Examination of Witnesses (Questions 1-19)
MR IVOR
CAPLIN AND
MR JONATHAN
IREMONGER
5 NOVEMBER 2003
Q1 Chairman: Mr Caplin, it seems
that pensions policy is far more interesting to the public than
the Royal Air Force and the war in Iraq, so no doubt you have
great drawing power. Welcome to you both. Just before I leave,
I am off to get a flight to New York. I am leading a delegation
to the United Nations. Rachel will be standing in, in my place.
This is an immensely complicated subject. You have only been in
the job a couple of months. Please do not think that as Minister
you have to answer all the questions. You have a highly paid civil
servant, probably earning far more than any of us here. Let him
earn his salary. I have seen macho ministers coming in here who
think they are so on top of their brief and they will not even
look to advisers or civil servants, even when it is patently obvious
that they are wrong. Please do not think that you have to soldier
on. If you do not know the answer, even though you are very well
briefed, please do not think that you have to answer yourself.
With those introductory words, I am going to depart.
Mr Caplin: Before you do, can
I wish you well on your trip to the UN and say that I thank you
for the note that you sent me on my appointment where you listed
a whole lot of issues in which you did not include pensions and
compensation schemes. Now you call me to appear before you on
firework night. I am not sure of the connection.
Chairman: I think I said in my letter
that we would be having you in to talk about pensions policy next
Wednesday but obviously it has taken you a little more time to
master this immensely complicated brief. If you have any problems
with the answers, we have excellent advisers here who I am sure
will be only too pleased to give you a few pointers. I will now
pass on to my colleague, Rachel.
(In the absence of the Chairman,
Rachel Squire was called to the Chair)
Q2 Rachel Squire: As you can see,
the existing Chairman has decided to try out the early departure
scheme which we will be questioning you on later. Can I too welcome
you, Mr Caplin and Mr Iremonger, to this evidence session? As
has been indicated, the purpose of this session is to follow up
this Committee's inquiry of 2002 and particularly to examine whether
the MoD's formal proposals for pension and compensation schemes
are an improvement on the proposals put forward for consultation
and whether, in our view, they meet the needs and justify the
expectations of service personnel. As you will be aware, the Committee
did examine in detail the general merits of the MoD's proposals
during their inquiry in 2002 and I think I can say we were less
than impressed with some of them, to put it mildly. We are looking
very much today to see how far the changes that are now being
proposed go towards meeting the concerns that we and others expressed
in that report. Clearly, there have been a number of changes to
the government's proposals for the new Armed forces pension and
compensation schemes since the consultation process carried out
earlier this Parliament. We will come to some of the particular
individual cases in due course. Some of the changes to the schemes
will require extra money: increased death in service benefits
and widows' pensions, for instance. Given the government's decision
to ensure that any changes to the schemes are cost neutral, can
you tell us how these improvements will be funded?
Mr Caplin: Thank you. Maybe first
I can introduce Jonathan Iremonger, who is the director of service
personnel pensions policy, responsible for the reviews that we
have undertaken. Can I say also how much I welcome this Committee's
evidence taking session in the inquiry and I agree with your summary.
This builds on the two sets of evidence that you received on 13
March and 18 December last year from Adam Ingram and my predecessor,
Dr Lewis Moonie. Indeed, it builds on your report of 9 May 2002.
In terms of the cost issue, it is our expectation that this new
Armed forces pension scheme will be cost neutral in the fulness
of time. As I indicated when I launched the scheme on 15 September,
if there are any initial costs that have to be borne, the Ministry
of Defence will bear them because we believe that this is a very
important change we are making to service terms and conditions
for new recruits from April 2005.
Q3 Rachel Squire: Can I ask you whether
the overall costs will be greater or lesser than the current scheme?
Mr Caplin: The cost of providing
benefits is broadly at the moment 22%. You have seen some of these
figures. I have rather a hefty note here which I am happy to share
with the Committee on accruing superannuation which will explain
some of the issues in relation to the 22% to the 24.5% that some
people have been mentioning. The cost of providing the current
pension scheme is going to go up due to the improving life expectancy.
