Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 64 - 79)




  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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