House of Commons - Defence - Minutes of Evidence

Select Committee on Defence Minutes of Evidence

Memorandum from the Forces Pension Society (25 February 2002)

INTRODUCTION

1. The Forces Pension Society (FPS) (formerly Officers' Pensions Society) welcomes this opportunity to submit evidence to the House of Commons Defence Committee (HCDC) inquiry into the outcome of the MoD's Armed Forces Pension Scheme (AFPS) review.

2. FPS judges the Review's proposals against two basic criteria:

(a) How well MoD meets its own stated policy objectives of meeting modern good practice standards and legitimate expectations.

(b) To what extent the well documented anomalies and inequities of the past are corrected and the likelihood of recurrence is prevented.

3. FPS bases its comments on actuarial research into the output standards to the beneficiaries of the scheme and their dependants compared to modern good or standard practice across the public sector and representative private sector schemes.

AIM

4. The aim of this paper is to present the views of the FPS on the known outcomes of the MoD Pension Review so far.

SUMMARY OF FINDINGS

5. The Forces Pension Society (FPS) has serious concerns that the MoD Pension Review proposals thus far do not meet MoD's own stated policy objectives of ensuring that the Armed Forces Pension Scheme is in line with modern good (or even standard) practice.

(a) A once in-a-generation opportunity to give a 30 year old pension scheme a thorough overhaul in order to bring it up to modern good practice standards (as promised), and to ensure that the sort of anomalies and injustices which bedevil current pensioners are not perpetuated or repeated is in serious danger of being missed.

(b) The cost neutral straitjacket imposed as a fundamental constraint has led to the same resources which have already fallen below the level required to keep up with modern good practice standards merely being redistributed.

(c) Full career and survivor benefits are well behind good practice in comparators and below Inland Revenue limits. It cannot be right or fair that those who make the greatest commitment, both in terms of service length and contributions through abated salary, should receive proportionally less good pension conditions than those who serve shorter terms.

(d) It is perverse that a costly manning tool the Immediate Pension (IP), should be financed at the expense of full career pensioners and survivors. An excellent benefit for short-service people is being funded to their detriment.

(e) Survivor benefits are heavily depressed by compulsory commutation to provide the terminal grant.

(f) Death-in-service benefits are disgracefully low but will move in the right direction.

(g) We are not unmindful of the cost factor in all of this but the cost of the AFPS appears to lie at about the median of public sector schemes, and of course "cost" does not necessarily translate into "value" to the beneficiaries.

de facto

(i) The MoD judgement that there is no manning need to apply extra resources to full career pensions is at best heroic; as expectations have been raised by the Review. If modern good practice is not eventually delivered for the quality people needed for full careers, the morale effects could be serious.

(j) There is an urgent need for MoD to find ways to correct the worst impacts of current injustices, and to prevent them from recurring.

(k) Some form of independent governance should be introduced to give employees the knowledge and confidence that their scheme meets their legitimate expectations.

6. The FPS has the best interests of Servicemen and women of all three Services, both serving and retired, and their dependants, at heart. If these people, who make such a unique commitment to their Country, are not treated at least as well in retirement as their comparators, that is unforgivable.

PREAMBLE

1. The definitive stage of the MoD Review of the Armed Forces Pension Scheme (AFPS) began on 22 September 1998[3], leading to the publication of a Consultation Document in March 2001. The House of Commons Select Committee on Defence (HCDC) examined the AFPS in the course of its inquiry into the Strategic Defence Review's Policy for People[4] in late 2000 and early 2001.

2. The (then) Officers' Pensions Society provided written evidence to that inquiry[5], and also gave an informal briefing on 18 December 2000. The Society's first responses to the Consultation Document were provided to HCDC on 16 May 2001.

3. The first inquiry of the new Parliament's re-appointed HCDC was announced to be into the outcome of the AFPS review. Written submissions were invited and the Society (re-constituted under the title of Forces Pension Society (FPS)) provided its detailed observations on the Consultation Document[6]. FPS provided a further informal briefing to HCDC on 18 December 2001.

AIM

4. The aim of this paper is to present the views of the FPS on the known outcomes of the MoD Pension Review so far.

INTRODUCTION

5. The Forces Pension Society (FPS) represents the pension interests of all ranks of all three Services, both serving and retired. FPS is wholly independent of Government and its principal objective is to secure, where equitable, improvements in the AFPS. The Society submits this memorandum of evidence, which we hope the Committee will find valuable to their inquiry.

