Memorandum from The Forces Pension Society
(17 October 2003)
INTRODUCTION
1. In your email of 2 October you informed
this Society that the Committee will be taking evidence from the
Minister for Veterans on the new Pension and Compensation Schemes
in early November and invited us to submit a paper setting out
our views. This paper outlines this Society's position on the
proposals for the new Armed Forces Pension Scheme announced by
the Minister on 15 September. It sets out where the Soicity's
concerns expressed during the consultation period have been met
or partially met and where concerns remain. It also outlines five
principal areas of concern under the heading of "historic
anomalies". This is because a number of the measures announced
in the new scheme have caused significant distress to victims
of previous injustices who see themselves ignored whilst improvements
are lavished on current and future generations.
2. This Society is ready and very willing
to give evidence to the Committee on all these issues.
MOD PENSION
REVIEW
3. Throughout the consultation period the
Forces Pension Society campaigned on three major issues where
the original proposals for the new scheme were demonstrably worse
than modern good practice standards. These were:
(a) Full career pensions, which should be
up to Inland Revenue (IR) limits (ie ²/3of final
salary).
(b) Survivor benefits which should be as
close as possible to the norm of 1/3 of
final salary (ie ½ of ²/3).
(c) Appropriate death-in-service benefits
(ie 4 x final salary).
4. Despite the imposition of the cost neutral
straitjacket and the Treasury demand for a contribution for the
increasing cost of longevity, the Society is generally pleased
to see that improvements to the scheme have been focused on the
benefits earned by long servers and on dependants. These improvements
have been funded by reductions in short and medium career benefits.
Nevertheless there are some significant shortcomings on which
the Committee may wish to seek reassurance from the Minister.
SATISFACTORY OUTCOMES
5. Two of the three major weaknesses inherent
in the original proposals have been addressed. These are:
(a) The uplifting of spouses pensions on
death in retirement (non-attributable). The current scheme pays
24.5% of the members final salary, the original proposal was 25%
and the final outcome is 31.25%. This is still worse than the
Private Sector norm of 33.33% and most Public Sector schemes but
is a significant improvement.
(b) The increase of Death-in-Service Benefit.
The current scheme pays approximately 1½ times salary, the
original proposal was three times salary and the final outcome
is four times salary. This places this aspect close to the top
of the Public Sector league table which, given the service person's
unique commitment, is exactly where it should be.
6. Other improvements that have met our
aspirations are the protection of preserved rights, the introduction
of mechanisms to mitigate against the trough phenomena, the rationalisation
of officer and other ranks terms, the accrual of pension from
the date of enlistment and the abolition of a vesting period.
REMAINING CONCERNS
7. There is however one fundamental weakness
with the new scheme and this is the failure to provide a genuine
full career pension plus lump sum at Inland Revenue limits of
66.67%. Under these proposals the best that can be achieved by
a very small minority is 62.5% which remains at the bottom of
the Public Sector League table. The unusually low normal retirement
age (NRA) of 55 and short working life of 35 years, which are
imposed by the MoD for its benefit as personnel management tools
and not as perks of the job, will seriously inhibit the opportunities
for actually earning the full career pension through service.
Despite the intention to announce that maximum service length
will be extended to 40 years, it remains a fact that only a tiny
percentage will be given the chance to accrue full career benefits.
Very few Service people join young enough or serve long enough
to earn full career benefits and extending service length within
a low NRA will exacerbate this. It is disingenuous at best, to
structure a scheme in which well over 90% of the members are debarred
from earning a full career pension. The vast majority are only
permitted to serve short career engagements for manpower management
reasons: even those who serve the full 35 years are highly unlikely
to achieve 66.67% without buying AVCs which should be a core benefit.
