has been extremely generous in some cases in which medical advisers have been unduly lenient in interpreting the rules.”⁶⁸ Although later he stated that “We have our own advisers and have indicated to them that the rules should be interpreted firmly.”⁶⁹

153. GAD stated that—

“there is anecdotal evidence to that effect” although “there has been no credible study to try to show that link.”⁷⁰

154. If such a link exists the Committee considers that the changes it is recommending to move to a two tier scheme, with the requirement for medical evidence to be provided and the power to the trustees to seek their own opinions from doctors qualified in occupational health, should minimise if not exclude altogether any increase in ill-health pensions.

Spouses, partners and Children

Spouses and civil partners

155. Part K of the Transitional Order makes provision for pension entitlement of surviving spouses and children of current or former MSPs and officeholders who were members of the pension scheme. The Transitional Order was amended⁷¹ to provide for civil partners’ rights corresponding to spouses’ rights.

56. The Committee recommends the provisions for spouses’ and civil partners’ pensions should remain unchanged except on re-marriage or cohabitation and where a participating member dies within six months of marriage.

57. At present a spouse’s or civil partner’s pension ceases on re-marriage or cohabitation with another person. The principle behind this seems to be that the surviving spouse can rely on a future spouse or partner for income. In the consultation the Committee noted that ceasing a pension on re-marriage or cohabitation with another person had been abolished in the UK Parliament and in most other public sector schemes. However, the consultees who expressed a view on this matter were split. GAD gave evidence—

“It is not significant in relation to past experience. If behaviour does not change and people do not manipulate the system, the cost is relatively small—of the order of a quarter of a per cent or one half of a per cent of pay. However, you have to be careful about what happens if you remove the cessation of a spouse's pension upon remarriage, particularly if you include unmarried partners, as the cessation of an unmarried partner's partnership is difficult to identify without being intrusive and seeking a lot of evidence. That situation can be difficult to operate, which is why one or two schemes did away with the cessation provision when they opened up to unmarried partners.”⁷²

158. The Committee recommends that spouses’ and civil partners’ pensions should continue for life. The Committee noted the relatively small cost involved and the difficulty involved in identifying when someone has re-married or cohabits with another person.

159. Linked to the above is a further provision under K1(6) of the current rules giving the SPCB discretion to withdraw all or any part of a surviving spouse’s pension. This applies where there are no children of the marriage and the marriage took place within six months of the participating member’s death and at the date of marriage the death was to be foreseen. Similar provisions apply to civil partnerships.

160. In the consultation the majority of consultees who expressed a view on this matter agreed that the discretion should be retained. GAD in evidence on this matter commented—

“However, if you remove the cessation provision, there is a danger that you might encourage people to identify an unmarried partner or marry a partner as they approach the end of their lives – it is a free hit against the scheme, particularly if you do not have to marry anyone but can simply nominate someone. To try to limit that risk, some schemes reduce the level of the spouse’s pension if there is a great age gap between the member and the partner. For example, if the age gap is, say, more than five years, the level of the spouse’s pension is reduced by 2.5 per cent for each year of the age difference, which means that with a 40-year age gap, the spouse’s pension would be practically nothing. That is common in the private sector, and one or two public schemes have started to do it as well.”⁷³

161. Another matter, not currently covered under the existing rules, that arose from the GAD evidence was including a provision to reduce a surviving spouse’s or civil partner’s pension where the participating member is much older than their partner.

162. The Committee concluded that as there has not been any pension payable in either of the above circumstances to date and the risk of any such pension becoming payable in the future is low these provisions should not be covered in the new rules.

163.The Committee recommends that the discretion to withdraw all or part of a surviving spouse’s pension should not be included in the new rules and that no provision should be made to reduce a surviving spouse’s or civil partner’s pension where the participating member is much older than their partner.

Unmarried partners

164. There is no pension provision under the current SPPS rules for unmarried partners. Both the National Assembly for Wales and the UK Parliament make provision for unmarried partners and, when giving evidence about the schemes that it administers, SPPA stated—

“Unmarried partners will have the same rights as civil partners or married partners. That provision is being introduced into the new scheme.”⁷⁴

165. The Committee heard evidence from Chad Dawtry, Director of Policy, Strategy and Development for the SPPA, on the rules for unmarried partners in other public sector schemes—

“The rule is based on Treasury guidance, and the period is two years.”⁷⁵

166. The Committee also heard evidence from GAD, on the cost to include provision for unmarried partners who said—

“The costs of extending the scheme to cover unmarried partners largely depend on what is and is not included in the definition of an unmarried partner. If there is a wide and lax definition, any member who does not have a spouse or civil partner will almost have the option of selecting any individual and claiming that they have an unmarried partner. The resulting costs can be significant—they can be 3 or 4 per cent of pay. Most schemes that have gone down that route have opted for a fairly tight definition of an unmarried partner, and have tried to limit the scope of the definition to those who are in relationships that are similar to those that spouses or civil partners are in. In other words, there must be a long-term or permanent commitment that has been established for some time. If the scheme is structured in such a way and is policed fairly regularly, the costs can represent less than 1 per cent of pay.”⁷⁶

167. The Committee agreed that in order to be consistent with other public sector pension schemes provision should be made for unmarried partners in the pension scheme. However, this would be on the condition that the relationship is similar to that of spouses and civil partners and that proof is provided that the relationship has been in existence for a minimum of two years.

