Examination of Witnesses (Questions 160
- 179)
WEDNESDAY 13 MARCH 2002
RT HON
ADAM INGRAM
AND MR
BARRY MILLER
160. I am asking you questions, Minister.
(Mr Ingram) There are also arguments contained within
it and premises upon which it is based.
161. I am trying to help you.
(Mr Ingram) If you are trying to help me against the
Treasury, we are always grateful to receive that type of assistance.
The more we can lift the argument about the importance of the
Armed Forces overall, and I know that is an issue you share with
us, then the better it is for all the people who serve in those
circumstances which we ask them to serve on behalf of the country.
However, in terms of that approach which is taken, of looking
at two schemes where, in the case of the police scheme, 11 per
cent is the contribution towards that, yes, if we change the basis
of it then you can have uplift in a whole lot of key areas. Please
recognise, however, what I am saying here in terms of how we assess
this: that we believe this to be a generous scheme (that may be
contested); we believe that it meets a whole lot of needs within
the Armed Forces community; we are rearranging it in certain areas
to deal with some of those specific issues, and there will be
an uplift as a consequence of the changes if that is what is then
implemented. So we are beginning to address all of that. However,
to cherry-pick and say "There is one element, now lift it
there; there is another element, now lift it there", means
there must be a cost-element to it and that must be met from somewhere.
Mr Howarth: The point we are making is that
you said in your memorandum that cost neutrality was not the starting
point. What you are now saying is cost neutrality has to be a
point. Let us not pursue that, because genuinely I recognise the
role of the Treasury in this and I do feel that the public has
got to know that if ministers are on-side in the department that
is responsible and the Treasury holds the purse-strings, the nation
has to decide on the priorities. One final point, Minister: when
you refer to the police, as Mr Cran has just pointed out to you,
the cost to the employer of benefits as a percentage of pension
payable to the police is 21 per cent; the Armed Forces is 15 per
cent. So they are less of a burden on the employer than the police,
yet if a police officer is killed in the line of duty his spouse
gets five times his pay, whereas the spouse of a serviceman or
women killed in action, it is proposed, will get three times.
Chairman: And the Army is not threatening
to strike.
Rachel Squire
162. Continuing with the issue of cost neutrality,
you will be well aware, Minister, that the Forces Pension Society
does consider that taking cost neutrality as the basis for the
review means that the proposals do no more than rearrange the
existing resources, and that yes there will be winners but there
will also be losers in the new system. It also seems to us, from
the table of costs provided to the Committee by the Ministry of
Defence, that retirement benefits are being cut to pay for improvements
in survivor and ill-health retirement benefits. Would you agree
that that is the case? If so, why does the MoD consider that reductions
in retirement benefits are either appropriate or necessary?
(Mr Ingram) What we have done is identified some of
those key areas that have been raised, and dependants' benefits
is a prime example and looked at the inequities that exist between
officers and other ranks and to try and find ways of smoothing
that—to try and find some sort of standard methodology contained
within that. It is right to say that in making some winners there
then has to be reductions elsewhere—that is the very nature
of the way in which the sum of money is being re-allocated—to
meet those areas of what we believe to be issues that need to
be addressed—widowers' and widows' benefits, and dependants'
benefits and other areas—and smoothing out of the relationship
in terms of other ranks and officers. So it is addressing some
of those inequities that we are seeking to do, and the inevitability
of the logic of this is there will be losers within all of that.
I do not know whether the argument will then be "Everyone
should be a winner out of all of this" and I can understand
some who may argue that, but we have to live within a real world
in all of this. The way in which we are approaching it—and
I repeat the point—is that we believe that we have a generous
scheme, we believe it is substantially funded and what we are
now seeking to do is to take that funding and better allocate
it. That is the philosophy which has been applied and will be
applied in all of this. To do it in a different way means we are
then into issues of funding. Where does the funding come from?
Contribution or by some other input? Our view is that we cannot
justify that other approach because it is not (and this may, hopefully,
convince Mr Howarth) the key issue that we believe other issues
are within the services which we seek to deliver. That becomes
the priority of government and the strategy of government. There
is nothing inconsistent with that approach across governments.
(Mr Miller) I wonder if I might just enlarge on this
business of reducing retirement benefits. What we have done is
slightly defer the Immediate Pension point for the early retirers
and reduced the accrual rate in the early stages of the Service,
which means someone who retired early will receive, relatively
speaking, lower retirement benefits than he would have done. That
has paid for both improved benefits to widows, dependants and
so forth, but also an improvement in the pension at the full career
point, because of course the move to final salary rather than
the notional salary, which we base the current scheme on, will
result in an improvement for a significant number of servicemen
who are serving on the higher pay range.
