Select Committee on Defence Minutes of Evidence

Forces Pension Society submission to the Ministry of Defence (July 2001)



    A.  Officers' Pensions Society Submission of Evidence to the MoD Review—1998.

    B.  MoD Consultation Document—March 2001.

    C.  Armed Forces Overarching Personnel Strategy—February 2000.

    D.  AFPS 1 (Rev 96).


  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, and

    (c)  Noting the effect of the cost neutral constraint.


  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 way forward.

  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 individual.


  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 10 above).

  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 be investigated.

  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 practice).

  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:


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)
50.00 (as Civil Service)
53.30 (notional retirement 60; 33 years service)
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:


Per cent of Final Salary
Armed Forces
25.00 Proposed
Fire/Police Forces
Civil Service
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:


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
2 x salary
4 x salary
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 6 below).

  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 Awards Panel.


  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.

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