Throughout the consultation period MoD have been urged to introduce
shared cost AVCs to ameliorate the worst effects of this fundamental
weakness. Other options offered to resolve this problem have been
a change in NRA or a change in the accrual rate. All these suggestions
have been steadfastly rejected and as a result the new scheme
remains well behind modern good practice. The flawed structure
inherent in this aspect of the scheme would suggest that MoD is
more concerned with maintaining its existing manpower control
mechanisms than its primary responsibility to its people—a
duty of care.
8. Under the current scheme non-attributable
widow(er)s who choose to remarry or cohabit lose their pension.
The Government have accepted the principle that this is illogical
and that attributable and non-attributable widow(er)s should retain
their pensions for life. The Government announced on 31 October
2000 that from that date newly created and existing attributable
widow(er)s would retain their pensions for life, and the same
will apply for attributable unmarried partners from 15 September
2003. The new scheme will extend these provisions to non-attributable
widow(er)s and partners from implementation. This Society has
pressed MoD to implement this measure immediately to provide pensions
for life for all widow(er)s and partners in order to avoid creating
a new group of disadvantaged people. In the ultimate case the
widow of a non-attributable service death who opts to remain in
the old scheme (for well founded financial reasons) will lose
her pension should she decide to remarry or co-habit. The unmarried
partner (possibly of the same sex) in the new scheme will retain
their pension for life regardless of how many subsequent partnerships
they may care to form. This is clearly bizarre and is a case of
reverse discrimination. In the future victims may well have to
resort to law which if successful would lay MoD open to considerable
expense. We continue to press for immediate implementation in
the current scheme for non-attributable widow(er)s. MoD have made
no concessions on this issue.
9. There are also a number of anomalies
that have yet to be explained or elements of the scheme that have
not been finalised. These include:
(a) The replacement of the Immediate Pension
(IP) with the Early Departure Scheme (EDS). This element of the
new scheme is the fundamental issue for a large proportion of
the serving community and it is disappointing that no details
at all have been forthcoming.
(b) Until the rules of the new scheme have
been written and promulgated it is not possible to define the
inconsistencies and future stumbling blocks.
(c) The deferment of payment of the EDS until
65 will have a very significant effect on those who are compulsorily
retired close to their 55th birthday.
(d) For those servers who elect to transfer
to the new scheme, it is unclear whether previous service will
be reckonable from the date of enlistment. If not this could be
a significant disincentive to transfer, and misrepresentation
of a new benefit.
(e) Compulsory introduction of the new compensation
scheme for all members of the AFPS on 6 April 2005 will cause
anomalies for those who elect to remain on the old pension scheme.
No transition arrangements have been published.
UNMARRIED PARTNERS
10. This Society recognises that the introduction
of benefits for unmarried partners was inevitable given the prevailing
trends in society and is not opposed to the concept. Nevertheless
great care will be required when framing the legislation surrounding
this aspect of the scheme. In particular it will be vital to avoid
discrimination against those who choose a more conventional approach
to life by electing to marry, or creating any disincentive to
marriage. One such example is non-attributable widows in para
7 above.
LEGACY ISSUES
11. The announcement that unmarried partners
under the new scheme will in future receive the same benefits
as married couples has provoked a backlash amongst the victims
of the traditional legacy issues. They feel alienated, neglected
and discriminated against with every justification. The MoD's
dogmatic interpretation of the policy of "no retrospection"
has consistently denied any possibility of finding pragmatic and
affordable solutions to these long standing, bitterly resented
problems despite this Society proposing many "no cost"
or "low cost" possibilities.
12. There are four principle issues that
require immediate resolution. Annexes to this submission outline
the problems and possible solutions. They are:
(a) Pre 1973 Retirees whose widow(er)s will
only receive one third pensions. They were not offered a "buy-in"
option. FPS suggest that a buy-in option should now be offered.
It may be that to "buy-in" all service prior to 1973
would be beyond the means of the majority but the afflicted would
have been given choice and it would "lance the boil"
forever. It would also be cost neutral. Annex A.