163. Just picking up on that and moving on to
the issue of the Immediate Pension, you are saying there will
be some benefits on the higher pay scales. Yet the Minister was
saying that one of the purposes of this whole review has been
to try and reduce, shall we say, the gap between what officers
are able to gain in terms of Immediate Pension and what those
below those ranks are able to gain. There seems to be a bit of
an inconsistency.
(Mr Miller) No. Both groups will in future be on a
common basis for the immediate payment, rather than the current
situation which means that another rank has to serve for longer
for immediate payment than does an officer. They will all have
to serve for the same time. As I say, there is some slight delay
in the immediate payment point. The other point I was making is
that for some of those who retire early there would, indeed, be
a reduction in benefits because the accrual rate has been reduced.
The current scheme provides for accelerated accrual in the early
years and then a much slower rate of accrual for the balance of
the Service. We have moved to a common rate right across the Service
and the net effect is that there will be some losers amongst those
who retire early; amongst those who serve to full career there
will be some who gain, and we have been able to fund the improvement
in benefits for widows and dependants and so forth.
164. Can I ask you this: would you say that
the purpose of the immediate pension, or one of the prime purposes,
is retention? I would say that, in my contact with Armed Services
personnel, particularly the Navy, whenever I have asked petty
officers and others how long they have been in the Service and
so on, they will say, you know, "13 years", "15
years", and then they will almost immediately say, "I
am going to stay for another 7 years", or whatever they need
in order to qualify for the pension. This is an issue that is
constantly mentioned when you ask people about their Service.
What do you see as the purpose of the immediate pension? Is it
that key issue of retention?
(Mr Ingram) We would see it very clearly as a manning
tool. There is absolutely no question at all about that, and it
can assist in encouraging people to remain in Service, because
they get to that point where they then get the benefit. There
is nothing I would suggest unusual in this approach: all employers,
public and private, would probably view their pension policies
and schemes as part of their overall remuneration package. If
they do not do that then it is an unusual philosophy they would
adopt. So it is about attraction and about trying to keep people
in place, and we are no different in that particular sense. The
immediate pension approach is an integral part of that overall
remuneration package, and it has benefits in terms of encouraging
the retention aspect to it. It is interesting that some have been
arguing a different approach on this but no one is saying that
we should abandon that strategy of the immediate pension.
165. No—well I have not heard anyone but
I think another issue that has come up in terms of encouraging
people to stay is the use of bonuses, certainly in looking at
the Services and the need, for instance, to try and keep experienced
highly trained pilots and encourage them to stay longer in the
RAF. There has obviously been use of that sort of long Service
period being a financial attraction. It appears from your memorandum
that no detailed work has yet been done on the possibilities of
using bonuses, and one therefore has to ask why not, when this
review has been going on for three years?
(Mr Ingram) What I have tried to do is give the flavour
that it is not the critical issue, as it can be elsewhere, in
terms of the golden handcuffs or however they are going to be
described. We have recently enhanced the air crew retention measures
because we have recognised that to be a device by which hopefully
we can encourage key personnel—and it is not just pilots
but others within that structure—who have particular skills
and attributes that we want to retain. Because we have been able
to justify it on the basis that there is a problem there and it
is a very real problem that has to be addressed and a response
is then given to that. In terms of bonuses, if it became the same
flavour elsewhere, then the way in which we would have to analyse
it is exactly the same. Is it important? Is it a measure which
we can now put in place that will get that potential return? We
will have critical areas. In one sense all of that is constantly
being considered but at the present time not actively considered.
It is a concept out there which can be lifted off the shelf at
any point if we have a critical area, and then looked at as a
possible solution. The danger I would suggest in all of that is
we would end up with a plethora of a whole range of different
schemes and remuneration packages, and that is not necessarily
the best way of tackling the scale of the problem that we then
have to address in all of this. I do not know whether that answers
your question? It is not written out as a concept, and it is something
which we constantly have to give consideration to—whether
this is a mechanism which would deliver in a critical area—but
the critical area has to be there before we apply it.
(Mr Miller) I wonder if I might, Minister, say this:
although we did not attempt any detailed costings of possible
bonuses, we did confront the basic parameters which are, of course,
that a bonus in these circumstances would be taxable and therefore,
by definition, has to be substantially higher than the gratuity
paid to the Serviceman when he retires—never mind something
to allow for the fact that he would have an income stream as well.
