Examination of Witnesses (Questions 64
- 79)
WEDNESDAY 6 MARCH 2002
AIR CHIEF
MARSHAL SIR
ROGER PALIN
KCB OBE, MAJOR GENERAL
JAMES GORDON
CBE AND AIR
COMMODORE PHIL
WILKINSON CVO
Chairman
63. Welcome. Major General, could you tell us
whether you are putting in a compensation claim to the Ministry
of Defence for your injury!
(Major General Gordon) I am working on
it!
64. Thanks very much for coming. We have a lot
of questions to ask you in just an hour. Perhaps I could start
off as I did with the first session, the Royal British Legion,
with a question on the consultation process which has taken three
years. The reviews of both pension and compensation arrangements
have been characterised by delays. The MoD have now informed us
that they are re-examining a number of `major areas' of the proposals
and do not now expect firm proposals to be put to the Cabinet
until `the autumn'. In your view, were the proposals sufficiently
thought through and developed before the MoD published the consultation
document a year ago?
(Air Chief Marshal Sir Roger Palin) I think our answer
has to be no because what we were led to expect was a thorough,
in-depth review which would look at the fundamentals, cost all
the various options, then consider affordability, priorities and
then the final package. What clearly happened was that because
they laid upon this exercise a cost-neutral parameter at the outset,
it could only be, by definition, a tinkering at the edges, a redistribution
of resources within the existing cost parameter. We also, I think,
found that they had not really thought through many of the not
just structural options, as alternative structural options, but
some of the alternative options, for example, incentive schemes
overseas. It was just not thought through and certainly not thought
through in sufficient depth or breadth about other options.
65. So why do you think there has been a delay?
Is it because they now realise from the number of letters and
memoranda which have been submitted that they really have to reappraise
their initial document?
(Air Chief Marshal Sir Roger Palin) Yes, I do. I honestly
believe, from our discussions with them, that they felt that the
compensation paper was going to give them the most problems and
that the pension paper would probably go through on the nod, or,
let us say, they hoped it would go through on the nod because,
quite frankly, there is very, very little detailed knowledge about
pensions in the Service community and this Pension Society is
the only external body which has any degree of expertise. We do
not claim to be experts, but we do have a degree of expertise.
I have to say that they are listening, we are having a dialogue,
but that is inevitably slowing them down, particularly as we are
bringing them face to face with the facts and the consequences
of a cost-neutrality parameter. If you do not put more money in,
this is all you can do and, therefore, you remain behind the drag
curve in a whole range of other ways and other people have moved
on. They also, I have to say, have a relatively small staff. I
should not be apologising for the MoD, should I, but this is what
I understand the position is, that they have a small staff, they
have had to have a major staff change in personalities, so inevitably
a lot of briefing-up to do on a very complex subject, and they
are inundated with both parliamentary questions and also other
pension matters, like Major Perry, so a small staff which should
be getting on with this post-consultation phase finds itself inundated
and delay is almost inevitable.
Mr Howarth
66. Could you possibly tell us what are the
major issues that you are currently in discussion with the Ministry
of Defence about? You said that you think they are listening to
you, but can you outline a number of the key areas that you are
trying to work with them on?
(Air Chief Marshal Sir Roger Palin) Yes, and we will
do this box and cox, Chairman, if that is all right, and James,
who is our General Secretary, can chip in where I miss out. Right
from the start, because they had just been rebalancing the package,
their scope for improvement has been very limited and what they
have done is clearly, by shaving the immediate pension point and
the cost of that, which is very considerable, redistributed what
that has released and they have put most of that improvement into
survivor benefits, which were, quite frankly, deplorable or are
deplorable at the moment, and a certain amount into the longer
term where it might benefit particularly the long-serving senior
NCOs. With that as a background, we have been focusing specifically
on full-career benefits. We have covered the whole gamut of the
package, but, in essence, our major concern at the moment is that-full-career
benefits remain very significantly behind what is actually standard
practice elsewhere, both in the public and private sectors, not
even best practice. We have come off the totem pole of seeking
best practice, but they are way behind even standard practice,
and that is really where we take issue. The proposed package is
still unbalanced. It has still got too much weight, in financial
terms, for the immediate early pensionability and what is actually
happening is that the full-career people of all ranks are paying
for that because they are subsidising it by having less than standard
full-career pensions.
