Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



  80. I will give you an example here. We have doormen here, for example, who are on a Forces pension and on a salary possibly they would not actually opt for—
  (Air Chief Marshal Sir Roger Palin) And they are prepared to take a lower salary because they have got the Forces pension.

  81. If you take the two together, it is quite substantial.
  (Air Chief Marshal Sir Roger Palin) Yes, but what I am saying is that there is some research done on this which the actuaries have done which is certainly worth your researchers picking out for you—


  82. In fact our staff are very proactive and the information is arriving this very afternoon, so we anticipated what you were going to say.
  (Air Chief Marshal Sir Roger Palin) But I think the second part of Mr Jones' question was whether we need this immediate pension point at all, which is of course crucial. The MoD will answer this, that they went through exhaustive modelling of alternative methods, they will say, because the consultation document says so, and that they judged that the risk to the manning structure and all the other regulators that they studied was too great and would be just as costly.

Mr Jones

  83. This is the point that I find difficult to grasp, that somehow you use a pension scheme actually to regulate your personnel.
  (Air Chief Marshal Sir Roger Palin) So do we. It is fundamental.

  84. There must be better ways as in industry of making sure that you move people through a career path or a development process other than using the pension scheme.
  (Air Chief Marshal Sir Roger Palin) If they stick with the pension as part of that mid-career package and forcing people to leave, we feel that there ought to be a whole range of financial instruments, if you like, from which an individual can choose, what is best for the individual. Some of it might be linked to a pension maybe of lower proportion than the immediate pension now. They have started towards this in suggesting a bonus scheme. There is no flesh on the bones of a bonus scheme that they suggest and they will be putting flesh on those bones, but that is just one way in which you might incentivise people to stay in longer so that they do not go out in order to take advantage of the immediate pension and then find themselves a less well salaried job elsewhere, financial retention incentives of different sorts, but we do not think that they have done that work, though we are not sure.
  (Major General Gordon) I think it is remarkable, if I may say so, that the MoD have not carried out a comparative cost-benefit analysis of alternative methods of meeting their manning needs, and that is not just me saying that, but the Minister said that in the House the other day, because without doing such work, how can they be certain that the immediate pension is the most cost-effective way of meeting their manning requirements? I would also support entirely your view that to use part of the pension as a manning regulator is perverse, particularly if it leads to a depression of full-career benefits in the way that we have described. If there was no problem with benefits elsewhere, we would not have a problem with it either, but because the cost of the immediate pension is so high and it is borne within the cost-neutral straitjacket, the distorting effect is very obvious.

  85. What I do find odd is if you look at large companies, certainly the ones I used to negotiate with, they have systems that actually do mean that people do progress through the system or do leave at certain points. There must be comparisons in the private sector or in large public sector bodies where you have a system which allows people to progress through the career pattern and there is a way of making sure your age profile is what you require. I accept they will probably come back and say it is different because you need younger people, but I do not think it is beyond the wit of man?
  (Major General Gordon) I entirely agree with you, I have to say.
  (Air Chief Marshal Sir Roger Palin) It does happen. They have engagement structures, trades, trade groups, age and rank, almost too mathematically precise, that is why so many people are required to leave at certain ages. In my own Service they join for 8 to 12 years and if they do not get further service to the pension point, 22, they are out. This is one of the fundamental recommendations that Sir Michael Bett made, that all three Services should move to that sort of structure engagement profile so that you do know who you want and when. That is what the immediate pension point is all about, particularly for the Army and Navy, less so for the Royal Air Force, because of the age factor you mentioned, because they do require a younger fighting force. They need lots and lots of people, broadly speaking, to the age of 40 and then they need to slim down that pyramid quite drastically.

  86. I think there are other ways of doing it other than using pension schemes.
  (Major General Gordon) A standard sort of occupational pension scheme does not use any of the pensions' aspects to manage its manpower in and out.

  Mr Jones: Some local authorities tried to start to do that in the early 1980s.

Mr Hancock

  87. And still do!
  (Major General Gordon) If you want to push people out early you simply give them a fixed term of six years, or whatever, and then you push them out with a gratuity, or whatever you want to give them, then their accrued pension rights are portable into their next career, that is the more normal method. If you want to keep them for some reason or other then golden handcuffs are widespread in the private sector.
  (Air Chief Marshal Sir Roger Palin) The contention from the Services, not the Royal Air Force, is that in order to pull these people through to that magic point financial incentives of the normal sort are not enough, it is the pensionability, the pension they can draw at that age, that persuades the chap who might leave at the age of 30 or 32 to stay on until the age of 38 or 40.

Mr Jones

  88. That does not wash with me.
  (Air Chief Marshal Sir Roger Palin) That is their contention. The Royal Air Force are different, I think the Royal Air Force would argue, much as I did 10 years ago, the immediate pension points are darn useless because it encourages people to leave, air crew, expensively trained senior NCOs, and people like that, who you want to retain. You want to retain them for a full career because they are your fighting capability. The three Services need to move together or want to move together.

Mr Howarth

  89. Given that you say that it is indefensible to use this as a manning tool what do you propose in its place? Can I ask a more technical question, given this is principally a problem for the Royal Navy and the Army, does their budget have to bear the cost of that or does it just come out of MoDs overall pool of funds?
  (Air Chief Marshal Sir Roger Palin) The second question first, and James will correct me if I am wrong, basically it is the Paymaster General, the Treasury, who bear the cost of public sector pension schemes. The MoD makes a paper transfer, accrued liability, whatever it is called, of a proportion of that each year from its defence budget.
  (Major General Gordon) Yes. In the accounts of the MoD, which is audited by the Auditor General every year, it is recorded. I can give you the document if you wish to read, it is not very technical.


