At the time of writing, it has been announced that Rishi Sunak is just about to replace Liz Truss as Leader of the Conservative Party, and by extension, as Prime Minister of the United Kingdom.
At the time of writing, it has been announced that Rishi Sunak is just about to replace Liz Truss as Leader of the Conservative Party, and by extension, as Prime Minister of the United Kingdom. This brings to end a very short period in office for the latter, about which much has been said elsewhere.
The reason why I bring it up is that it has been reported in the press that the outgoing Prime Minister is entitled to “a pension of £115,000 pa, starting immediately” and it is the valuation of such pension rights that whets my appetite: something of an occupational hazard alas for a pension’s actuary.
In truth, what is described above is in fact known as the “Public Duty Costs Allowance”—see https://www.gov.uk/government/publications/public-duty-cost-allowance/public-duty-costs-allowance-guidance—which since 1991 has been available for former Prime Ministers to draw upon on account of their continuing to have “a special position in public life”. £115,000 pa is in fact the upper limit to what is available, rather than being a promised amount, and it has been frozen at this level since 2011. It is made clear that there are strings attached to such funds, and that only “legitimate salary or office expenses incurred in meeting the demands of the former Prime Minister’s public life up to the annual limit” may be claimed.
Nevertheless, a figure of £115,000 pa is by no means insubstantial, especially given for how long such an income might be in payment, and is indeed over and above what one might receive as a pension upon leaving office as an MP.
While it is perhaps ungallant of me to give away a lady’s age, it is a matter of public record that the (at the time of writing) soon-to-be-former PM was born in 1975 and is thus at present aged just 47. Ms Truss will be the youngest person to hold the title “former Prime Minister of the United Kingdom” since Frederick John Robinson, 1st Viscount Goderich, left office at age 45 in, err, 1828. Needless to say, this somewhat predates the Public Duty Costs Allowance!
How then might one value such an income stream as is—potentially at least—payable for life to Ms Truss? I look out my trusty copy of the Galbraith Tables, our Firm’s proprietary actuarial tables used for valuing pension rights in divorce cases, and I remember that they only start at age 50: we did not anticipate anyone below this age being in receipt of such a Prime Minister’s pension. However, I am able to interpolate back from age 50 to age 47. I need also to make an adjustment to reflect the fact that the Galbraith Tables assume that pensions will follow the Consumer Prices Index (CPI) measure of price inflation, while PDCA is fixed, at least at present.
I arrive at a multiplier of 34.7, which is to say that the Galbraith Tables methodology suggests that every £1 pa of level income payable for life to a woman aged 47 is worth £34.70 today. To this end, we can say that the maximum £115,000 pa PDCA is worth around £4,000,000: a significant cost to the Exchequer that would not have otherwise existed but for Ms Truss’ short premiership.
In truth though, there is no real “market value” of such a stream of income, as this is not an off-the-shelf product that one could readily purchase. The usual caveats apply: others may place a different value on this stream of income. Indeed, the valuation of such a benefit depends on i) how many years it is to be in payment; and ii) the scope for money today to earn investment returns in the future. The events of recent weeks have increased the yields on Government bonds, which—perhaps paradoxically—reduces the cost associated with providing such an income stream in the future to the outgoing PM.
Moreover, it is noted that with Ms Truss being replaced by Mr Sunak today (Tuesday 25th October), she has served for just 50 days in office, and on this basis has accrued a benefit of up to £80,000 for each day of having been Prime Minister. No political point is made or ought to be read into the above; I simply note that this would crash through the limits that exist in respect of the pensions tax system rather rapidly were this a registered pension arrangement! Some public sector pension schemes are noted for their generosity—not least the Judicial scheme—but this is altogether a different order of magnitude.
I end by noting that Mr Sunak was born in 1980 and is thus just 42 years old: by my reckoning, he is about to become the youngest holder of the office since Robert Jenkinson, 2nd Earl of Liverpool, in 1812. As a result, any PDCA to be payable to him might be expected to be even more valuable! Perhaps the simple actuarial lesson in all of this is that such costs to HM Treasury—and by extension, the taxpayer—are minimised where we have older and fewer Prime Ministers.
What this means for the governance of the country, I shall leave for others to decide. But it certainly demonstrates how the Galbraith Tables might be used to place a value upon a future stream of income!
Jonathan Galbraith
Head of Mathieson Consulting Limited