(Major General Gordon) I would add to that,
Chairman, that the MoD, in my view, never attempted to benchmark
their scheme against modern standard practice elsewhere. They
carried out this tinkering at the edges within the cost-neutral
constraint. We did do a benchmarking exercise which we used actuaries
to perform for us and that began to show us where the output benefits
to the beneficiaries compared with reasonable comparators. For
us, as the Pension Society, that is the only reasonable measure
of a decent occupational pension scheme, what is the value of
the output benefits to the beneficiaries. Based on that evidence,
we started to identify the major shortcomings against benchmark
and, as my Chairman has said, the principal one is in full-career
benefits which lag well behind modern standard practice. We also
looked very carefully at the work and logic of the Armed Forces
Pay Review Body where the evidence flowing from that shows that
the comparator value, judged by that independent body, of the
benefits of the Armed Forces pension scheme has declined over
time not because the Armed Forces pension scheme has got worse,
but because the comparative schemes have improved. That leads
to the inevitable consequence that the cost-neutral straitjacket
which currently contains resources which have fallen behind modern
standard practice will perpetuate that circumstance, albeit with
the resources redistributed around the model.
67. Would it be correct to say that the essence
of your case is that, first and foremost, those who join our Services
join with the prospect that they may have to lay down their lives
for their country and, therefore, they should be treated perhaps
exceptionally and perhaps even more favourably than other people
who are in the public service, but that, even worse, within the
public service they actually do worse than other people who do
not, in the course of their duty, expect to lay down their lives
for their country?
(Major General Gordon) I think it would be nice and
indeed tempting to claim exceptional treatment because of the
exceptional commitment, but we base our comments on "no less
good than other reasonable comparators" and where we can
show without, we believe, any doubt that the benefits available
to Armed Forces people are less good than standard comparators,
we believe that that is quite unacceptable from an employer which
deliberately puts its employees at extreme risk as part of their
function.
Jim Knight
68. I accept that and I accept very much the
validity of comparators with fire, police, et cetera, but I am
surprised in some way that I do not see more comparators in your
admirable technical approach to this with other armed forces in
other countries, with the same point that Gerald has made really
and that the British Legion made, that the Armed Forces should
be a special case and we should have a particular regard for them
in this country and in many ways we do not compared to, say, the
United States where we were a few weeks ago. Do you have any comment
on why, and obviously there is a limit to the amount of work you
can do, but on why you have not given us some comparisons with
the treatment of other armed forces?
(Air Chief Marshal Sir Roger Palin) We have done a
certain amount of work on this, or James has.
(Major General Gordon) Yes, some years ago now this
Society attempted to do just that, to do a comparative study with
NATO nations, which we thought were suitable comparators. We found
that although you could analyse the pension contributions reasonably
accurately, the social security, taxation and public service provision
arrangements in the other nations were so dissimilar that you
were into an apples-and-pears exercise and arriving at any legitimate
conclusions was very difficult indeed. It is terribly easy to
identify the Dutch sea captain who is on 88 per cent final salary
as a cherry-picking type of headline statement, but it is not
really very responsible, in my view, so that is basically why
we did not take it any further.
Chairman: Responsibility is not something
we are deeply worried about on all occasions!
Jim Knight: Especially of Opposition defence
spokesmen!
Mr Hancock
69. What then do you think the MoD have done
with their proposals which is actually going to please you in
the sense that they are putting down the requirements that you
feel are suitable for a good occupational pension scheme?
(Air Chief Marshal Sir Roger Palin) One of the features
of the new package that I think we would support is the general
improvement in what we might call survivor benefits. The death-in-service
benefit, for example, of 1½ times is deplorably low for people
who lay their life on the line. It is coming up to 3 and that
is actually less than the standard outside, but it is a significant
move in the right direction and for those who die in service,
there is in the compensation paper which you have been discussing
already the addition of a £20,000 one-off payment, so, by
and large, we would support those, except that they still remain
below, in percentage terms, what is available elsewhere because
they are based on 50 per cent in the new proposals and not 662/3.
70. Did the MoD not say that one of the reasons
for going through this exercise was that there was significant
inconsistency within the Forces pension scheme as opposed to what
was available not in the private sector, but available within
the public sector for other government agencies?
(Air Chief Marshal Sir Roger Palin) Inconsistencies,
I think they would claim that the major inconsistency is the early
pensionability which is unique and one must admit that the Armed
Forces pension scheme remains a fleet leader in terms of early
pensionability. There is no other scheme which allows people to
draw a pension even at 25 or 26 per cent, whatever it is, of pay
so early, but the price they are paying for that is enormous in
all the other facets of a pension scheme which you would look
for in any normal occupational pension scheme.
