Select Committee on Defence Minutes of Evidence


Examination of Witnesses (Questions 40-59)

WEDNESDAY 18 DECEMBER 2002

DR LEWIS MOONIE, MP, MS LIZ MCLOUGHLIN, CBE, AND MR ALAN BURNHAM

Mr Cran

  40. Minister, you will recall, because I dare say you read our last report on this subject, we took a very dim view of cost neutrality. It was not nearly as dim a view as the Forces Pension Society, which really does take a very dim view—it calls it a straitjacket. The question the Committee want you to answer is, how do you justify that the needs of the Armed Forces can be met within this, as the Forces Pension Society calls it, straitjacket?
  (Dr Moonie) This "straitjacket" phrase is being used and no doubt will appear again in the future. There was a straitjacket to apply a "no additional cost per annum". The cost of pension schemes is rising anyway with increased longevity in society. As I said earlier, we have to balance all our decisions on how we apply our resources. Resources are scarce; the demands on them are virtually infinite. There will always have to be decisions made like this. We have had no choice, and I support that decision, although I was not responsible for it at the time. I think we had no option but to try to alter the scheme within its existing parameters. We do not have the resources to do anything else.

  41. We can see, I can see, and everybody can see the question of resources is one key element and I could not argue with you. The question, however, that I was really trying to get to ask was: are you absolutely confident that this will not in any way damage the ability that you must have, given the role that the UK plays, in attracting the calibre of people you need into the Armed Services; because your critics would say that it does?
  (Dr Moonie) I think that the new scheme, from what I have seen of it, is an improvement on the existing one; and, therefore, we have no evidence whatsoever that the present pension provisions are in any way a disincentive to people. Despite that, we are really trying to make them more attractive. I think the new scheme is better and will be better in many ways. There are substantial changes within the overall parameters of the scheme. I think it is also fair to say that if any savings are made then an attempt will be made to apply those to pay for additional benefits.

  42. I take it you are saying very clearly to the Committee that there will be no deleterious effects on recruitment and retention through the pension fund?
  (Dr Moonie) That is a very, very difficult claim for me to make; but I have no evidence to suggest that it would be, and we have been looking at it very closely. Obviously, as I have indicated, young men and women pay very little attention to their pensions provision until they get considerably older. The fact that it does not impinge on their decisions does not necessarily mean it is a negative or positive thing; but just means they have ignored it completely. We are trying to improve and increase the volume of information given to people; and this will be a key feature of the scheme, to ensure that people know exactly what is going on and how it is sold to them as a concept.

  43. It would be true to say, would it not, that cost neutrality has really stifled the range of options open to you, has it not, in terms of any improvements you could have made to the pension scheme; or in terms of any improvements which the Forces Pension Society and others have made?
  (Dr Moonie) We would not have been able to make any improvements retrospectively, anyway; they would apply to existing people who join the new scheme and future entrants to the new scheme. Yes, financial restraints do apply strictures to the way in which we have to behave. There is no doubt about that. I am not going to apologise for it. All governments have to do that. Yes, it would be very nice if we had an open-ended budget where we could have made some wider arrangements, but we did not. I have to defend that.

  44. My final question is simply this: because of the view you have taken on cost neutrality you really have opened yourself to the charge, have you not, that you see your obligations to Service personnel merely in terms of financial obligation; really the minimum you can get away with without damaging recruitment and retention? That is what your critics would say and, indeed, are saying to you?
  (Dr Moonie) It is very definitely not that. The fact is all decisions on whatever we do are resourced-based decisions—they have to be. At the end of the day somebody has to put their hand in their pocket and pay for them. That does not alter the way in which we look on our people; we value them; we value the risks they take on our behalf; and we want to give them the very best provisions that we can afford. We believe that our scheme is a good one; and that is why we felt that it could be reformed within the existing budgets we had.

