Examination of Witnesses (Questions 140
- 159)
WEDNESDAY 13 MARCH 2002
RT HON
ADAM INGRAM
AND MR
BARRY MILLER
140. All of this I entirely understand; I used
to work in the occupational pension sector and I know well the
perils of comparing unlike with unlike. I merely say that the
study that you referred to would have been better done before
the statement was made.
(Mr Ingram) That is an opinion, I would suggest.
141. I have an opinion, but you have an opinion
as well, which is unsupported by actuarial or other advice.
(Mr Miller) If I may, please? It is not the case that
it is unsupported by actuarial examination. The Armed Forces Pay
Review Body did involve actuaries in reaching the conclusions
they did, and their clear conclusion is that in terms of the benefit
to members the Armed Forces scheme is between 6 and 7 per cent
better than the comparators.
142. So, in fact, if we move that along from
what the Minister said, there is some expert advice. If that exists
we would like to see it to support what the Minister said.
(Mr Miller) I will need to talk to the Pay Review
Body, because they are an independent body.
Mr Cran: But you will come back to us on this.
Chairman: We have that information already.
Mr Cran
143. There are some who would say that this
is not a very generous scheme at all, because although it costs
22 per cent of pensionable pay, there is a 7 per cent abatement,
so that means the cost to the employer is 15 per cent. Some would
say—whether that includes me or not is another matter—that
that is very parsimonious indeed by comparison with, let us say,
the Fire Service: cost to the employer 23.75 per cent; Police,
21 per cent; Civil Service 16.5 per cent with a members contribution
of 1.5 per cent. Where is the generosity here?
(Mr Ingram) You say you already have that information
in terms of the comparator study in all of this. We are not saying
that it is the best in every element. I do not think many pension
schemes could say that. Indeed, probably those schemes which would
make that assertion are probably those schemes in the private
sector that are now being examined as being too expensive. Mr
Cran, you are only too well aware of what is happening in the
private sector; the way in which industry is resiling from this
particular cost-element. Remember, it is put within a context
of being part of a manning tool as well, and remember also what
I said, that if it was a critical issue in terms of that strategy,
then we would have to revisit it in a different way. It is because
of those aspects that we believe that it is a generous scheme—which
may be debatable.
144. It is indeed.
(Mr Ingram) It is always going to be debatable and
we will never satisfy everyone to the nth degree. Indeed, our
own MPs pension scheme—which many would say was exceptionally
generous—has been voted on by the House to make it even
more generous. Things can always improve. It is the role that
is played by that pension scheme. We believe it is generous at
the present time, we believe that it is well-received within the
Services; we believe that what we are seeking to do enhances the
overall delivery in some of the key areas, which will assist in
dealing with some of the pitfalls or weaknesses which exist within
the present scheme and which are being referred to as matters
that need addressing as well as the matters which we have addressed
ourselves in all of that. I believe I am not going to convince
you on the overall merits of the scheme.
145. My mind is completely open on the subject.
I am a piece of blotting paper waiting for you to write on it.
Chairman, I have two other small questions. My experience leads
me to believe that every pension scheme has got a collection of
schemes by which it compares itself—it, by definition, has
to, for all sorts of reasons. What are your comparator schemes?
Are they merely the public sector schemes, or do you take a wider
view? Do you take no view at all?
(Mr Miller) We have looked wider but our principal
comparators are undoubtedly the public service schemes.
146. I think I am correct in saying that you
have indeed compared yourselves with the private sector, but the
details of that have not been published. Am I correct?
(Mr Miller) We clearly are aware of the levels of
benefits which are common in the private sector. In that sense,
that has been taken into account in the early stages of the work,
but, no, we have not offered it in detail.
147. Therefore, my final question is: if you
do compare yourselves with other pension schemes in the public
sector and the private sector, that seems to me to be an on-going
thing that you do. Can you not let the Committee have a sight
of the information you gathered as a result of that process and
the conclusions you have drawn from it?
(Mr Miller) We could let the Committee have sight
of any information that we have available. As you say, it is an
on-going process and we are very conscious that the private sector,
in particular, is changing quite radically at the moment—and
not for the better.
148. Indeed it is. I, for one, would like to
see that analysis.