So we are looking at bonuses which would, of necessity, be substantially
higher than the gratuity that is paid. The reason for not going
into detailed costing is that there seems little point in detailed
costing when any assessment of the likely effect of the bonus
would be, at best, broadbrush and, arguably, highly judgmental,
because one has no scientific way of assessing what effect the
figure of X as a bonus would have in terms of the retention or
the tendency of people to leave. So it was really faced with this
basic problem of accommodating the taxability of bonuses that
made us think that we were unlikely to be able to produce an acceptable
solution to replace the immediate pension
166. I have just one other small question which
is whether the abatement system is fair, given that only a minority
of personnel leave the Services each year and qualify for an early
immediate pension, and yet everybody pays for that to happen?
(Mr Ingram) My answer, shortly, would be yes. If we
thought differently then we would be tackling it in a different
way. Barry may be able to give a more detailed answer in terms
of the valuations made and the attitudinal surveys and the focus
group approach on all of this.
(Mr Miller) Frankly, it is a feature of any pension
scheme—some people benefit more from elements of a pension
scheme than others. What one is doing, whether it is a contribution
or an abatement, which it tends to be with a flat rate across
the board, is paying for the average. The fact is, just taking
the basics, somebody who dies within, say, five years of retirement
does far less well out of his pension scheme than someone who
survives for twenty or twenty-five years
Rachel Squire: A point well made.
Syd Rapson
167. Looking at the individual Services, there
appear to be different and relative levels of fitness, et cetera,
and I was wondering about the retention incentives. Are they different
for each Service? Should there be a different approach to fit
personnel needs or their requirements rather than a one size fitting
all? Are all the Services the same, or should there be some consideration
of different approaches?
(Mr Miller) I am not quite sure, Mr Rapson, what you
are after. The fact is yes, there are different fitness standards
in the three Services. The three Services also differ, of necessity,
in terms of the point at which they may well find it necessary
to dispense with the Services of some individuals. Clearly, for
example, the infantry requires a much higher level of fitness
than, for example, the Royal Electrical and Mechanical Engineers,
as they were. That would be adjusted and I am taking examples
deliberately within one Service. They will have a different approach
to these things. What we have done is attempt to construct a pension
scheme that will cope with the extremes of the likely requirements
of the Services.
168. So one size fits all is about average,
you think? I was just thinking that there might be a greater incentive
needed to encourage certain elements of the forces to stay in
and take the package rather than at the moment, where if you see
it as a means of retaining people as a benefit some Services look
at it differently? Whether they want to stay in longer or leave
earlier, they are fed up? Do you think there is a bland average
for everyone that fits all?
(Mr Miller) No, I do not for one moment think there
is a bland average for everyone. I think the pension scheme inevitably
charts a mean path between the alternatives. We then tend to rely
on other manning devices to do the fine tuning and, as I say,
this is not an issue between the Services: it can be an issue
within a given Service.
169. Has there been any discussion with the
Treasury about the bonus payments and how they fit into overall
pay policies, and whether we should raise or lower them? Any discussion
at all?
(Mr Miller) We have made no proposals to the Treasury
on bonuses. As I said earlier, having realised that bonuses would
be taxable and therefore substantially greater than the gratuity,
we did not feel there was much mileage in that particular way
forward.
170. Talking about the information, we are worried
about how Service personnel found out the information and what
arrangements you have made for them to understand that complexities
of the schemes. What arrangements will the MoD put in place to
ensure the Armed Forces personnel have sufficient information
about the new pension scheme? For example, will they receive individual
projections on future pension entitlements under both the existing
and proposed schemes to enable them to decide which is best for
them? Part of my earlier role as a shop steward was to interpret
regulations and tell my people what it was all about, and I did
not understand it. Without shop stewards in the Armed Forces,
how will the MoD as a good employer make sure they understand
complexities and are not persuaded to go the wrong way?
(Mr Ingram) I think this is an important issue and
we do recognise that a lot of the material is not best placed
and probably a bit out of date. Clearly, if and when the new scheme
comes into place, we have a responsibility on us as a Department
to try and make this as clear and informative as it possibly can
be without it being over complex, because even very experienced
people trying to assess some of this find it difficult and there
are occasions when there is a requirement to go to an independent
financial adviser. If, say, the choice was to move from the existing
scheme to the new one for an existing member of the Armed Forces,
that has to be the individual's judgment, so there is an onus
upon us to make sure that they are fully up to speed with every
aspect of this—the complexity as well as the simplicity
of it, as best as that can be explained. We recognise at the end
of the day, if it is a transitional judgment that has to be made,
it is a matter for the individual and best advice would be given
but it cannot be independent advice. We cannot then say, "It
is best for you to do this". That has to be taken on the
basis of all the information that we so provide. We are putting
a lot of effort and energy into looking at how this can be done
and how we communicate that, both in written material and on the
internet and other ways we can spin out or play out all that information.