6. We attach our submission to the MoD Pension Review consultation exercise of 26 July 20014 for completeness as it remains extant and contains our full commentary on the MoD proposals to date. We know from contact with MoD that further thought is being given to some of the points we have raised but as yet we have seen no amended proposals. In this memorandum we will highlight the salient points.

PRINCIPLES

7. When MoD set up the current review in 1998 the then Minister for the Armed Forces said "we need to ensure that the Armed Forces' scheme is in line with best modern practice". The Armed Forces Overarching Personnel Strategy (AFOPS)[7] sets out in Personnel Strategy Guideline 26 as a principle of its pension policy "to provide a pension scheme for the Armed Forces that reflects modern standards and is consistent with the legitimate expectations of Service personnel", with a goal of "setting benefits at levels which are fair to individuals and consistent with good practice".

8. Government places unlimited demands on Armed Forces personnel of a quite different order of magnitude to those placed on any other public servants: moreover Service people have no form of independent representation. Government therefore bears a heavy moral duty to provide pension conditions for Service people which are at least broadly in line with those provided for other public servants, plus any special provisions to meet the particular requirements of military service. It is not acceptable that the requirements of military service should lead to benefits' being provided that are worse than elsewhere. Nor is it acceptable that Service people should have to pay extra for standard benefits that are available elsewhere. Members of the Armed Forces make a unique commitment to their Country and are deserving of no less than modern good practice pension conditions in retirement.

9. FPS judges the Pension Review proposals against two basic criteria:

(a) How well MoD meets its own stated policy objectives of meeting modern good practice standards and legitimate expectations.

(b) To what extent the well documented anomalies and inequities of the past are corrected and the likelihood of recurrence is prevented.

METHOD

10. FPS commissioned research by actuaries to establish the value of the current and proposed benefits to pensioners and survivors compared to those enjoyed by the beneficiaries of a broad spread of public sector comparators and a typical example of the generality of the private sector, including many of those used by the Armed Forces Pay Review Body (AFPRB) to set comparative military salaries and abatement rates (to reflect pension values). This amounts to comparison against modern "standard" or "good" practice rather than "best" practice.

11. FPS also studied the work and opinions of the AFPRB and their consulting actuaries to help identify comparative values.

COMMENTARY

AFPRB Opinion

12. The AFPRB's quinquennial review of pension values, conducted by consulting actuaries in 2001[8] shows that the level of pay adjustments (abatement) recommended to reflect the value of AFPS benefits compared to those of comparator pension schemes has declined steadily form 11 per cent of comparator pay in 1981 to 7 per cent in 1997 (with a further 1 per cent reduction recommenced by actuaries but not adopted by AFPRB). This demonstrates that since there have been no significant changes to AFPS benefits during this time, comparator benefits have improved: AFPS has thus failed to keep up with modern good practice over time.

13. The AFPRB method of measuring comparator values takes full account of the levels of contribution from members of each scheme. The actuarial methodology values the AFPS and comparator schemes using an identical approach and then makes a deduction to take into account member contributions in the comparator schemes. The resulting difference is then weighted across the age and rank profile to establish an appropriate rate of abatement to military salaries to reflect differential values. The abatement is effectively a contribution from Service people's pay and the argument, sometimes advanced, that the formal non-contributory nature of the AFPS somehow confers additional value or justifies lower benefits is not valid. The AFPS is de facto contributory[9].

Cost Neutrality

14. The MoD Pension Review was conducted within the fundamental constraint of cost neutrality, ie no extra resources. This has inevitably led to proposals which merely re-arrange the resources which had already fallen behind the level required to keep up with modern good practice standards. Thus there can be no overall betterment; indeed it is likely that there will be at least as many losers as gainers in these proposals.

15. The cost factor has dominated the logic leading to a serious missed opportunity. A fundamental review of appropriate levels of benefits for a modern good practice pension scheme, with issues of affordability and priorities being addressed thereafter, has not been done. Furthermore, the opportunity to ensure that the mistakes of the past will not be repeated or replicated has not been fully taken.

Early Immediate Pension (IP)

16. A unique element of the present AFPS is the availability of immediate pensions (IP) after 16 years reckonable service for officers and 22 years reckonable service for other ranks (OR), with a fast initial accrual rate. This is a manning tool designed to pull significant numbers through their 30s and then push them out at mid-career in order to meet Service manning profiles: it has no other purpose, It is often argued that the valuable early IP makes the whole pension package very valuable and attractive. It is very costly to provide and, whilst an extremely valuable benefit to those who take it, it is evident, as we will show later, that the effect is to reduce full career pensions to a level significantly behind comparator schemes and well below Inland Revenue (IR) limits. Thus the IP is a disbenefit to full career personnel who by definition make the greatest commitment both in terms of service and contributions from abated pay. The longer one serves the less good one's pension becomes proportionally, which is perverse.

