6 December 2012
The Independent Parliamentary Standards Authority (IPSA) is currently reviewing the level of pay of Members of Parliament (MPs). As part of this review, on the home page of its website it issued a formal consultation document on 15 October 2012 with a deadline for responses of 7 December 2012.
The pay of MPs is something I have had strong views about for many years. However, despite the best of intentions, I did not manage to send in my response until today, the day before the deadline.
Very briefly, MPs are presently paid £65,738 per year, plus the value of a quite generous defined benefit pension scheme. I have proposed changing this to a salary of £200,000 per year, from which MPs would be responsible for providing their own defined contribution pension.
I explain the rationale for this proposal in the full text of my consultation submission which is reproduced below.
6 December 2012
This is a response to the IPSA consultation document issued in October 2012. Permission is given for the entirety of the response, including the information about the respondent, to be published by IPSA.
Mohammed Amin is a British citizen who was born in Pakistan and who has lived in the United Kingdom continuously since 1952. More information about the respondent is available from his website www.mohammedamin.com which also includes details regarding how he may be contacted.
The respondent was born into a poor working-class family. Thanks to passing the 11+ examination he attended a state grammar school, obtained a mathematics degree from Cambridge University and a PGCE from Leeds University. After one year as a secondary school teacher the respondent trained as a chartered accountant and upon qualification became a taxation specialist. The remainder of his career until retirement at the end of 2009 was spent as a tax adviser, culminating in 19 years as a tax partner in Price Waterhouse / PricewaterhouseCoopers.
Since 1983 the respondent has been a member of the Conservative Party.
Despite being absorbed by politics since the age of 10, the respondent has never stood for election as an MP. The fundamental reason is that when younger the respondent could never have afforded the drop in income that election as an MP would entail. In the interests of full disclosure, on one occasion in the early 1980s the respondent was a "paper candidate" for the Liberal party in a council election in Manchester; otherwise he has never been a candidate in any council elections.
This response is given in a personal capacity and the respondent's views should not be attributed to any of the organisations with which the respondent is associated.
The IPSA document contains 17 questions. These are reproduced below in bold text along with the respondent’s answers.
The consultation document sets out five principles. The first four, A - D are unobjectionable. Principle E is potentially problematical since the role of an MP is fundamentally different from that of other citizens.
Under our constitution, with the principle of parliamentary sovereignty, MPs collectively have sweeping powers over the governance of our country. As well as passing all of our laws, they authorise all central government taxation. They are responsible for holding the Executive to account for its management of public expenditure and for its management of domestic and foreign policy including such life and death issues for our country such as the decision to go to war.
The Chancellor's Autumn Statement 2012 shows total managed expenditure of £690 billion. Ultimately MPs are responsible for ensuring whether this money is spent well or badly. The total costs of MPs should be considered in comparison with the expenditure they are responsible for supervising.
Furthermore, MPs have to engage with many highly talented people such as senior civil servants, chief executives of public sector entities, chief executives of private companies, senior members of professions such as the law, accountancy, education, the actuarial profession etc. It is essential that our country has MPs with the educational background and intellectual ability to hold their own when dealing with such individuals.
Before addressing the remaining detailed questions, it is worth considering two extreme answers regarding MPs’ pay as they help to clarify the philosophical issues.
As the consultation document points out, until 1911 MPs were not paid. There was however no shortage of people willing to serve as MPs.
If MPs were unpaid today, there would still be no shortage of people willing to serve as MPs. There are many people who are independently wealthy who would wish to influence the way that our country is governed by becoming MPs. Indeed many members of the present government are known to be independently wealthy individuals for whom the Parliamentary salary is financially irrelevant. Furthermore many organisations would be willing to provide funding to enable individuals who were not personally wealthy to serve as MPs.
However, most British citizens would be concerned if the House of Commons consisted entirely of individuals who were independently wealthy or who were sponsored by outside organisations, no matter what efforts were put in place to ensure their political independence from such organisations. Inevitably there would be the concern that "he who pays the piper calls the tune."
At this level of pay almost nobody in Britain would be deterred from becoming an MP for financial reasons. While there are highly paid individuals (some investment bankers, sports stars etc.) who earn significantly more than this figure, most of them could afford to reduce their income to £10 million per year without impairing their lifestyles.