(Mr Miller) I will need to offer you a paper on that.
Mr Cran: Thank you.
Mr Jones
149. Minister, part of the unique nature of
the scheme is the abatement system, which I think currently stands
at 7 per cent—or the actuary sets it nearer 6 per cent.
How confident are you of the reliability of the scheme, certainly
in terms of the abatement figure in the last 20 years, which has
actually reduced? Has this made the benefits less competitive
compared to the private sector or civilian schemes? The second
point is, this issue of abatement does mean—and the Forces
Pension Society raised this quite clearly—that it is not
clear exactly what people are contributing from their pay. Have
you considered introducing a system based on overt contributions
to a scheme from the Armed Forces rather than the abatement system
which we have at the moment?
(Mr Miller) In general, the Pay Review Body's assessment
has indeed changed over the last few years, coming down from a
full 7 per cent to 6 per cent, although they are still abating
pay by 7 per cent. That is their judgment, we have no say in that.
That is very largely because the level of benefits in the comparator
schemes have improved over that period. Clearly, there must now
be a question mark over that. We did look at the possibility—and
this really touches both on contributions and funding—of
going for a funded scheme or a contributory scheme, and came to
the conclusion that the benefits to the individual pensioner were
not such as would justify the very considerable additional administrative
complications that would go along with that approach. Fundamentally,
it is the view we took in relation to the funded schemes, where
the main reason for funds, of course, is protection against bankruptcy,
and government bankruptcy seems a somewhat unlikely eventuality
to protect against. Contributions, if you do not have a funded
scheme, have a certain element of artificiality about them, and
if the whole process is unnecessary and administratively complex,
as it would be, we took the view it would be better avoided.
150. Could you not have a scheme which would
actually have a contribution element, or a fund, that was actually
guaranteed by government?
(Mr Miller) We could indeed, but why do we need it?
Funds exist in the private sector's pension industry because of
the risk that the company will go bankrupt.
151. One of the contentions of the Forces Pension
Society is the transparent nature of people knowing what they
actually pay. You talk about administration, but under the proposals
you are actually running two schemes, one for new entrants and
one for existing people. So is there not going to be an administrative
cost in that, in terms of running two schemes side-by-side?
(Mr Miller) There would be anyway, and if we had gone
for a funded, contributory scheme that would be an additional
complication to the new scheme. The fact that the Pay Review Body
make that adjustment in their assessment is well-known. I would
not, for one moment, pretend that every soldier carries it in
the forefront of his consciousness every day, but the information
is readily available.
152. Would you not agree that if there was an
actual contribution—for example, most people who contribute
to a pension scheme actually see each month on their payslip how
much they are contributing—you would know what the value
is? Under this scheme, as it is worked at the moment, it is very
much unclear what the contribution is in terms of what people
are paying into the scheme.
(Mr Miller) It would be more apparent if there was
a contribution, yes.
Mr Howarth
153. Can we come back to this business of cost
neutrality and explore that a little bit further. Last year's
Review document stated that it is Government policy that improvements
in public service pensions should generally be paid for either
by savings elsewhere in the scheme, or by scheme members through
contributions, clearly implying that you were bound by that policy.
You have reminded us this morning that in your own memorandum
to us you explained that "cost neutrality was not originally
and necessarily one of the ground rules for the pension review".
So we clearly have a conflict here; that initially you were telling
us that any improvements had to be paid for either by increased
contributions or by savings elsewhere, implying, clearly, cost
neutrality, and you now, in your memorandum, tell us that actually
cost neutrality was not a ground rule. Then you concluded in the
statement that you made this morning that "We cannot justify
spending more on a new pension scheme". It does seem to me
that the department is all over the shop.
(Mr Ingram) I do not think the department is all over
the shop, I think the department is very clear in its approach
on this. What I said—and it is in the memorandum as well—was
that the cost neutrality aspect was not an original driver in
all of this.
154. Even though you said that any improved
benefits had to be paid for by savings elsewhere, or by increased
contributions?