Anyone who tries to understand the pension scheme knows how difficult
it is, and all we can say is we will do our best to take the very
best practice in the explanation of all of this.
171. There is one part of it, inverse computation,
which I find extremely difficult to understand—
(Mr Ingram) How long have you got?
172. If there is a very good explanation given
to personnel to understand it, would you send me a copy?
(Mr Ingram) Yes.
(Mr Miller) Just to answer Mr Rapson's specific question:
we do envisage that we will give individual projections of what
they would get under these schemes.
Chairman
173. Perhaps the letter you write to lieutenant
colonels could be sent, explaining to them why they are going
to be £2,500 down on their pension and £8,000 less on
their lump sum, and then the special letter to sergeants telling
them they are not going to be winners in this game. It would be
interesting to know why you chose lieutenant colonels and sergeants
to be amongst the losers. It is great for the winners but not
so hot for the losers.
(Mr Ingram) You are taking these from the examples.
They, of course, are features of the particular combination of
time served and so forth in the examples that were given. It is
not necessarily the case that all lieutenant colonels or all sergeants
have lost out.
174. Eighteen years, I think?
(Mr Ingram) In that particular case, yes.
175. So you isolate the lieutenant colonels
for eighteen years and tell them how they are going to be worse
off.
(Mr Ingram) The point I was making earlier is that
we have said that it is recognised that those who retire early
will not do as well under the new scheme as under the old, and
that is one of the things they will have to take into account
when they make the judgment as to whether or not they want to
transfer to the new scheme.
Mr Roy
176. Minister, why can most private sector schemes
and the Civil Service scheme offer the option of commuting part
of the pension to a lump sum rather than having an automatic lump
sum, yet in the Review the MoD says that this would be too complex
to administer? It is not too complex for everyone else, so does
this not reflect very badly on the MoD?
(Mr Miller) It is more complex and I think this is
one of the issues that we certainly need to give some more thought
to before we draw up our final proposals. The fact is, though,
that all our experience of commutation is that it is very few
individuals who do not take the option of a tax free lump sum.
The question really is one of how many benefit against the complexity,
but, as I say, one notes what the principal Civil Service scheme
has done and it is an area we would need to think about.
177. But why is it more complex than the comparator
Civil Service scheme?
(Mr Miller) I would not say that it is any more complex
for us than for the comparator.
178. But they can do it and—?
(Mr Miller) We have not said we cannot do it. We have
said it would be more complex and, therefore, we sought to avoid
it because very few people do not take the option, but I think
we would certainly want to look at this as one of the features.
It is one of the things that has emerged from the consultation
and it is definitely a point that we would consider.
(Mr Ingram) Remembering the comment I made, we are
still in an input mode at the moment. We have not concluded our
assessment of all of this, and that is why I said in my opening
statement that the input from this Committee, coming at the time,
will assist us in that. It does not mean to say that every recommendation
will be automatically accepted before we know what the recommendation
is, but the quality of the assessment out there helps us to come
to conclusions in some of those areas. It is not signed off on
all of these aspects and, therefore, if the case is well made
and there is a sustainable argument, then it has to be given a
positive consideration.
Mr Crausby
179. On unmarried partners, you wrote to the
Chairman in November to say that you would also need to look again
at the position on entitled partners. What costing have you done
on the financing of pension benefits for unmarried partners?
(Mr Ingram) Barry will deal with this but there is
a general issue here that this is another example of where, as
we have been through this process, we have begun to look at this
because it has taken on an increased debatable point as to what
should happen. These are very big issues right across the whole
of the public sector, and some departments I understand are now
beginning to tackle it. We have a particular issue in depth here
that we have to look at. It is then how is that going to be costed,
how is that going to be funded as well at the end of the day,
and there is work still required on this to establish fully where
we will end up in terms of what is identified as being the type
of partner, what the qualifying criteria would be, and how that
is to be met. If it is to be met within the existing scheme, then
it means that the benefits that have been paid to new members
may have to be modified accordingly. So we have to look at this
in that particular way and we have not yet done a total summation
of all of that.
(Mr Miller) We have been in the first instance talking
to the Government Actuary about the costing of this. There are
discussions still going on. We will need in the process of producing
our estimate to get some sort of handle on the number of servicemen
who have unmarried partners who would fall within an acceptable
definition. We have been giving some thought to acceptable definitions—there
are a number of models out there—for example, the Australians—and
the aim would be to bring all of this work together in due course
to enable us to put a handle on what it would cost. Once we have
done that, of course, we are then up against the general policy,
and Mr Howarth just now quoted the policy which, of course, applies
to the specific issue, not the generality of the pension scheme.
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