17. The MoD proposals replace early fast accrual with 1/70th accrual over 35 years for all ranks starting at entry with an IP available at age 40 or after 18 years service whichever is later. This will lead to a small reduction in the value of the IP for ORs, and officers having to serve longer to qualify for it. Thus the majority of leavers on early immediate pensions will see some worsenment.

18. Within the cost neutral straitjacket the reduced cost of the IP has allowed limited redistribution of resources but, as we will show, the principal full career benefits are only marginally improved and remain well short of standard let alone best practice. Thus what is clearly recognised as a manning tool will continue to be financed at the expense of genuine full career pensions and survivor benefits. This is indefensible.

19. It is notable (from recent statements by Minister Armed Forces[10]) that no attempt has been made by MoD to cost the IP and conduct comparative cost/benefit analysis with other non-pension methods of achieving similar manning targets. It is not for FPS to judge whether the IP is the best method of meeting manning targets but we do comment strongly on the effect on full career pensions.

Comparative Values

20. The following tables show the current and proposed AFPS principal full career benefits, which are the basis of any reasonable defined benefit scheme, compared to a spread of comparators in the public sector and a representative private sector scheme from the generality of major providers. This includes known changes to date and those which will come into effect in 2002.

1. PENSION AT RETIREMENT (NET OF LUMP SUM ELEMENT)

Scheme	Per cent of Final Salary
Armed Forces — current — proposed	48.5 per cent (retirement age 55; 34-37 years) 50.0 per cent (over 35 years)
Police/Firefighters	52.8 per cent (retirement age 55; max pension 30 years)
Principal Civil Service — current (classic) — 2002 (premium)	50.0 per cent (retirement age 60; 40 years) 54.1 per cent (retirement age 60; 40 years)
Parliamentary	53.3 per cent (notional retirement age 60; 33 years)
Private Sector	53.3 per cent (retirement age 60; 40 years)
Note: In order to compare like with like, those schemes where lump sum is through voluntary commutation of pension have been adjusted to take that into account.

Full career pensions, whilst improved slightly, will remain well behind good practice elsewhere. When the lump sum element is aggregated the value of the full career pension will equate to 62.5 per cent of final salary or 4.2 per cent below IR limits. This is indefensible. There can be no defensible reason why those who make the maximum commitment, who retire at a time not of their own choosing but to meet Service requirements, and who have limited opportunities at age 55 to find second careers at comparable earnings, should receive a pension which is less good than comparators or below IR limits. The cause is clearly the high cost of the IP: a manning tool is being brought at the expense of full career pensions.

2. SPOUSE'S PENSION ON DEATH-IN-RETIREMENT (NON-ATTRIBUTABLE)

Scheme	Per cent of Final Salary
Armed Forces — current — proposed	24.25 per cent 25.00 per cent
Police/Firefighters	33.33 per cent
Principal Civil Service — current (Classic) — 2002 (Premium)	25.00 per cent 25.00 per cent
Parliamentary	41.67 per cent
Private Sector	33.33 per cent

Survivor benefits will improve slightly but, because in the AFPS they are based on 50 per cent of the net pension in receipt excluding the compulsory lump sum element (unlike comparators where the benefit is normally calculated on the gross pension with any voluntary commutation disregarded) the outcome for the AFPS is very poor indeed. Military spouses themselves make a far greater commitment in terms of turbulence, limitations on their own careers and pension earning capability and family pressures than those of any comparable group of public servants or the generality of the private sector; and yet their pensions are well below modern good practice. There can be no justification for this.

3. DEATH-IN-SERVICE BENEFIT (PAYMENT TO SURVIVOR)

Scheme	Multiple of Salary
Armed Forces — current — proposed	1 to 1½ x (up to 2 x for death on duty) 3 x
Police/Firefighters	2 x (5 x for death on duty)
Principal Civil Service — current (Classic) — 2002 (Premium)	2 x 3 x
Parliamentary	4 x (recently improved from 3 x)
Private Sector	4 x

This benefit, which is effectively the insurance element of any good scheme, has been allowed to fall disgracefully behind modern god practice at 1 to 1½ times salary for non-attributable deaths (and up to 2 times salary for attributable deaths). Raising it to 3 times salary is appropriate but still lags behind good practice.