That is our expectation at the present time. That was set out
in a table we provided to the Committee previously. Until the
new scheme has been introduced, there will be a need to increase
our accruing superannuation liability costs by not more than 2.5%.
That brings us up to 24.5% of the average pay bill for the Armed
forces. Against that expectation, best actuaruial estimates show,
there will eventually be savings from the slippage of preserved
pensions in the current scheme, once a decision has been taken
by government on when this becomes compulsory and also as significant
numbers enter service on the new scheme. Ultimately, we consider
it appropriate for those entering service on the new scheme that
they should bear the bulk of the cost of longevity as on average
it is they and their widows who can expect to have longer lives.
This relates to the two schemes running in parallel, creating
possible extra expense at the present time. Eventually, that will
fall off. We will be in a position where it will be cost neutral
at 22% of the pay bill as it is today.
Q4 Rachel Squire: With the initially
increased costs and later on a reduction in the overall cost,
how are the initial increased costs going to be funded?
Mr Caplin: I have made clear right
from the start that if we are in a situation where the Ministry
of Defence has to bear some costs on day one, 6 April 2005, then
we will bear those costs. In my view, it is unlikely that we will
be in that position, but I am making the necessary provisions
should we have to do so. I expect this new pension scheme to be
cost neutral year on year, but I have to make some expectation
provision at the present time that there could be some initial
costs, including the 2.5% that I have just informed the Committee
about. Jonathan can give you more detail on the technicalities
of that, or we can give you some more information at the conclusion
of the Committee in writing.[1]
Q5 Rachel Squire: One of the things
we may look at this afternoon is how much detail has been worked
out. One of the general concerns is are there benefits that have
been cut to finance improvements elsewhere in the scheme and are
there savings being made which will not go to finance those improvements
in the scheme.
Mr Caplin: The big change, as
everyone here on the Committee knows, is the change to the early
leavers scheme. We are in a position where we have to accede to
Inland Revenue requirements, forthcoming government legislation
on pensions, the government Green Paper on pensions. Our role
has been to take all of that into account, but still try to put
forward a scheme that deals with our recruitment and retention
requirements, which are to keep people in the Armed forces as
long as possible and certainly through those key years when they
are being trained and developed and becoming very effective in
any of the three services. That is the aim and aspiration we have
for this scheme. I believe we have managed to do that, but there
is no denying that that is different from the current scheme.
There are lots of differences. There are benefits that have changed
as well. No doubt we will get on to that later.
Q6 Mr Howarth: Can I pursue those
points that you have just raised? If you are saying that you recognise
in the interim there will be an increased cost based on the new
actuarial assumptions but you cannot tell us how much those costs
are, that is not entirely satisfactory and I will tell you why.
It is because we already know that the defence budget is under
pressure. I am sure you will say every government department budget
is under pressure, but I think it would be helpful if you could
give us some ball park estimate as to how much extra this transitional
arrangement is likely to cost and how much it is likely to run
for, because it is about 10% extra over the existing budgeted
provision for pensions.
Mr Caplin: The issue about transition
is that we have made absolutely clear from the start that there
will be the individual choice for current members of the Armed
forces whether or not they join the new pension scheme. There
will be a transition period when the new scheme will be up and
running, if we get it through both Houses of Parliament of course,
and the old scheme will still be running as well. Members of the
Armed forces will have to choose whether or not they join one
or other pension scheme. There are inevitable costs in that but,
as I have already made clear publicly and this afternoon, these
are costs that we will bear if they come about. We are very serious
about securing the best pension and compensation arrangements
that we can for our Armed forces.
Q7 Mr Howarth: My point is that you
have a finite budget and within that budget you have to establish
priorities. If you are saying that this is going to be an overriding
priority, the pinch is going to be felt somewhere else in the
defence budget.
Mr Caplin: We are not here to
speculate on the budget situation of the Ministry of Defence or
any other government department. We are obviously well aware that
if there were some initial costs the Ministry would have to bear
them. We are talking about 2005 onwards, so we can plan for them
and I think that is very important in terms of our short term
budgeting approach.
Q8 Mr Howarth: I am sorry you cannot
give us some kind of figure, whether it is likely to be tens of
millions of pounds or hundreds of millions of pounds. Perhaps
Mr Iremonger might be able to assist?