(Mr Ingram) Yes. That is the way in which it has now
been developed because what we are doing is reshuffling the pack,
so to speak; to take some elements and modify them to pay for
enhancements and improvements elsewhere. I tried to explain in
my earlier comments about what the driver in this would have been;
that if this had been a major, key issue—before my time
but it may well have been revisited in the time in which I have
been doing this job—then the arguments would have had to
have been advanced to say "We now need more money to do something
because the scheme, in terms of the overall assessment and our
own internal assessment, is far short of what we believe is necessary.
It is a drag on that recruitment and retention strategy."
The reality is, though, that if that argument is advanced and
money is then given to the defence vote for that purpose, it is
then not being given to something else. There is not an open book
from the Treasury in all of this. We would have then had to have
set our demand against other priorities. However, that is not
the way in which it has been approached. That could well have
been the way in which that would have been approached because
the cost of pensions—by the very nature of the numbers we
are dealing with—is likely to be heavy. In those ways it
could have become an issue. The other aspect they could have looked
at could have been on the contribution side and, going back to
the earlier approach, to say "Is this another way in which
enhancements can be made in all this?" That would have been
quite a significant departure from the current approach, but it
would have been a way of dealing with some of those issues.
155. I think the public, and certainly the Armed
Forces, would be appalled if they felt that the Treasury was saying
to defence ministers "You can have this amount of money,
you can either spend it to defend our country to pursue our military
interests and our political interests around the world—in
which case we rely upon the men and women of our Armed Forces
to lay down their lives for their country, potentially—or
you can have more money to improve their pension scheme".
(Mr Ingram) I did not use that emotive analogy. That
is your interpretation.
156. That is what you have told us, in effect,
is it not?
(Mr Ingram) That may be how you interpret that. What
I am saying is that in any set of relationships, if money is being
made available, if we are making a bid against the centre across
the broad reach of the Armed Forces, then we have to justify our
case. By your argument, there should simply be an open pot from
which the Armed Forces can draw. That does happen in terms of
times of emergency or in times or crisis—not a wholly open
book, everything has to be justified in terms of extra expenditure,
and there has been quite exceptionally extra expenditure because
of events in Afghanistan. So the Treasury (ie, the Government)
shows a willingness to deal with the immediacy of those particular
problems, but it must be part of the overall assessment of what
we are doing, in terms of whether it is pay or whether it is pensions,
and that then becomes a cost which we are saying is something
that has to be justified against all the other demands across
the broad reach of Government. If people are appalled by that
(and I assume you may well be appalled by that) I would ask them
to look at the real world and not at the world of rhetoric.
157. Minister, I assure you I am trying to help
you. I am not trying to do you down, I am trying to help you with
the Treasury. It does seem to me that you have got a case to make
to the Treasury and we want to help you make that case. The stark
way in which I put it seemed to be reasonable. If you are saying
that this has got to be cost neutral in order to ensure that there
will be resources for the hardware, let me take you back to what
your predecessor said in 1998. He said: "We need to ensure
that the Armed Forces scheme is in line with the best modern practice".
In other words, this was not a cost-neutral approach, this was
an approach to say "Look, the Armed Forces pension scheme
needs to be reviewed and we need to review it in the light of
the comparators." Some points have been put to you already
indicating that there are unfavourable comparators—although
Mr Miller cites unspecific examples which show this is a more
favourable scheme than others. Let me put this to you: if you
take one of the most important things, death-in-service benefits,
at the moment the spouse of a Serviceman killed in action would
get up to two times their salary. The spouse of a Serviceman killed
in training would get one to one-and-a-half times. It is proposed
that that should increase to three times, which obviously we welcome.
However, the wife of a policeman killed on duty would get five
times their salary, and in the private sector four times salary
is normal. If it is your desire to produce a pension scheme which
is going to be comparable with best modern practice, I have given
you one example—and a dramatic example—of where this
scheme is inadequate by comparison with other key areas.
(Mr Ingram) Both the schemes you refer to are contributory
schemes, and I cannot remember the figure off the top of my head—
158. These guys contribute, Minister. Do not
say they do not contribute, they contribute by abatement.
(Mr Ingram) I do not know whether, Mr Howarth, you
are developing your own policy as part of this. I understand you
are—
159. I am here as a Member of this Committee,
Minister.
(Mr Ingram) I am interested to know whether it is
a spending commitment which has been made to you because you set
out your arguments at length trying to justify—
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