71. So what is your bottom line that you would
put to the Government for this scheme then?
(Air Chief Marshal Sir Roger Palin) Our bottom line
is that if you insist on an immediate pension point which is nothing
other than a manning regulator and if you are saying that there
is no other series of financial manning regulators available to
you, that you must continue with the immediate pension point as
it is proposed with its cost, then you have to put new money in
if you are to correct properly all the other facets of the pension
scheme and bring it up even to standard practice. That is the
burden of our message.
72. Have you done any assessment of what the
costs of that would be?
(Air Chief Marshal Sir Roger Palin) Yes, we have got
some of their figures.
(Major General Gordon) The MoD have made their own
analysis of that and I think I am right in saying that in order
to bring full-career benefits up to full Inland Revenue limits
of 662/3 per cent, that would add a further
£56 million per annum to the scheme costs. I think that is
about another 1.2 per cent on the pay bill. In order to improve
spouses' benefits, survivor benefits, in the way we have recommended
in our paper, that would add another £36 million per annum.
73. About a 2 per cent increase in total?
(Major General Gordon) In total.
74. It is not a great price to pay, is it?
(Major General Gordon) That is what we would contend,
and it all comes down to, in our view, political will of providing
a package of end-of-career benefits which meets modern standards.
Affordability is part of the priorities of government spending.
Syd Rapson
75. During my 39 years employed by the MoD,
I represented members and none of those were interested in pensions.
It was something which was way off, but they had a feeling that
they were fairly safe and at the end of their time they would
have a reasonably good pension. My son-in-law is a Lieutenant
Commander now in the Navy and he is of the same opinion, that
in the Navy he is going to be looked after and everything is wonderful.
What is your assessment of the role played by the pension benefits
is ensuring that the Armed Forces are able to recruit and retain
people? Is it beneficial for recruitment and retention and will
the pension proposals that are live at the moment and being drafted
increase the attractiveness of the Armed Forces as a career or
will they work in the opposite direction?
(Air Chief Marshal Sir Roger Palin) To take the first
part, I would agree with you entirely that pensions do not figure
at all high, I suggest, in a serviceman's psyche, and particularly
not in the early days. They only really become an issue if he
or she is considering leaving or staying and then it is part of
the future. The other factor where Service people are concerned
is that so long as pay is not an issue, then, by definition, pensions
is not an issue because the two are in some way linked and the
success of the Armed Forces Pay Review Body over the years in
preventing pay from becoming an issue, and governments accepting
or not their recommendations, is that pensions have never been
an issue. I have to suggest that very, very few people know anything
about their pensions. I certainly did not and James has met an
awful lot of people in our consultation phase and I think he will
tell you, "ignorance" is the word about pension matters.
To give you one concrete example, we have what we call the `terminal
grant' and most of us thought that that was sort of out of the
kindness of our employer's heart, that he gave us a bonus at the
end of our service for almost long service and good conduct. We
now know that it is actually called a `compulsory commutation'
and it is a cheaper way of providing a lump sum and it also feeds
in and depresses survivor benefits. No serviceman knows that.
He is just grateful that he will get a lump sum at the end of
his time called a terminal grant.
(Major General Gordon) I think this whole subject
of how well informed the current Armed Forces people are is critical
to this. My straw-polling around the current serving Armed Forces,
and I do a great deal of it whenever I find ways of doing it,
is that there is almost universal ignorance of the details of
the pension scheme. They know they have one, they know it is okay
and indeed the MoD's own literature, which was issued, leads them
to believe that it really is one of the best pension schemes in
the business. Now, we are critical of that sort of comment because
it is not entirely accurate. He certainly, the serviceman, has
absolutely no capacity for benchmarking his benefits against standard
practice elsewhere and our concern is that the MoD's approach,
which is along the lines of, "We don't have a problem retaining
people through to full career. We may have retention problems
elsewhere, but we don't have this problem of retaining sufficient
quality people through to fill the long-serving senior slots",
we believe that that is over-optimistic. The pension review process
has raised expectations. The commentary on launching the review
was that this would be a "fundamental review which would
lead to a modern pension scheme which met modern standards and
legitimate expectations". The MoD have undertaken to carry
out an education programme when they produce their final proposals.
Our concern is that that education programme will cause a good
deal of anxiety when they discover that the benefits are less
good than they ought to be.