  90. We have that.
  (Air Chief Marshal Sir Roger Palin) It shows that the MoD makes a block transfer of cash, which is a percentage of the pay bill, it is currently 22 per cent of the pay bill, which accounts for the employers accrued liability for the pension liabilities.

Mr Howarth

  91. In other words, it is a general MoD transfer, it not a cost attributed specifically to the Army.
  (Major General Gordon) Not to any particular Service. Of course it does bear on the MoDs total budget.
  (Air Chief Marshal Sir Roger Palin) Yes, I think so. I do not know how far they have gone in breaking down their budgets. I dare say it is disaggregated down to individual levels, so a person employing people knows the full cost of employing those people. At the end of day if there is new money it either comes from the Exchequer or it comes from within the defence budget, which means there will be something less they can afford within the defence quota.

  92. Going back to my first question, if it is indefensible as the manning tool how do you propose that we should change it?
  (Air Chief Marshal Sir Roger Palin) I think what we said is it was indefensible if the effects of it depress full career benefit because the man who commits himself for longer has his gross pay discounted by the AFPRB abatement for longest and gets the comparatively poorest return, that is indefensible.

  93. We have that message pretty firmly.
  (Air Chief Marshal Sir Roger Palin) If they brought those full career benefits up and if the Ministry continues to think that the immediate pension is the best manning tool they can come up with to solve the structural problem—
  (Major General Gordon) They should pay for it.
  (Air Chief Marshal Sir Roger Palin) That is not for us to judge.

  94. You bring the full-term career Serviceman up to standards and leave the existing immediate pension arrangement?
  (Major General Gordon) That is really not for us to say. If the MoD judged that the IP is the best tool then they need to fund that in a different way, not at the expense of the full career pension, that is what is indefensible.

Jim Knight

  95. I want to return to something that you covered largely when you replied to a question from Syd earlier on, which is round how Service personnel are informed of new proposals when they come out, so that they have options to opt in if they choose to. I am particularly interested in whether you think Service personnel are generally aware that they, in effect, make a contribution towards their pension through abatement of pay?
  (Air Chief Marshal Sir Roger Palin) I would be very surprised if the generality of Servicemen were not aware that their pay is discounted in some way or other to take into account the pension benefits. I doubt there is any one Serviceman, possibly even including the senior personnel officers, who understand the methodology and how it is done and the intricacies and the variations that lie within it and the anomalies, the discrepancies. I hasten to say if they do not I hope they never find out because there are such broad variations that an awful lot of people would say, "this is unfair, because I am paying a darn sight more than actuarially I ought to be". Equally there are others that pay less. At the end of the process the actuaries recommend an appropriate level, the AFPRB uses its wider judgment, quite rightly, and, says, "we think it should be there", that is then published in all the documents, pay levels are depressed by that amount and that becomes their gross payment. I think they are generally aware, but not of the mechanics.
  (Major General Gordon) I think they are more than just aware, they look upon it as a de facto contribution, their base pay is depressed by a pension abatement.

  96. Just to go back to the comments that were made earlier, we are going to end up with a process, we hope, sooner or later that a decision will be made and something will be put to Service personnel, they will have an option of staying with what they have got or going into a new scheme, so comparisons will start to be made, how can the MoD handle that or avoid them? There will be some inquisitive individuals, one assumes, who will really start to pick away and try and get to grips with some of these issues. That is set against an environment out there where pensions are being talked about a lot now,—Panorama this weekend was about final salary schemes and those going away. We have the Fire and Police Services really struggling to fund their pension schemes and the prospect of whether or not they will change. It is a more informed public if they choose to be, and they may choose to be because they have to compare to make a choice about going into a new scheme.
  (Air Chief Marshal Sir Roger Palin) There is a whole step which has to take place that we have not heard the MoD talk about too much, presumably there has to be an actuarial reevaluation of the new scheme, whatever it is, after they have done further work because it may be they say that five per cent is an appropriate abatement. For the new scheme you can transfer only pay five per cent of your pay, but if you stick with what you have you only pay six per cent. I do not see how the MoD can do the educational process and give people the option to transfer until they have done this further step.
  (Major General Gordon) In my view the employer has an absolute responsibility to inform his people better than the MoD does now—the MoD's efforts to inform its people now are, frankly, pretty weak. Having raised expectations all of the serving members of the Armed Forces will expect to be informed about what their old conditions were, how the new conditions compare, not only between each other and with modern practice standards but also what does it mean for me, the individual, where do I lie on the curve, which decision should I make, to stay with the old or transfer with the new. That will all depend on the rank and length of service.

  97. As a society that now covers all Service personnel and not just officers I could almost liken you to a trade union?
  (Major General Gordon) Heaven forbid.

  Mr Hancock: It is not that bad. You will have another arm broken!

Jim Knight

  98. In other walks of life one would expect, it would be likely that the trade union would end up playing a role in the educative process and responding to individual members of the union or in your case individual Service personnel coming to you and saying, "the MoD told me one thing, I need a voice I can trust". How are you as a society going to deal with that?
  (Major General Gordon) We are a membership society, funded entirely by membership subscription and, therefore, have quite limited resources. Were a member to come to us and ask for that advice we would do our level best to respond. Two things, we will be critically dependent on the MoD for factual information and we will be seeking that from them as soon as the package is finalised. Secondly, under any no circumstances can we act as an independent financial adviser, we are not licensed.

Mr Jones

  99. Anybody who left the Services and was in an excellent trade union could get that advice from them?
  (Major General Gordon) He could, but if he has left the Services he has no entitlement to any service under the new scheme anyway.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 9 April 2002