Mr Caplin: In terms of figures,
it is far too early. I know the Committee has been through this
for two years, but you will appreciate we are now at a very critical
stage as to whether or not this Bill is in the Queen's Speech
and then we would have the opportunity for both Houses of Parliament
to examine it. I accept that some of these issues will come about
as we discuss that.
Mr Iremonger: We do not have a
final figure for the cost. The cost increase relates to the existing
scheme, not to the new scheme. That arises from taking account
of longevity assumption changes. People are living longer. They
are spending longer in retirement. Therefore, pension costs are
going up. That in itself has nothing to do with the new scheme.
In terms of how much money is involved in that, we do not know
precisely in the sense we have a figure which says roughly that
the 2.5% is worth about £125 million, but that is not the
end of the issue. That is a figure based on an assumption about
new entrants to our scheme, people coming in now, who will not
start drawing benefits until 40 years' time. The accruing cost
of the scheme does not relate solely to those coming in now; it
relates to a lot of people who are in the scheme already. The
final figure is likely to be a little less than the £125
million but until we have agreed with our actuary and the Treasury
exactly what the figure should be the £125 million is the
top mark. Every other public sector scheme has the same problems
and they will be addressing the same issue about how to manage
those costs into their budgets as they get the same news, effectively.
Q9 Mr Howarth: Reference has already
been made to the actuarial assumptions of last year. We were told
by the Ministry that the actuarial assumptions being used to calculate
the costs of the existing and proposed schemes were the same.
This year you have announced that changes will be "broadly
cost-neutral, taking account of the steps taken to cover increasing
longevity costs." The question arising is why these new assumptions
have been made and why they were not built in, in the first place,
but I will leave that on one side and ask you whether this change
means that some of the cost savings you will be making under the
new schemes will go to pay for pensioners" improved life
expectancy, rather than to improve the benefits available under
the scheme. [2]
Mr Caplin: We have put forward
a comprehensive package of improved benefits for the new scheme.
They are fundamentally different, I accept, to the old scheme.
At some stage this afternoon, it may be useful to put on the record
those differences, if the Committee wants me to. The cost neutrality
of the situation I have already described in relation to the two
schemes. What we need to achieve is the right balance here and
I think we have in terms of the benefits that we are able to offer
in the new scheme which are considerably better. A 25% increase
in widows" benefits is one of them.
Q10 Mr Howarth: How would you respond
to the suggestion that you are stretching the definition of "cost
neutral", given that the same pensioners would live longer
whatever the scheme was that you put in place?
Mr Caplin: I do not think we are
stretching cost neutral. The aim that we have set ourselves is
to have cost neutrality in the scheme by changing in particular
the early departure scheme that we have already mentioned. Because
of long term government policy changes in pension policy, it does
produce costs changes that we can use for benefit improvements.
I suppose the genuine answer here is that we will know a lot more
in 2005 when the scheme starts—how many people transfer,
etc., and that is something I cannot prejudge this afternoon.
Q11 Mr Roy: Are you content that
the level of pension benefits will be fair for the vast majority
of personnel who will leave service before the age of 40? I am
concerned that officers are given a privileged pension opportunity
over the lower ranked personnel because they are able to serve
for a longer period. Is this not unfair to the vast majority?
Mr Caplin: No, it is not unfair.
It is the way that the old scheme has grown up. That scheme has
been in existence since the end of 1973, I think. The last changes
were 30 years ago to a scheme some years before that. I do not
think it is wrong that we would have different terms. The one
area of change that we are proposing in the new pension scheme
is to base the pension on final salary. It will be much more relevant
to the salary that someone earns, rather than the rank. I think
that is an important change. At the moment, as I am sure you are
aware, there is a hypothecated amount based on rank.[3]
Q12 Mr Roy: Is there not some sort
of distant correlation between the rank and the amount of salary—ie,
the higher the rank, the higher the salary?
Mr Caplin: There is. That is a
natural cause. What we are trying to do is to use real figures
here, people's salaries, to base their pensions on. This is consistent
with good private sector practice and other public sectors as
well will probably move to this system in time, if they are not
already there. The idea is to use people's final salary for their
pensions rather than a mythical amount of money based on rank[4],
which is what happens at the present time.
