The UK's best pension plan

This fantastic pension scheme is only open to VIPs, but you pay into it!

One of the biggest problems Britain faces in the coming decades is a 'pension time-bomb' caused by workers saving not nearly enough towards retirement.

The death of proper pensions

What's more, thanks to the mass closure of final-salary schemes over the past 15 years, this coming crisis will be much worse in the private sector than in the public sector. In the latter, the vast majority of pension contributions come from taxpayers, so almost nine in ten workers remain members of generous, guaranteed, final-salary schemes.

However, taxpayer support for public pensions has reached billions of pounds a year. Hence, the government has asked public-sector workers to pay higher contributions, accept lower pensions and retire later. As a result, the biggest strike since the Seventies took place last month.

A plump parliamentary pension scheme

With coalition ministers and MPs insisting that public-sector workers must agree to inferior pensions, I thought it was high time I looked into the pensions on offer to our 650 Members of Parliament.

As you'd expect, their scheme is generous. In fact, it's one of the very best in the country. Its members include members of the House of Commons and House of Lords, plus parliamentary office holders and the Lord Speaker in the Lords.

Here are the current terms for the Parliamentary Contributory Pension Fund (PCPF):

Basis of pension	Final salary
Normal retirement age	65
Accrual and rates	1/40th for 11.9% a year 1/50th for 7.9% a year 1/60th for 5.9% a year
Taxpayer contribution	Capped at 20%, but the true cost exceeds this (Plus an extra 8.7% a year until 2021 to make up a deficit)
Surviving spouse’s or partner’s pension	5/8ths of member’s pension
Death in service cover	Lump sum of four times pensionable salary, plus three months’ normal salary
Other benefits	Members can buy 'added years' via additional voluntary contributions (AVCs)

Most public-sector pensions and the state pension are pay-as-you-go plans, which are funded from general taxation. However, the PCPF is a funded scheme. In other words, members' and taxpayers' contributions go towards building a ring-fenced pot used to provide future parliamentary pensions.

Please may I join?

By handing over a mere 5.9% of their pre-tax salary each year, PCPF members get a sixtieth (1.67%) of their final salary for each year in the PCPF, paid from the age of 65.

However, by paying in another 2% a year, their accrual rate rises to a fiftieth (2%) per year. Another 4% on top (for a total of 11.9%) gets them a mouth-watering pension worth a fortieth (2.5%) of their salary for each year of work.

In addition, MPs' contributions buy them life insurance worth four times their salary -- almost £263,000 of cover, based on the basic MP's salary of £65,738 a year. Also, pension members who die pass on a spouse's pension of five-eighths (62.5%) of pension payouts.

With payouts this generous, it's worth getting elected to the House of Commons just for an MP's plump pension alone!

You pay most of this scheme's cost

I've studied scores of workplace pension schemes and this is one of the very best. Hardly any private-sector schemes offer such generous benefits. Indeed, 1/40th schemes are almost unheard of outside of the City of London, large company boardrooms, and the top ranks of the public sector.

Now for the bad news: thanks to a whopping contribution from the Exchequer, taxpayers pay the vast majority of the Parliamentary Contributory Pension Fund's steep cost.

Even worse, the 20% cap imposed on taxpayer contributions isn't enough, as the actual cost to taxpayers was estimated at 23.1% of salary in 2008/09. Add in another 8.7% a year to pay off a shortfall identified in the scheme review of 2005 and taxpayers contribute 28.7% toward this plan.

An MP choosing the 1/60th accrual rate pays in 5.9% a year and gets 28.7% from taxpayers, making his/her total contribution 34.6% a year, or more than a third of salary. Thus, for every £1 this MP pays in, taxpayers add nearly £5.

In short, while you may have no or negligible pension savings, your taxes go towards providing our lawmakers with copper-bottomed pensions. In effect, we're all feathering MPs' nests!

Not a penny more from taxpayers

Of course, MPs can hardly demand that workers in the public and private sectors show restraint on pay and benefits when they themselves gobble greedily from the pensions trough.

That's why, in February 2009, the government asked the Review Body on Senior Salaries (RBSS) to carry out a fundamental review of the PCPF. This was aimed at making the scheme "sustainable, appropriate to the members’ circumstances and fair to both them and the taxpayer".

In a review released in July 2010, the RBSS stated, that "any future increase in the cost of ongoing accrual will have to be borne entirely by the members". Quite right, too -- why should taxpayers take all of the pain while MPs continue to enjoy all of the gains?

The good news is that the RBSS has recommended the following changes to the PCPF:

Raising the normal retirement age from 65 to 68.
Moving from final-salary to career-average payouts.
Creating a single accrual rate of 1/60th, by stopping the 1/50th and 1/40th accrual rates.
Reducing the member's contribution rate to 5.5% from 5.9%.
Making the initial taxpayer contribution 10.5%, capped at a maximum of 15.5%.

Alas, these changes may not come into force after the next General Election, which could be as late as the spring of 2015. Thus, MPs can happily ride this pension gravy train for another 3½ years!

How do you feel about politicians' gilt-edged pensions in this age of austerity? Please let us know in the comments box below...

More: Start saving for a rainy day | Become a pensions expert in five days | Don't turn down free money