168. The Committee recommends that provision for unmarried partners’ pensions should be made in the new scheme.

Children

169. Article K2 of the Transitional Order makes provision for children’s pensions. The only changes considered necessary are those that result from provisions in the Finance Act 2004.⁷⁷ That Act allows discretion to increase the maximum age for a child’s pension from under 22 to under 23 and to pay a pension where a surviving child, irrespective of their age, was dependant on the deceased due to physical or mental impairment.

170. The Committee sought views on these matters in the consultation and a small majority agreed that the age limit should be raised and all 13 of the consultees who responded on paying a dependant’s pension due to physical or mental impairment, irrespective of age, agreed that provision should be made for it. On the cost of including provision for this GAD explained—

“The cost of paying a child's pension for an extra year, for those in full-time education, is minor. It does not alter the funding rate. It is way under 0.1 per cent or something.

The question of extending the coverage to dependent children is somewhat more problematical. There are some similarities to what I said before about selection against the scheme. The issue is identifying whether the child was dependent. It is, perhaps, not too difficult for a member to claim that he is supporting a child who just chooses not to work, for example. You need to be pretty confident that you can establish that a real illness or disability prevents the child from working and makes them dependent on the member. That is particularly the case if we say simply that the child must be dependent on the member at the date of the member's death, which sort of writes off what happens between the child being 22 or 23 and being 45, if that is when the member dies. Having a reasonably tight definition or criterion for what qualifies, such as the child being permanently and totally disabled from the age of 23 until the member's death, should ensure that costs are kept relatively small.”⁷⁸

171. In light of the minor cost involved and to take account of the position of a child starting further education at age 18 to complete the normal four year Scottish degree course, the Committee agreed to propose an increase in the age limit for a child’s pension from under 22 to under 23. The Committee agreed that the age restriction of 22 for becoming incapacitated should be removed in relation to a surviving child who was dependant on the deceased due to physical or mental impairment. The pension will be payable irrespective of the age of the child, so long as the child is dependant on the member. The limitation on any pension continuing to be paid is that the illness or disability of the child should continue.

172. The Committee recommends that the age limit for a child’s pension should be increased from under 22 to under 23 and that the age limit of 22 for paying a pension to a surviving child who was dependant on the deceased due to physical or mental impairment should be removed.

ADDED YEARS

173. At present scheme members have two options within the SPPS rules should they wish to enhance their pension benefits. They can contribute additional voluntary contributions (AVCs) or purchase added years of service.

174. Scheme members can apply to the SPCB to buy a specific number of added years, which will increase the length of service on which their pension is based. As members pay for added years, there are no contributions payable from the SPCPF.

Age limits
175. The current rules place an age limit of 65 on the purchase of added years. However, this is not a universal retirement date as, unlike most pension schemes, retirement is not on the 65th birthday. Retirement for most MSPs occurs at the end of a four year session with Members over age 65 continuing to contribute towards their pension.

176. The Committee considered whether the age restriction should be removed with no restriction on purchasing added years by age providing the person is a participant in the scheme.

177. At its meeting on 18 September 2007, the Committee agreed to consult on the issue of an age limit on the purchase of added years—

“On AVCs and added years, the main question is whether we should continue to provide such a facility. If so, should the purchase of added years be subject to an age limit of 65? Should a portion of an AVC benefit be able to be taken as a tax-free lump sum? Do members agree to seek views on those questions? Members indicated agreement.”⁷⁹

178. The majority of responses indicated that scheme members should be allowed to purchase added years beyond their 65th birthday.

179. The Committee also took into account evidence from Sir John Butterfill MP, the Chairman of the Trustees of the Westminster PCPF—

“Even the Chancellor of the Exchequer eventually gets a pension that is based on the salary of a back bencher. The only way in which that can be enhanced under the present rules of our scheme is if the member continues after the age of 65 and resumes making contributions. If a member gets to the maximum level before the age of 65, contributions have to cease but, uniquely in our scheme, if they continue after 65, they can resume making contributions without limit. It is not common—not many members do it—but it is technically possible.”⁸⁰

180. Given that there is no cost to the fund arising as a result of the purchase of added years and the majority who responded to the question were in favour of removing the age restriction, the Committee recommends that the scheme continues to allow members to purchase added years and that there be no age restriction beyond conformity with revenue limits of age 75.

