Forces Pension Society submission to the
Ministry of Defence (July 2001)
A. Officers' Pensions Society Submission
of Evidence to the MoD Review1998.
B. MoD Consultation DocumentMarch
C. Armed Forces Overarching Personnel StrategyFebruary
1. The Forces Pension Society (FPS) (formerly
the Officers' Pensions Society) submitted full and carefully researched
evidence at the invitation of the then Minister of State for the
Armed Forces at the start of the MoD Pension Review process in
1998 (Reference A), and had previously submitted evidence to the
earlier review in 1994 and the Bett Independent Review. The evidence
at Reference A, which was also submitted to the House of Commons
Defence Select Committee in October 2000, remains extant and this
document should be read in conjunction with it.
2. This Society welcomes the invitation
to comment further on the Consultation Document issued by MoD
in March 2001 (Reference B). Where appropriate our comments in
this document are cross-referenced to the relevant section of
the Consultation Document.
3. This Society has, throughout its 55 year
history, represented the pension interests of all ranks of all
three Services, both serving and retired, to Government. Its recent
decision to admit all ranks to membership and to change its name
makes explicit who it represents, which is the whole Service community,
both serving and retired.
4. The aim of this paper is to set out the
Forces Pension Society's views on the MoD Review of the AFPS as
described in the Consultation Document.
5. The FPS focuses on the pension interests
of both current and future beneficiaries of the AFPS and their
dependants, who make a unique commitment to their Country. Because
the demands placed upon them throughout their service by the Government
are unlimited and of a different order of magnitude from those
of any other public servants, Armed Forces personnel are deserving
of exceptional treatment in retirement: there is a very heavy
moral responsibility on Government. Pension conditions are earned
through service as well as through de facto contributions
from abatement of pay.
6. The FPS takes careful note of the MoD's
"Overarching Personnel Strategy" (Reference C) particularly
the underlying principles in PSG 26 "to provide a pension
scheme for the Armed Forces that reflects modern standards and
is consistent with the legitimate expectations of Service personnel",
which we applaud. This Society measures the consultation proposals
against those principles.
7. Equally important to the FPS is the inequitable
treatment of those ex-Servicemen and women and of those widow(er)s
of former personnel whose benefits seem to have been arbitrarily
reduced. These include, for example, people whose pension rates
have been permanently depressed by the effects of short-term Government
pay restraint measures. The Society's examination of the Pension
Review seeks assurance that future pensioners will have been protected
against such effects. Similarly, for the effect of legislative/administrative
block dates on the eventual shape and size of pension benefits
for personnel and surviving dependants, any new scheme will be
tested for correction of current anomalies and for protection
against future difficulties of the same kind.
8. The Society notes that the Review was
undertaken with cost neutrality as a guiding principle, indeed
serious constraint, which makes it inevitable that there can be
no overall betterment regardless of any current shortcomings.
We comment forcefully that where the existing scheme does not
meet modern best practice standards it cannot be acceptable to
perpetuate that situation. Any reasonable attempt to modernise
a pension scheme which is over 30 years old should start from
first principles, with analysis of what is best for individuals,
the Armed Forces and Government and what is likely to recommend
it to potential members. Judgements on affordability should follow
that process, not precede it.
9. In summary therefore the FPS approaches
its task in the context of:
(a) The Unique status of Service people.
(b) Testing the proposals against modern
best practice standards and the correction of past injustices,
(c) Noting the effect of the cost neutral
10. Cost. (Page 3) Cost neutrality
dominates the logic and so by definition there can be no overall
betterment, only a redistribution of resources. Indeed, there
will be (relative) "losers" as well as "winners".
The three main variables are full career pensions, immediate pensions
(IP) and survivor benefits. It appears that the total value of
the full career pension has fallen from 66.67 per cent to 62.5
per cent of final salary (see paragraph 19 below); that the value
of the IP will reduce; and that survivor benefits will improve.
No logic is deployed to show how this redistribution has been
calculated. The emphasis is on costs rather than benefits. Despite
our repeated requests MoD has failed to expose how the cost neutrality
balance has been achieved, and one is bound therefore to deduce
that this is actually a cost cutting exercise.
11. Unfunded. (Page 2) No logic is
advanced to justify remaining as an unfunded scheme. One point
of view is that a funded scheme might offer better value to pensioners
as well as reduced costs to HMG, but there is no discussion to
support or deny this thesis. One could assume that the Review
Terms of Reference simply denied the option.