(b) Pre 1978 Retirees who contracted Post
Retirement Marriages. Their widow(er)s currently receive no pension.
Without doubt this generation had very special reasons for marrying
later than the norm. This is explained in the Annex. As a result
there is no "read across" to the remainer of the public
sector and the dependants' benefits for this discrete group should
be instituted forthwith. Annex B.
(c) Pensions for Life. The Government has
accepted in principal that attributable and non-attributable widow(er)s/partners
should not lose their pensions should they remarry or cohabit.
Whilst FPS accepts that it would be unaffordable to apply a retrospective
change for all non-attributable widows across the Public Sector
there is clearly a case for compromise. An alignment of all benefits
for all widow(er)s from a set date would be affordable and logical. Annex
C.
(d) Troughs. The impact of pay restraint
policies on AFPS pensioners is untoward and can be seriously adverse.
Armed Forces pensioners have no way of avoiding such financial
penalties, they endure them for the rest of their lives and so
do their widows. Because these effects are not part of the AFPS
rules, and fiscal policy can never have been intended to penalise
pensioners in the long term. FPS would wish to see all trough
victims pensions uplifted from a due date to rates based on comparability
of pay. This should be costed before any judgement is made by
MoD on affordability. FPS accepts that restoration of "lost"
pension is unaffordable. Annex D.
IMPROPER TAXATION
13. To date no compensation plan has been
announced for the 1,300 odd victims who had their invaliding pensions
improperly taxed as a result of MoD maladministration. These men
have suffered severe financial pain over many years having been
defrauded of their entitlement. The then Minister promised that
he would announce a compensation package "by Easter 2003"
and subsequently amended this to "by the summer recess".
No announcement has yet been made. This is extremely shabby treatment
of a significant number of servicemen who were disabled in the
service of their country. Many are very old and some have died
since the blunder was originally admitted by the Government. At
the very least these men, their widows or estates should be compensated
with no further delay at a rate which ensures they are no worse
off than they would have been if they had lent their money to
Government through National Savings plus an element for damages.
SUMMARY
14. The Forces Pension Society is encouraged
that MoD has moved some way towards modern good practice since
the original lamentable proposals were first exposed at the start
of the consultation process. Nevertheless some significant shortcomings
remain, particularly with regard to full career benefits. The
Committee are urged to question the Minister on these aspects.
Finally the improvements inherent in the proposals for current
and future generations have alienated the already aggrieved victims
of past injustices. It is crucial that the MoD now commits itself
to finding satisfactory solutions to these problems for yesterday's
generations. In particular the lack of any compensation package
for the victims of improper taxation is a scandal that must be
resolved immediately.
Annex A
ONE THIRD RATE WIDOW(ER)S' PENSIONS
DESCRIPTION
1. Between 4 November 1958 and 31 March
1973 widows' pensions were set at 1/3 of
the husband's pension. On 31 March 1973 this was changed to½
rate. Those still in service at the time were offered the option
of buying-in their previous years' pensionable service prior to
that date to count for full½ rate widows' pensions: those
who had already retired were not. Thus anyone who retired before
31 March 1973 was significantly disadvantaged, despite having
given the same service commitment and financial contribution through
abated pay as people who retired immediately after the date of
introduction. The point at issue is that this arbitrary choice
of date was grossly unfair because MoD did not offer the same
buy-in option to retired beneficiaries that would have been at
no net cost.
POTENTIAL SOLUTIONS
2. We suggest that it would be feasible
and legitimate to construct a buy-in option to enable pre-1973
retirees to enjoy the same element of choice, at their own cost,
as their post 31 March 1973 retiree colleagues. The scheme should
be based on the same principles and costing mechanisms used in
1973. This would allow the disadvantaged individuals to choose
whether to use their own resources to secure a better pension
for their prospective widows, and would extinguish the complaint
of inequity once and for all. Any costs of administering the scheme
or any additional risk (which would presumably be very low) could
be factored into the cost to the individual. There is precedent.