Chairman

  45. Minister, if you are operating within this "straitjacket" are there any examples, and if there are will you tell us, where if savings are found the Treasury tries to claw them back before you have the opportunity of transferring any savings from one sector of the pensions scheme to improve another sector? Do you have absolute power to change within the MoD budget, or do you have to report to your masters first?
  (Dr Moonie) Obviously since pensions in general are unfunded, in the sense that they are paid from taxation, then the Treasury have a role in all of these things. All I can say to you is that we will attempt to deploy all the savings which are likely to be made to produce improvements to the scheme. I can give you no absolute guarantee that we will be able to do that; but we will be substantially successful. As I have indicated, of course, the cost of these schemes is rising anyway, and the Treasury is well aware of that.

  46. If the Treasury does claw back money from the existing budget I am sure you will be only too pleased to inform us so we can write to the Treasury?
  (Dr Moonie) I think it would become very clear if that happened, Chairman.

Mr Hancock

  47. Is the pension fund within the MoD ring-fenced? For example, if a high proportion of servicemen never draw a pension, and leave before for various reasons, the money that has been paid in on their behalf what happens to that?
  (Dr Moonie) Money is not paid in; it is not done like that. It is an unfunded scheme.

  48. It is completely unfunded?
  (Dr Moonie) It is paid for out of current revenue.

  49. As and when they retire?
  (Dr Moonie) Yes, so in that respect it is an open-ended scheme. The earlier they retire and the longer they live, the more pension they are paid.

Mr Crausby

  50. We have touched on this to some extent, and the Chairman asked a question about clawback. I guess it is difficult to be completely cost neutral, absolutely cost neutral. The Forces Pension Society have expressed some concerns about that. They are concerned that money saved in one area might not be ploughed back into pensions. I accept that it is difficult to be completely spot on, but are they justified in that; in the sense that the further work that the review team is doing on the final proposals, we understand, includes ideas for a further reallocation of resources. Can you confirm that the government will not use the outcome of this particular further work as an opportunity to reduce the overall cost of the scheme and then turn the review into a savings exercise? I accept that no-one expects it to be better than cost neutral; but I think there will be some very big concern if it was substantially worse than cost neutral.
  (Dr Moonie) I do not think it would be substantially worse anyway. Obviously this is a matter for discussion with the Treasury once the savings are identified, and once we see what we want to spend them on. I am reluctant to go into details of a paper of which I have only sketchy knowledge at present, until the full thing is put to me next month. I am quite sure we will be having other sessions on it, and I am happy to defend whatever decisions are made. To the best of my ability I would say that any resources which are spared will be devoted to improving the scheme. I cannot give you any guarantees.

  51. I would not expect any guarantee of these things, and I would not expect a guarantee on the margin. As I say, I think it is absolutely impossible to get cost neutrality right. I think it is important for people to expect that the principle would be not to make savings.
  (Dr Moonie) The principle would be that wherever possible we employ any money we have available to make the scheme more attractive.

Mr Jones

  52. Minister, the internal MoD review of the Taxation of Armed Forces Invaliding Pensions that we have seen says that there are something like 1,200 cases where taxation was improperly levied. The recent internal review links the errors between 1995 and 1999 with management failures. Why was this allowed to exist for so long? The review blames poor management for some of the failures. Can you tell me what action has been taken since to improve the situation? Can I ask a supplementary to take the wind out of Gerald's sails—what is actually being done with the individual cases in terms of people with grievances still ongoing?
  (Dr Moonie) The period of the late 1990s was a very difficult one for the pensions administration in the MoD. There were substantial change with regard to relocation; changes to top management; and, at the same time, substantial downsizing in the number of staff involved. A relatively small number of managers had to take on a very great deal of responsibility. I do believe sincerely that this was an undue burden placed upon them and allowed mistakes to continue in practice which should not have done. This was, as you have said, identified in 1999 and we took action from then on to correct it; although it only became widely known to the public earlier this year, but that action was and is still being taken to remedy that. With regard to individual managers, I think because of what I have said, it would probably be invidious to single out individuals. We will, however, look at it, if nothing else, to see and make sure the important thing takes place—which is that in future we do things better.