The total cost of MPs’ salaries, with 650 MPs, would increase to £6.5 billion per year. While our country could pay this, most people would consider that a large part of the payroll bill would be a "deadweight expense" in the strict economic sense since a House of Commons of appropriately talented individuals could be recruited at a salary cost of much less than £10 million per person per year.
As the amount of salary per person and the supply of available people are both essentially continuous variables, there will be a "right" level of salary at which we have appropriately talented MPs from politically diverse backgrounds but where we do not incur the deadweight cost of overpaying MPs.
The challenge which IPSA faces is arriving at that number. This review will be its sole opportunity to do so since at present it is a new body unconstrained by past decisions and is free from political interference or control. Conversely when it undertakes its next review in five years’ time, it will be expected to act consistently with whatever decisions it reaches in its current review.
Any particular number put forward in a consultation response inevitably has a significant level of arbitrariness about it. However in the opinion of the respondent the right level of salary is about £200,000 per year. This is based upon levels of income for people who are just about to become partners in major accounting or legal firms and senior management at large companies just below main board level. The figure is intended to allow such people (in the absence of personal wealth) to serve as MPs without reducing the financial resources available to their families. The respondent believes that an individual’s family should not suffer financially from the individual's decision to serve his or her country as an MP. If anything, the respondent considers £200,000 to be on the low side rather than the high side.
Paragraph 133 of the consultation document states: "MPs’ current salary places them at approximately the 95th percentile of the earnings distribution". This could be taken to imply that MPs are well paid. While this is clearly true compared to average salaries, in the opinion of the respondent that is entirely the wrong test. The test is not the ability level of the average Briton but the ability level of the people that MPs must deal with, supervise or challenge and almost all such individuals will be in or near the top 1% in terms of intellectual ability, education and earning power.
As outlined earlier in this response, it is undesirable for the House of Commons to be an institution you can only afford to join if you are either independently wealthy or if your earning power is so low that your income is equivalent to or below present MPs’ salaries.
There will be many individuals in society who are similar to the respondent in that they have the ability to serve as MPs, and also have the wish to serve, but who cannot afford the drop in income that election as an MP would entail. This is the key diversity component missing from the present House of Commons.
There should be no differential element in MPs’ pay.
Regardless of where they live, in the respondent’s view the most essential part of an MP's job is performed in London since it consists of the scrutiny of legislation and holding the Executive to account. The key part of an MP’s constituency role is ascertaining the views of his or her constituents, but what matters is what the MP does in London. Accordingly regional pay is not appropriate. The respondent also sees no scope for performance related pay.
The respondent understands that IPSA does not have the power to stop MPs taking on outside interests, and there is some logic in MPs having such interests. Having two alternative rates of pay, full-time and part-time, would not be appropriate and would give entirely the wrong message to constituents.
The respondent would like to propose introducing a "withdrawal rate" whereby, for every extra pound of external earnings, an MP’s salary was reduced by a certain number of pence. However the respondent assumes that would be outside IPSA's present powers.
Consideration of the salary levels of other occupations is inevitable when trying to set a salary level for MPs or indeed for any other category of employee.
The respondent has set out his views on comparable occupations earlier in this response. These occupations are not considered comparable because they involve the same kind of work as the work of an MP. They are considered comparable because of the calibre of individual who works in such occupations; if MPs are of a lower calibre then they cannot deal effectively with such individuals. That means they cannot adequately perform the role of MP on behalf of the nation.
Setting MPs’ pay as a multiple of average earnings is not appropriate. Any particular multiple would look arbitrary. Furthermore setting a fixed multiple would mean that MPs’ pay would no longer adapt to changes in the country's income distribution.
For a variety of reasons which space does not allow to be discussed, our country's income distribution has changed over the last 50 years with the incomes of the most talented individuals (whether top sportsmen, corporate executives or professionals) rising much faster than average earnings. As the respondent considers it essential that MPs be paid at a rate comparable to such highly talented individuals, it is not appropriate to set a fixed multiple of average earnings.
Nobody becomes an MP for the pay since the salary is relatively low for the demanding nature of the role and the job insecurity.
The above statement would be less true if the salary became the figure proposed by the respondent. While highly talented individuals can still expect to earn more elsewhere, some low talented individuals might wish to become an MP primarily for the salary. However it is not appropriate to set MPs’ salaries at a level which requires talented individuals to make a serious financial sacrifice, which is the situation at current salary levels.
In the respondent’s view MPs' salaries should be set at a level which attracts appropriately talented people to become MPs without worrying whether the public service component is a reason for paying them more money or for paying them less money.