3. In 1996 (2 December Commons Written Answer)
Minister Armed Forces (Soames) estimated that there were some
52,000 pre 31 March 1973 Armed Forces widows and that the cost
of correction would be £29 million per annum. This figure
will be lower now because of natural causes. In 2002 (18 January
Commons Written Answer) Minister Armed Forces (Ingram) estimated
that the cost would be £25-30 million per annum for the Armed
Forces. He also admitted that a buy-in option would be cost neutral
and that administrative costs would be relatively small. Nevertheless
he ruled out such an option because it would breach long-standing
Government policy on retrospection.
4. Government Policy on Retrospection is
well understood but in the case of a Buy-In Option for pre 1973
retirees it appears to have little relevance. The main planks
of the policy are:
(a) Affordability. Since the
proposal is cost neutral this is clearly not an issue.
(b) Read Across. Since the proposal
is cost neutral it clearly doesn't make any difference at all
if there is read across. Indeed it would provide a pan public
sector solution to a long festering sore at no cost (but plenty
of kudos) to the Government.
(c) Applicability. Members of
the scheme serve and retire under the conditions applicable at
the time and cannot enjoy new benefits subsequently bestowed.
Whilst this plank of the policy remains slightly relevant, this
issue is about inequity, poor implementation and lack of transition
arrangements. The fact remains that members of the scheme with
identical commitments, serving under identical conditions of service
and of identical age have not been treated equitably. The requirements
of natural justice alone demand that the disadvantaged be given
the same treatment as those who benefited. That treatment is CHOICE.
5. Nevertheless, should the buy-in option
be introduced it would not be applicable to existing widows on
1/3 rate pensions because they could not
buy-in to a scheme which they personally have never been members
of. There are two options to achieve a solution. These are:
(a) Find a legal instrument that allows such
widows to be given the option to buy-in their husband's service
thereby offering them the same choice as 1973 servers and pre
1973 retirees.
(b) Treat them as a special case deserving
of exceptional treatment and increase their pensions to½
rate with immediate effect. Two examples of such acceptable retrospection
are the pensions of pre 1958 Service widows which, in 1964, were
reassessed as if their husbands had died and were pensioned on
a code of December 1963: and the uplifting of pre 1973 war widows'
pensions to bring them up to the 1973 standards which were then
seen as wholly appropriate despite retrospection. We accept that
on grounds of affordability it may not be feasible for the rise
to be backdated.
6. It is doubly galling for the mainly elderly
victims of 1/3-rate pensions to see the
current generation being promised nearly double that. This further
deepens the sense of injustice.
SUMMARY
7. The introduction of a "one-off"
buy-in option for both pre 1973 retirees and their widows would
go a long way to right the wrong and to treat elderly people who
have served their Country loyally, many of them through a world
war, fairly and equitably. Furthermore it could be achieved without
breaching Government policy on Retrospection and would be cost
neutral. Finally by offering all these pensioners choice (one
of the Government's cornerstone propositions in the Pensions Green
Paper) it would remove this longstanding anomaly forever.
Annex B
POST RETIREMENT MARRIAGES (PRM)
DESCRIPTION
1. Pensions for widow(er)s of post retirement
marriages were introduced on 6 April 1978 to comply with the Social
Security Pensions Act 1975, but this change only benefited those
serving at that date and only service from that date qualified.
The Review of the Armed Forces Pension Scheme announced on 15
September 2003 introduced full dependant's benefits for unmarried
partners with effect from 6 April 2005. Although not explicit
in the announcement it is assumed that this will apply to "substantial
partnerships" formed after retirement.
2. The implications of the above are:
(a) Those who retired before 6 April 1978
and married for the first or subsequent time post retirement have
no widow's benefit.