  53. I asked what changes have been put in place, and what is actually happening in the individual case?
  (Dr Moonie) They are being dealt with as quickly as possible. There is still a huge number of records to go through. As has been pointed out in the report, which I know you have all had copies of, it is vital it is done properly, because it is such a complex area and it is possible still to make mistakes in it. It is done by experts. It takes a long time. We are going to spend six months over it. The vast majority of the errors have now been identified and payments have been made. We will do our very best to ensure that all others are made as quickly as possible; and try to prioritise older cases, for example. I have to say though, for many of the people who get in touch with us about their records, because it was such a long time ago records are sketchy, it is a very difficult exercise. I think my people are doing very well indeed and would compliment them on it.

Mr Roy

  54. Minister there are 1,200 cases of people improperly taxed, and probably more. I am sure you will agree that those people at this stage have been feeling ripped off and quite angry and also very concerned that if mistakes have been made with them they do not want it to happen in the future, because sometimes that can really burn into people. What steps are you going to take to make sure that there is closer cooperation amongst the agencies to make sure that they do speak to and understand one another and are able to move on?
  (Dr Moonie) It is an interesting point. As you know, the first thing we have done is appoint a Veterans Minister who actually has responsibility clearly defined for seeing that this thing takes place. I am accountable for the way in which things happen from now on. We have a situation here over a period of many decades where three individual haphazard Service-based schemes with different parameters grew up, with the Veterans Agency, formerly the War Pensions Agency, responsible for compensation payments which was separate and actually administered by another department from about the 1940s onwards. It is not a situation which is conducive to good management. However much we may talk about joint working in government, it is much easier to work if you are doing it from within one department. Bringing the War Pensions Agency into the MoD was a start. What we have to ensure is that there is effective management all the way through the system; that we have a decent system that operates (and, quite frankly, the quicker we get a proper computer based system in and working the better), that the staff are properly trained, properly supervised, and the proper audits are carried out to make sure things remain accurate. Some of the errors are random errors. There are errors where people have been paid, and have been given tax free pensions when they should not have been. Rather than any systematic error on one side, there were general errors taking place in the system. I believe now that effective management action has been, and is being, taken to ensure that does not happen again. Most of the cases have been identified. I have a table here to look at. We have reviewed 126,000 files, of which roughly 125,500 were correct. We still have a great many files, 13,000 to go through, but these are the ones we have to look at in detail.

  55. You look at those files in detail—do you contact those people to say, "Just as a matter of course, we think you should know we have looked at your pension"; have you done that?
  (Dr Moonie) No. The minute we identify an error we would let somebody know.

  56. I understand you would do that. At the same time, once you identify that a person's pension is fine, do you also reassure those people?
  (Dr Moonie) I am not sure.

  57. It seems to me there are an awful lot of people out there who do not know you are doing the review in their particular case. If you were reviewing my case ten weeks ago and I was fine, I would like to be told you had done it and it was fine.
  (Ms McLoughlin) Some of the reviews will be as a result of enquiries that were invited by advertising; and to that extent the enquirer clearly would be told the result.

  58. The Minister has just told us he has done 120,000-odd. Have you contacted those 120,00-odd people to say, "We have looked at your case and, as a matter of course, this caring government has looked at your case ....."
  (Dr Moonie) No, we have not. Most people are very well aware of whether their pension is taxed or not taxed, and whether it is being done properly or not. Frankly, we have seen no need to do that. Concentration has been on rectifying errors.

  59. Surely, there is a need to be proactive instead of just reactive when there is a problem? Surely it is a classic case where you could be proactive just to reassure people that everything is fine?
  (Dr Moonie) I think if we had any great feeling from our pensioners that they were concerned we might have done that, but we have not. It is an interesting suggestion and possibly a valuable one. I think we should look at that.

  Chairman: The concept that MoD does things right is well worth transferring to the rest of the world and should be done more often!


 
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