Contribution limit
181. The Committee also considered the limit on a member’s contribution towards added years which is specified in the current scheme. This is set currently at 15% of a member’s salary. The effect of buying added years is largely cost-neutral to the pension scheme although, as GAD pointed out in evidence, a large number of pension scheme members who enjoy long life spans in retirement could impact on the scheme funds—

“For that reason, most employers who offer the added-years facility try to limit the scale of the option in order to limit the scale of the risk—it is more a limitation of risk than of cost. If it were a completely unlimited option, the pension scheme would be converted into something that is like an insurance company that offers benefits on pseudo-commercial terms, and that is not really the scheme's purpose.”⁸¹

182. GAD went on to point out that the Committee could increase the attractiveness to members of buying added years by recommending an increase in a member’s contribution without creating a very dramatic effect—

“An easy limit would be to control the contribution input rather than the number of years, in addition to having the two-thirds limit. You could also relax significantly the existing contribution limit—at something like 20 per cent of pay—without exposing the scheme to any great risk. It should look reasonable in relation to a member's pay. You do not want to get to the stage at which a member who has other resources contributes 60 per cent of pay.”⁸²

183. The Committee recommends a relaxation of the current maximum member’s contribution by increasing the limit to 20% of salary (mirroring the situation at the UK Parliament and the National Assembly for Wales).

Pension Sharing

184. Pension sharing on divorce was introduced by the Welfare Reform and Pensions Act 1999. Pension rights accrued by either, or both, parties may now be shared by a pension sharing order made by the courts or under a joint minute of agreement. There is no current provision in the scheme rules for pension sharing on divorce however the scheme would be required to comply with the terms of any pension sharing order in accordance with the overriding primary legislation.

185. As part of the divorce or dissolution process the assets of a marriage or civil partnership are identified and agreement is reached about how these assets or their cash value are to be shared. A court order then gives an ex-spouse or civil partner individual rights in the form of a pension credit. This is done by calculating either the value of the pension in payment or the value of the benefits accrued to date (equivalent to a transfer value). These values are then apportioned relative to the period of the marriage or civil partnership with the periods outwith excluded.

186. As the SPPS is a funded occupational pension scheme, it can choose to offer either an external transfer or membership of the scheme to the recipient of the pension credit. The Committee recommends that the scheme allows for recipients of a pension credit to be given the choice of an external transfer or membership of the scheme.

187. For those who decide to leave their pension credit with the scheme the pension should be payable from the scheme’s normal retirement age of 65 with the option to take payment earlier from age 60⁸³ on actuarially neutral reduced terms. Very limited options on retiral are available to recipients and we make what provision we can in the proposed rules.

Other areas

188. The preceding pages have set out a number of our recommendations for changes that are contained in the draft bill. This section covers the other parts of the bill, many of which are unchanged.

Five year guarantee

189. The current SPPS rules at Part M create a “guarantee” period of five years running from the date that a member commences receipt of a pension from the scheme. The effect of the “guarantee” is that in the event of death before pension has been paid, for a period of five years, any pension paid to a surviving spouse or civil partner will be increased and paid at the member’s rate. The amount payable is reduced by the amount of any pension payable to an eligible child or children.

190. Part M also makes provision for payment of a lump sum equivalent to the balance of five years’ pension payments to be made to the pensioner member’s executor, where there is no spouse or civil partner and death occurs within the five year period. The Finance Act 2004, while allowing schemes to guarantee pension payments, prevents the commutation of certain “outstanding” payments into lump sums after death. For example, where a surviving spouse also dies within the five years, there will be an ability to continue to pay pension payments to the executor for the balance of the period but no ability to pay a lump sum.

191. For persons who die with no survivors, there continues to be the ability to pay an appropriately designated⁸⁴ lump sum covering the guaranteed period, provided the member had not reached age 75. For cases over that age only payment of pension for the remainder of the guaranteed period to executors is possible.

192. The Committee recommends that appropriate changes are made to the wording of the rules to comply with the Finance Act 2004, which will in effect continue payment of the current five year guaranteed amounts.

Reckonable service

193. Reckonable service continues to be the period during which an MSP or officeholder makes contributions from their salary. Reckonable service may, as at present, be enhanced through transfers-in from other registered pension schemes or by purchasing added years.

Lump sum death benefits

194. In the consultation the Committee sought views on whether the amount of the death in service lump sum benefit should be altered from three times salary following relaxations permitted by the Finance Act 2004 Responses were equally divided between retaining the existing level and increasing the benefit to four times salary.

195. The Committee noted that the benefit is reinsured and sought views from GAD. Its advice was that—

“It was sensible to insure the lump sum death benefit in the scheme's early years, as it protected the fund's position when there were very few assets. However, now that the fund stands at £18 million, the scheme's asset base is probably of sufficient size that the death benefits should be self-insured, assuming, of course, that the benefit stays roughly at the current level of three times pay.”

196. The Committee considered that the benefit should be brought into line with that of the PCPS and that for the National Assembly for Wales Members’ Pension Scheme and recommends that the death in service lump sum benefit be altered to four times salary.

197. The other rules in this Part of the draft remain in line with existing rules.

Short service refunds

198. Under the existing rules a member who has paid pension contributions with less than t