(b) Those who retired after 6 April 1978
have widow(er)s benefits based on only post 1978 service. For
example a Service man who served a full career with half his service
pre 1978 would leave his PRM widow on a pension of 12.13% of his
final salary as opposed to 24.25% for a pre retirement marriage
widow. New cases will continue to arise on a diminishing scale
until 2015 by which time all service will be post 1978.
(c) Some people who bought-in to the ½
rate widow(er)s' pensions in 1973 lose that money if they contract
a post retirement marriage.
(d) Unmarried partners (who are effectively
cohabiting) will in the future attract full dependants benefits
whilst those who selected to marry their partners in the past
will not. This change for the better for future generations deepens
the sense of injustice among former generations who feel discarded.
NUMBERS AND
COSTS INVOLVED
3. In December 1997 MoD estimated a one-off
capital cost of £20 million to bring current serving people
(with pre 1978 service) on board. A further estimate of £16
million pa was given as the cost of retrospectively recognising
all post retirement marriages. In 2002 (22 Jan Commons
Written Answer) Minister Armed Forces (Ingram) estimated a one-off
cost of £50 million to extend pensions for widows of PRM
to all current and deferred AFPS pensioners. These two sets of
figures appear to be inconsistent particularly when it is recognised
that:
(a) The number of pre 1978 PRM widow(er)s
is steadily decreasing.
(b) The number of personnel in the Armed Forces
decreased significantly between 1995 and 2002.
SERVICE LIFE
AND CAREER
PATTERNS
4. Special factors undoubtedly apply to
Service personnel that are not applicable to any other group of
public (or indeed private) sector workers. These are:
(a) The pattern of Service life, particularly
during and after the 2nd World War, mitigated against early marriage.
Service people were stationed abroad for long periods with limited
opportunities to meet suitable potential future spouses and therefore
tended to marry later—in many cases after having completed
distinguished military careers.
(b) For officers early marriage was formally
discouraged right up until 1973 through denial of allowances and
married quarters.
(c) The strains on marriages of enforced
separation and exposure to danger also led to the incidence of
divorce being higher in the Armed Forces than elsewhere.
(d) The Services' normal retirement age of
55 is well below the norm of 60 or 65 elsewhere. Furthermore the
vast majority of Service people are forced to retire at or below
age 40 because of Service manpower policy.
In consequence the probability of Service people
marrying for the first or subsequent time after they have left
the Armed Forces was and remains higher than elsewhere. The post
retirement marriage pension rules bear heavily and unfairly on
the Armed Forces whose unique conditions of service make them
a special case.
POTENTIAL SOLUTIONS
5. A buy-in option may not be appropriate
in this case as none was offered when the rules changed in 1978.
It is interesting that since it's introduction the Parliamentary
Pension Scheme has provided pensions for the legal widow of an
MP regardless of the date of marriage. The 1965 Ministerial Salaries
and Members' Pension Act which introduced the scheme did not distinguish
those married during service from those who married after service
had ended (Treasury Minister Stephen Byers 15 September 1998).
It is also instructive that when it was discovered that the pension
arrangements for Mr Speaker King (subsequently Lord Maybray-King)
did not contain any widow's pension provision for his second wife
who he married after he had retired, the Government found it expedient
to change the rules to bring Lord Maybray-King's scheme into line
with MPs. There is precedent.
6. It is perhaps worth drawing attention
to the bizarre situation that now arises from the introduction
in 2000 of the possibility of pension splitting on divorce. A
couple in a post retirement marriage could circumvent the rules
by agreeing to divorce amicably, splitting the pension to each
partner as part of the divorce settlement thus creating two pensioners
in their own rights and then remarrying. This surely underlines
how inappropriate the existing rules have become.
7. We propose that the Armed Forces should
be treated as a special case and that pensions should be made
available to the widows of post retirement marriages with immediate
effect, but we accept that it may not be feasible for the pension
"lost" to date to be reimbursed. If necessary some token
buy-in option could be offered in recognition that later generations
had to earn this PRM benefit through service.