12. Contributions. (Page 14) The
scheme remains formally non-contributory despite abatement of
salary, again with no discussion of the pros and cons. The scheme
is de facto contributory and this should be made explicit
in order to confer some ownership and more flexibility, and to
allow pensions to be based on gross salary not abated salary.
13. Governance. MoD continues (under
Treasury direction) to be both the employer and the guardian of
pensions. This is a straight conflict of interest. At the very
least some form of independent governance structure is required
to safeguard pensioners' interests. The AFPRB reinforced with
professionally competent pension trustees is suggested as a potential
14. Defined Benefit. (paragraph 4.2)
The proposed retention of a defined benefit scheme is supported,
albeit that no logic is deployed to argue the pros and cons.
15. Current Shortcomings. (Page 3)
The scheme will only apply to new entrants and active members
who transfer in voluntarily. There will be no retrospection and
therefore no correction of current anomalies/injustices with the
exception of widows' pensions for life (see paragraph 25 below);
nor are there any measures to prevent recurrence. It is essential
that mechanisms are included to prevent further incidences of
block date induced inequities (some sort of buy-in in options
for example); and pay restraint induced troughs (dynamising for
example), otherwise the new scheme will deliberately perpetuate
injustices and this is indefensible.
16. Good Practice and Special Features.
(Page 2) There is no definition of what constitutes best or good
practice or of the special conditions of Service life which influence
the structure of the scheme. Has anything changed and if so what
impact has that had?
17. "All of One Company".
The revised pay structure introduced by Pay 2000 will perforce
move the pension scheme off representative rates of pay. Thus
"all of one company" will cease to be a feature; this
is outside the FPS's purview, but the Society must assume PPO
concurrence. The education programme, needed to explain the benefits
of the new scheme, will no doubt cover the change in approach.
18. Education Programme. It is clear
from our regular contacts with current Armed Forces personnel
at all levels that there is widespread, almost total, lack of
knowledge of the current pension scheme except in the sketchiest
of terms. It is essential that MoD devise and deliver a professional,
impartial and transparent education process for Armed Forces personnel,
so that individuals can make informed decisions when invited to
transfer to the new pension terms. MoD has a duty as employer
to ensure that all its personnel fully understand the benefits
and disbenefits of the changes for the circumstances of every
19. Full Career Pension. (Paragraphs
3.6 and 4.13) The aim of the AFPS is to provide a full career
pension at normal retirement age (55). The current scheme is described
by MoD to scheme members as being equivalent to 66.67 per cent
of final salary if pension and terminal grant are aggregated (Reference
D). The Review's proposals claim that it is actually 62.5 per
cent and that it should remain so. The existing scheme is therefore
not a genuine full career pension and nor is the new proposal.
This is very difficult to justify particularly as AVCs are currently
denied on the grounds of no headroom. Indeed failure to provide
a full career pension at normal retirement age is nothing short
of a scandal. We find the comment that there were few complaints
from members of the Armed Forces about the level of pensions both
implausible and misleading, given the widespread lack of knowledge
of their own scheme let alone appropriate comparators. Furthermore
the consultation pamphlet sent out by MoD to current service people
through the chain of command was both inaccurate and misleading,
and may well lead to ill informed or inadequate response from
those likely to be most critically affected.
20. Accrual Rate. A rate of 1/70th
is retained (albeit the current scheme is faster to the IP point
and slower thereafter), which leads to 50 per cent of final salary
after 35 years (currently 48.5 per cent after 34 years). Full
career pension is therefore better but still short of Revenue
limits. Anything short of a full 35-year career, given accrual
rates, is likely to be less in value than currently for the majority.
21. Immediate Pension (IP) (Paragraphs
4.6-4.9) The accrual rate is straight line and the IP point is
later for officers. It is not for FPS to comment on whether the
new IP is a good idea as it remains the case that the IP is a
management tool for manning and retention purposes. Four key comments
are however relevant:
(a) The cost of providing the IP should be
met by MoD rather than by reduced full career pensions which appears
to be the case now;
(b) The value of the IP will reduce for officers
in both volume and time terms and for ORs in volume. As the abatement
rate is very largely predicated on the value of the IP there is
a clear case for an early re-evaluation by AFPRB;
(c) Removal of early fast accrual is a significant
worsenment as the majority leave before full career;
(d) It appears that any savings from the
reduced cost of the IP are translated to survivor benefits rather
than to full career pension but with no clear logic (see paragraph
22. Common Scheme. (Paragraph 4.3)
A single common scheme for all ranks is to be welcomed but there
are some questions about reckonable service. It will be possible
to serve for 39 years (16-55) but only 35 years will be pensionable
ie four fallow years; this is even less satisfactory than the
current potential three fallow years for officers and two for
ORs, and is puzzling given that the full service pension at age
55 is well below Inland Revenue limits.