21. In summary therefore it is clear that the full career and survivor benefits, both current and proposed, fall well short of modern good practice and below IR limits; and the death-in-service benefit is proposed to rise from a derisory level to something approaching good practice. These less than satisfactory outcomes are for Service people and their dependants who make a unique commitment to their Country. This is morally indefensible.

COSTS

22. FPS is not unmindful of the overall cost to the employer of the AFPS, but on the MoD's own figures this appears to lie at about the median of public sector schemes:

4. COMPARATIVE COSTS

	Cost of benefits per year of service per cent of pensionable salary	Member Contributions
AFPS	22 per cent weighted average (range 18.1 per cent for ORs to 33.8 per cent for officers)	7 per cent (through abatement)
Fire Service	34.75 per cent	11.00 per cent
Police	32.00 per cent	11.00 per cent
NHS	20.00 per cent	6.50 per cent
Teachers	18.50 per cent	6.00 per cent
Civil Service (current) (Classic) 2002 (Premium)	18.5 per cent 18.5 per cent	1.50 per cent 3.5 per cent
Local Government	17.00 per cent	6.00 per cent

23. The levels of contribution are taken into account when setting comparative military salaries which reduces the pay and pension bills to the MoD: so the true cost to the employer could be measured for the AFPS as 22 per cent-7 per cent or 15 per cent compared to eg the Police 32 per cent-11 per cent or 21 per cent, or the NHS of 20 per cent-6.5 per cent or 13.5 per cent.

24. A measurement of cost does not of course necessarily translate into value to the beneficiaries. In the AFPS, both current and proposed, there is uniquely high value for that proportion who leave with an IP, whereas the full career and survivor benefits fail to meet modern standard practice in exchange for maximum commitment. As everyone makes the same annual contribution from abated pay the differential in benefits between categories is stark and difficult to justify.

25. The argument is sometimes advanced that the only justification for applying extra resources to full career benefits would be evidence that the current level is acting as a significant disincentive to pulling sufficient people of the right quality through to filling the full career positions and senior rank. Because there is an almost total lack of understanding among Service people of their current benefits and no ability to bench mark them against comparators, any such judgement is at best naive and at worst complacent. If the expectations raised by the MoD's consultation exercise are not eventually fulfilled (ie modern good practice standards) the effect on morale and retention could be dire. Moreover, when those already committed to full careers come to learn, through the better education programme to which MoD is committed, that they have effectively been subsidising the IP manning tool, there is likely to be an adverse reaction.

Governance and Representation

26. Uniquely the AFPS has no independent governance or employee representation. The MoD is the employer as well as the administrator of the scheme. The employees have to rely on their employer to provide fair good practice pension conditions, and to provide clear and sufficient information about their entitlements and options. The former function presents the MoD with a potential conflict of interest as evidenced by their cost neutral approach. There is clear need for significant improvement in the latter function as the current level of ignorance is appalling. There also needs to be an independent appeals mechanism.

Current Anomalies

27. The second of FPS' core criteria is the extent to which current anomalies are corrected and recurrence is prevented. The MoD proposals are for the future with the new benefits accruing from the date of introduction with no retrospection. Thus for those who have already retired there will be no change and the existing anomalies will persist. For those still serving there will be an option to transfer to the new scheme, and whilst there are some proposals to mitigate some of the anomalies, many of the most serious are not addressed.

28. FPS has urged MoD to devise legitimate devices to prevent recurrence otherwise injustices will be deliberately perpetuated:

(a) dynamising (best of last three years final salary uplifted for inflation) to prevent troughs.

(b) buy-in options for future improvements to prevent block date anomalies.

(c) immediate introduction of widows pensions for life for all categories including existing widows, to match the concession already made for war widows and widely available elsewhere and to prevent creation of another disadvantaged group.

3 D/MIN(AF)/DH/5/1/3, 22 September 1998. Back

4 HC 29-I and 29-II, 14 February 2001. Back

5 HC 29-II, pp 243-49. Back

6 FPS/Parl/3, 26 July 2001. Back

7 AFOPS dated February 2000. Back

8 AFPRB Thirtieth Report (CM 4993) February 2001-Appendix 4 (and separately published technical annexes). Back

9 Baroness Dean: Lords Hansard (Col 1544-46), 10 July 1998. Back

10 Hansard: HC Written Answer (Col 16W) 28 January 2002. Back



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