Paragraph 121 explains that a review of MPs’ pay will take place in the first year of each new Parliament; in other words every five years.
It is not appropriate for MPs’ pay to be fixed in monetary terms for the full five years between reviews. Accordingly some form of automatic increase is appropriate. The respondent proposes an annual percentage increase based upon average earnings in the whole economy.
The respondent opposes any linkage to particular civil service pay grades or any other salary benchmark which is ultimately under the control of the Executive since that creates a moral hazard.
If indexation between reviews is introduced, IPSA should make it clear to MPs that it is perfectly possible that when the next quinquennial review takes place MPs’ salaries may be reduced from their indexed amount if the review concludes that the revised level of pay should be lower than the amount to which the level set five years prior has been indexed.
The respondent opposes additional pay for Committee Chairs and Members of the Panel of Chairs.
All MPs should be regarded as giving the entirety of their time to their role as an MP. If that proposition is accepted then it becomes impossible for the MP to give a higher level of commitment if he or she becomes a Committee Chair. Furthermore financial considerations should not play any part in the decision to seek to become a Committee Chair or a Member of the Panel of Chairs, or in deciding who to vote for in connection with such roles.
The respondent has no fundamental objection to the guiding principles set out in paragraph 182.
In the opinion of the respondent, MPs should not be regarded in the same way as other public sector employees. The role of an MP is quite different and a much higher level of independence of mind is required, including willingness to cease to be an MP on an issue of principle. That is quite different from someone who may join the public sector as an employee in their 20's with the intention of serving through to retirement.
The independent mindset required of MPs is most consistent with having a defined contribution pension scheme where all of the key decisions and risks ultimately rest with the individual and not with the employer. That is the situation in which the overwhelming majority of private sector employees now find themselves and MPs who are making decisions on behalf of their fellow citizens should be in the same situation as them.
The respondent acknowledges that there may be good reasons for the government to offer defined benefit pensions to public sector employees, but as outlined above does not consider that those reasons are applicable to MPs.
This question would become otiose if MPs changed to a defined contribution scheme.
If MPs are to retain a defined benefit scheme then the respondent has no objection to such flexibility.
When fixing the new level of MPs salaries, IPSA should aim to come up with a number based on a private sector comparable where there is a defined contribution pension scheme. That will give a single aggregate number (cash pay plus any employer pension contributions) which is the total cost of employing that person.
If a decision is taken to move to defined contribution pensions, all that is required is to give the MP the right to determine how much of that aggregate cost is taken as cash pay and how much is used to make employer pension contributions, subject of course to any limitations arising from tax law.
If a decision is taken to retain defined benefit pensions for MPs, then one first needs to consider what level of pensions to provide in the manner that IPSA does in paragraph 190 where the total cost is stated at 24.5% of payroll. That amount should be deducted from the total cost of an MP computed above and the balance then paid to the MP as cash pay.
The split of the pension cost between employer contribution and employee contribution is then primarily relevant because the salary used to compute the pension will of course be gross of employee pension contributions. The respondent leans towards the simple approach of making employer and employee contributions equal on day one and establishing a principle that any increase in costs as a result of changes in actuarial assumptions should be borne equally by employer and employee.
Until IPSA completes its fundamental review to set an entirely new level of pay for MPs, we are locked into an existing level of MPs’ salary and related expectations in the minds of the electorate.
In this environment IPSA should increase MPs pay by 1% in 2013 and 2014 while making it clear that this is entirely without prejudice to any decisions by IPSA regarding the level of MPs’ salary as a result of its fundamental review.
If MPs’ salaries are to be reviewed so that they receive a realistic rate of pay for the role that they perform then the need for resettlement payments should disappear. MPs should understand that their political careers may be ephemeral and that they need to plan their finances, and also maintain their ability to perform alternative occupations, to allow for the possibility of not being re-elected.
The respondent does not agree with the decision of IPSA set out in paragraph 226. With the current level of MPs’ salary it would be appropriate to make a resettlement payment to every MP who leaves the House of Commons for any reason other than formal expulsion for misconduct or conviction for a criminal offence.
If IPSA does not accept the respondent’s view, then the answer to question 16 should be "yes".
With the present level of MPs pay, outplacement should be provided to eligible MPs.
Consistent with the respondent’s answer to question 16, the respondent considers that outplacement support should be provided to all MPs leaving the House of Commons except for misconduct.