23. True Final Salary. (Paragraph
4.5) This is a significant change and is logical and supportable
(albeit the logic breaks down when specialist pay is addressed).
FPS also welcome the claimed smoothing effect on differentials
and pension code troughs. However, there will be almost no impact
on pay restraint induced troughs and some form of protection mechanism
is needed for the future as such anomalies are almost certain
to recur. Dynamising is one such legitimate mechanism which should
24. Death in Service. (Paragraph
4.19) Doubling from 1½ x salary to 3 x salary is welcomed.
However, it is disgraceful that this element was ever allowed
to slip so far behind common practice of 3 x salary.
25. Survivors' Benefits for Life.
(Paragraph 4.19) As promised this is a main recommendation for
all types of widow(er) and is welcomed. However, for non-attributable
widows the concession will not apply until the new scheme is effective
(2004) and with no retrospection, unlike for existing attributable
widows who are already included. This concession should be extended
to existing non-attributable widows (and new ones before 2004)
with immediate effect. Government has conceded the principle and
could gain much credit at minimal cost from being magnanimous
and inclusive in advance of anything else.
26. Terminal Grant. (Paragraph 4.14)
The proposal to allow opting out of the terminal grant (so-called
inverse commutation) to secure higher pension benefits offers
welcome choice and flexibility. However, unless it also confers
widows' benefits on the gross figure before commutation, which
is not clear, it leaves widows on half of 50 per cent rather than
half of 66.67 per cent as allowed. Widows' benefits should be
based on the gross figure regardless of commutation (as is normal
27. Specialist Pay. (Paragraph 4.12)
The Review recommends that this remain unpensionable, with the
Review's cost neutrality stipulation a major factor in this outcome.
The Society would not wish that to be the last word, even though
only some 10 per cent of Service personnel are affected, recognising
the significant constituent of total remuneration that specialist
pay can represent (throughout a full career), and the gulf that
opens for widows between full pay and pension based only on basic
pay. (Also, and cf paragraph 4.11 of the Review document, it is
noted that the non-pensionability of Specialist Pay is ".
. . taken into account in setting rates of Specialist Pay".
The Society can find no reference to this in AFPRB Reports.) Nevertheless,
as an initial corrective, the proposal for improved and part funded
AVCs is a neat solution. This may also offer a route for solution
to other issues which MoD say are unaffordable.
28. Portability. (Paragraph 4.9)
True portability of accrued pension rights is still not offered
(despite it being a statutory requirement elsewhere). We are not
clear how the suggested bonus instead of IP would work or what
benefits it would offer to the employer or the pensioner. By definition
a transfer value should be cost neutral and it is not clear why
this normal facility is not offered.
29. Total Value. The value of the
proposed full career package equates to 62.5 per cent of final
salary (pension of 50 per cent plus terminal grant). This is well
below Inland Revenue limits of 66.67 per cent and compares poorly
to many existing comparator schemes. The proposed net pension,
although better, is not as good as some:
NET PENSION AT RETIREMENT (AFTER COMMUTATION)
||Per cent of Final Salary
|Armed Forces||50.00 (at retirement age 55; 35 years service) new proposal
|Fire/Police Forces||52.80 (normal retirement age 55, max pension at 30 years)
|Civil Service||50.00 (at retirement age 60; 40 years service)
|Teachers||50.00 (as Civil Service)
|Parliamentary||53.30 (notional retirement 60; 33 years service)
|Airline||53.30 (normal retirement age 55; 33 years service)
This constitutes the most significant comment which this
Society wishes to make. The net pension at normal retirement age
falls well short of a full career pension and is considerably
worse than best practice. There can be no justification for Armed
Forces personnel to be treated less favourably than comparators.