Q13 Mr Roy: I still have it in my
head that the officers of higher rank will be getting more money.
Mr Caplin: They will get bigger
pensions. I am not denying that.
Mr Iremonger: Under the existing
scheme, other ranks have to serve longer to get a pension, to
get an immediate pension—that is the early pension—and,
under the new scheme, we have done away with that. We have produced
a fairer system whereby officers and other ranks will serve the
same period to get the immediate pension and the same period to
get a full pension. In terms of what we have done on the immediate
pension, the change to the value of what you get between the ages
of 18 and 35, that is not to the disadvantage of other ranks at
all. The majority of other ranks go before the 18 year period.
One of the criticisms of our schemes was that too much money was
in that middle period of pension and that we ought to take money
out of that; that it was disproportionate to what you would get
in the private sector scheme outside or in other public sector
schemes. Effectively, that is what we have done. We have taken
that money and given it to widows who, in large number, will come
from the other ranks. Death in service benefit, ditto. If you
look at the recent war, the majority of those who have been killed
have been other ranks. We are taking money from that middle period
where we do not think they need the money so much, because the
skills they have are ones now that ought to enable them to get
a reasonable job outside, and giving it much more widely, particularly
to widows and their dependents but also to unmarried partners.
A lot of the unmarried partners are among other ranks as well.
Q14 Mr Roy: Do you acknowledge that,
of those who serve until the early departure point—ie, age
40—very few will be given the chance to accrue a full career
pension within the Armed forces?
Mr Caplin: Do you mean my answer
earlier?
Q15 Mr Roy: Yes, to take it further.
Mr Caplin: I think I was referring
to the old scheme there and the superannuation point I was making
earlier, which is incredibly technical. Maybe I should clarify
that in writing. On the issue about early departure, I said earlier
that it is important that the services have the opportunity to
still bring people through from the moment of recruitment to those
key years when they train, develop and are effective members of
the Armed forces. That is not an age issue; that is a very important
issue after five, ten, 12 or 15 years in many of our forces and
we do not want to lose that expertise. We try to design an arrangement
that will satisfy long term government pension policy, the Inland
Revenue and still leave us with that recruiting and retention
advantage in the Armed forces which is critical to us. That is
where we are in terms of the early departure scheme.
Q16 Mr Roy: In relation to the full
picture and career structure, how has this affected the MoD's
thinking on the sorts of benefit that former personnel deserve
to receive? Do you think this does help the big picture or not?
Mr Caplin: There are two points:
firstly, when I launched the scheme, I made it clear that I thought
the pension scheme was a significant improvement on the current
scheme. It is one that I think will be welcomed, but my clarification
on my second point is that the transfer of an individual member
to that pension scheme is a matter for individual choice. There
will be no compulsion in transferring to the new scheme.
Q17 Mr Roy: Do you think the base
for this is going to be a saleable item?
Mr Caplin: I am in a difficult
position here because none of us is licensed to give financial
advice. If I say that this is the scheme and all members of the
Armed forces should join it, that could be construed as a breach
of the Financial Services Act, which is not something that I would
want to do. That is why I have been insistent that—
Q18 Mr Roy: Surely you must accept
that there is either an improvement or there is not? Do you think
you can put the case: here is a pension scheme that is an improvement
for you as service personnel? You do not need a financial adviser.
Mr Caplin: They may do. Are you
talking about current Armed forces or future Armed forces?
Q19 Mr Roy: Future.
Mr Caplin: Those who join us from
6 April 2005, provided we have been able to get this legislation
through both Houses, will automatically enter the new scheme.
Those who are still on the old scheme on 6 April 2005 will have
the choice. I believe that we are putting forward a new scheme
which offers significant improvements to those new recruits from
6 April 2005 but I am not prepared to say that everyone has to
join it.
1 Ev 39 Back
2
Ev 39 Back
3
Note from Witness: Replace with a median pay rate for
the rank. Back
4
Note from Witness: Replace with a median pay rate for
the rank. Back
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