76. So there is a real danger that you can see
that if the scheme does not come out as well as we think or better
than anyone anticipates, then there will be a retention problem?
(Major General Gordon) There could be.
(Air Chief Marshal Sir Roger Palin) There will be
some categories of people who will benefit and clearly that is
retention-positive. One cohort, if I can use that word, of people
who will benefit are long-serving senior NCOs because they will
qualify for full pension at 35 years of 737 and there is now an
even accrual rate of 1/70th as opposed to 1/90th at the back end
of the old days. What we have to ask and what we do not know is
how many of these people are there. From my own service in the
Royal Air Force, its manpower structure encouraged long-term retention
of highly-trained, expensively-trained senior NCOs. The Royal
Air Force will welcome that element of this package, but in the
other two services, the numbers who are engaged to full career
among senior NCOs is relatively small in comparison, so we do
not know on this whole question of retention-positive/retention-negative,
winners and losers, we have not got the details, but looking at
it overall, we judge that there are going to be an enormous number
of "losers", possibly the majority, and it will be something
that you perhaps will wish to put to the MoD themselves.
77. The pensions proposals represent a rebalancing
within the proposals away from pensions towards ill-health and
death benefits. Do you agree with the rebalancing and, if not,
what priorities would you set?
(Air Chief Marshal Sir Roger Palin) I think the revamping
of the ill-health is sound, in principle, three tiers. I think
that is sound, in principle. As with all these things, normally
the devil is in the detail and it depends of course on whether
it is attributable to service or not because one of the things
that is not specified in the new documents is the tax regime which
will surround the various benefits, particularly in the case of
a spouse. I think the MoD has got to put much more flesh on the
bones of both the ill-health and survivor benefits generally before
one can cast a judgment. In principle, they are moving in the
right direction because they were so deplorably poor. I am not
saying they bring it up to standard practice elsewhere, but they
are an improvement.
(Major General Gordon) If I might add to that, I think
that is exactly right, that the move of resources into survivor
benefits and ill-health benefits is essential, but within the
cost-neutral straitjacket, that has an inevitable consequence,
that the full-career benefits are depressed. Going back to your
earlier question, I think that when the full-service server, the
soldier, sailor, airman and officer, discovers that he is effectively
subsidising a manning tool, he may be somewhat disappointed by
that.
(Air Chief Marshal Sir Roger Palin) You see,
more people are likely to take their option to leave if they know
the full implications of the pension package and the full-career
benefits. People these days are more materially minded. We know
that. They do do their sums and the information and data on which
they base their sums is available, widely available, so I fear
that a lot of people would be less likely to stay in. The whole
point about the IP, I know you are coming to it separately, Chairman,
is of course yes, it helps to pull some people through, but equally
they are acting as a push for a whole raft of people that you
might want to retain.
Mr Jones
78. Just on that point and what Syd asked about
in terms of what people's perception of this is, as I have over
ten years been involved in a variety and a lot of pay negotiations,
I cannot ever remember or on a very few occasions pensions being
part of the actual pay claim. It was only usually at the end of
the day when we had a bit of spare money and we did a bit of window-dressing,
so I agree with you in the sense that the immediate thing is what
people get in their pay packet every week, so that is their concentration.
Is it not, therefore, a little bit of a shroud, this idea that
people will be able to go at 40 in the sense that when people
get to 40, they are not possibly going to leave because of their
pension, but they are actually going to leave in most cases perhaps
to pursue a different career somewhere else and perhaps get more
than they are actually getting now in the Armed Forces? Is it
not a syndrome of what we get in the police force where people
can retire at 50 and most of them retire on the Friday and go
into a well-paid job on the Monday morning? Is it so crucial that
we have this early retirement, being able to retire at 40?
(Air Chief Marshal Sir Roger Palin) The actuaries
who do the five-yearly valuation do a lot of work on what they
call the re-employment of servicemen, not just at the immediate
pension point, but all the way up the final retirement point of
55 and they do it by questionnaire. They have had a very good
response on this last one, much better than the first one they
did in 1995, and it is quite interesting, the numbers, and I have
not got the percentages in my head, but the numbers of people,
you are mentioning, who are actually finding a job or who do not
and what levels of pay they manage to achieve and whether the
aggregate of the immediate pension and their pay level—
79. Yes, but some of them take lower-paid employment
to get their pension.
(Air Chief Marshal Sir Roger Palin) Yes, but at least
it gets them a job.
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