30. Accrual Rate. This continues to be set at
1/70th which is worse than normal practice of 1/60th. It is of
interest that MPs have recently voted to improve their scheme's
accrual rate from 1/50th to 1/40th with costs to be borne by the
Exchequer despite the recommendations of the SSRB that the 1/50th
rate was fair and indeed generous.
31. Widows. Benefits appear to be based on ½
of 50 per cent which is a marginal improvement, but this still
compares poorly with comparator schemes:
WIDOW(ER)'S PENSION ON DEATH IN RETIREMENT
| ||Per cent of Final Salary
|Armed Forces||25.00 Proposed
|Civil Service 2002||33.33 Agreed
This is the combined consequence of paras 26 and 29 and therefore
merits equal strength of comment to para 29 above.
32. Widow's Benefits For Life. These are widely
available and the AFPS is woefully behind. MPs have recently voted
this benefit into their own scheme with costs to be borne by the
Exchequer, and there can be no justification for not introducing
this into the AFPS with immediate effect.
33. Death in Service. 3 x salary is quite common
but 4 of even 5 x salary is also available elsewhere, albeit that
there is some evidence of some schemes drawing back:
DEATH IN SERVICE BENEFIT PAYMENT TO SURVIVOR
|Armed Forces||3 x salary proposed (up from current 1.5 x salary)
|Fire/Police Forces||5 x salary if on duty; 2 x salary if natural causes
|Civil Service||2 x salary
|Civil Service 2002||3 x salary
|Teachers||2 x salary
|Parliamentary||4 x salary
|Airline||4 x salary
This improved benefit is gained at the expense of the short-term
widow's pension, which is withdrawn. (It is also withdrawn for
death in retirement which appears wrong.)
34. Costs. Cost limitations dominate the logic
as opposed to best practice or even fairness, which means that
the new scheme continues to fall short of modern standards. This
is difficult to reconcile with the MoD's stated aims (see paragraph
35. Ill-Health Benefits. These are difficult to
judge as the devil is in the detail, but as a generalisation,
given the nature of the Unique service and the especially hazardous
occupation, the AFPS should at least err on the side of generosity
and inclusivity. More information is needed on how this compares
to best practice and how it will be managed, judged and appealed.
The employer is also the arbiter.
(a) In any properly administered scheme, ill-health retirement
will be involuntary and an employee whose contract is being terminated
prematurely for medical reasons should be entitled to compensation
for loss of career. As with redundancy (which is another form
of involuntary severance)this element of compensation should
be paid irrespective of how good or bad an individual's employment
prospects in civilian life might be;
(b) To the extent that redundancy compensation schemes
can include provision for early payment of immediate pension,
comparable provisions should apply in all categories of ill-health
retirement as a basic entitlement. The proposal in paragraph 4.18
of the document, that those who are discharged with a medical
condition which is judged unlikely to affect their earnings capacity
in civilian life should have no entitlement to an ill-health pension,
is too simplistic and in practice would be open to challenge;
(c) A good occupational pension scheme should also include
an element of personal ill-health insurance, in which enhanced
rates of ill-health pension are paid to individuals whose earnings
capacity in civilian life is likely to be significantly impaired.
However, individual circumstances will vary widely. Such additional
enhancements should be assessed individually, on a case by case
basis, and awards made by a properly constituted independent Discretionary
36. A list of other points which should also be addressed
is at Annex A. Many of these are pragmatic suggestions for solutions
to anomalies or so-called unaffordability of important benefits.
37. The Forces Pension Society believes that the AFPS
is well overdue for modernisation. It has many anomalies and shortcomings,
and no independence of governance. It also fails to reflect modern
best practice standards or the legitimate expectations of Service
personnel and their dependants. Given the Unique nature of Service
commitment this is indefensible.
38. We are disappointed to see that the Review's proposals,
constrained as they are by the dictum of cost neutrality, will
perpetuate this unsatisfactory situation. We recognise that some
improvements are identified, but many serious weaknesses remain,
and it would appear that there will be many more losers than gainers.
39. Of particular concern are:
(a) The failure to provide full career pensions and survivor
benefits which come anywhere near Inland Revenue limits or reflect
modern best practice standards;
(b) The impact of the reduction of the value of the IP
for the majority of Service leavers;
(c) The lack, not only of any attempt to correct past
injustices, but also of any mechanisms to prevent recurrence of
the many inequities caused by past weaknesses.