SUMMARY
8. The likelihood of Service people contracting
post retirement marriages is higher than elsewhere. There is no
evidence to show that the introduction of pensions for widows
of PRM across Government service in 1975 had to be paid for by
public servants. There is no logic in denying this facility to
the Armed Forces.
9. Pensions for widows of PRM should be
introduced in the Armed Forces with immediate effect regardless
of the date of marriage.
Annex C
WIDOW(ER)S'/PARTNERS' PENSIONS FOR LIFE
DESCRIPTION
1. The rules surrounding the payments of
Armed Forces widow(er)s' pensions for life remain exceedingly
complicated and recent changes announced by the Minister will
result in further alienation amongst discrete groups of widow(er)s
whom the legislation has passed by. Currently the situation is:
(a) Until 31 October 2000 any Armed Forces
widow(er) who remarried or co-habited lost their pension.
(b) From 31 October 2000 attributable (war)
widow(er)s, both existing and future widow(er)s but not widow(er)s
who had already remarried, retained their pensions for life. This
change was clearly retrospective since it included existing widow(er)s
who had been excluded under the rules of the scheme at the time
of their spouse's death.
(c) On 20 March 2003 the Minister announced
that from that date benefits would be paid to unmarried partners
where the death related to conflict. This did not cover attributable
deaths that did not occur in conflict.
(d) From 15 September 2003 benefits will
be paid to unmarried partners of those whose death was attributable.
(e) From 6 April 2005 the unmarried partners/widow(er)s
of new entrants to the Armed Forces (who by definition will become
members of the new scheme) will receive pensions for life should
they die regardless of whether the death is attributable or non-attributable.
(f) From some unspecified date in 2007 the
non-attributable widow(er)s/unmarried partners of servicemen/women
whose spouse/partner joined the Armed Forces prior to 6 April
2005 will only retain their pensions for life should they elect
to transfer to the new scheme.
2. The end result of this is to create the
following groups of disadvantaged partners/widow(er)s:
(a) Partners whose death was attributable
but not due to conflict between 20 March 2003 and 15 September
2003.
(b) Existing non-attributable widow(er)s.
(c) Non-attributable widow(er)s created between
15 September 2003 and the introduction of the new scheme in 2007.
(d) Non-attributable partners created between
15 September 2003 and the introduction of the new scheme in 2007.
3. MoD has already conceded that retrospection
is appropriate for the small discrete group of attributable widow(er)s
but by deferring implementation until 2007 for a proportion of
the non-attributable widow(er)s/partners will create a new group
of disadvantaged people.
They will still have to choose between financial
well being and happiness in a future relationship. This is morally
indefensible.
NUMBERS AND
COSTS INVOLVED
4. The 1995 MoD Internal Review estimated
that for the then serving personnel a one-off cost of £50
million for service already completed plus 0.2% of pay for future
service. In 2001 US of S (Moonie) estimated that about 130 new
non-attributable widow(er)s are created each year about half of
whom subsequently remarry. The cost of reinstating widow(er)s'
pensions which had been stopped from 1973 to 2000 would be £22-26
million. MoD also estimated the cost of spouses' pensions for
life as 0.3% of pay or £12 million pa for future service,
and factored this into their Pension Review's cost neutral equation.
5. Clearly the cost (quoted in paragraph
4 above) of reinstating the pensions of those non-attributable
widow(er)s' pensions who remarried between 1973 and 2000 is problematic.
Nevertheless the MoD conceded the principle for attributable widow(er)s
in 2000 and it should be possible to achieve a compromise solution
for the remainder of the existing non-attributable widow(er)s
and those created between now and implementation of the new AFPS.
POTENTIAL SOLUTIONS
6. The group at risk are tightly defined
and very small ie existing non-attributable widow(er)s and those
tragically created between now and the introduction of the new
pension scheme in about 2007. Only about half of them might be
expected to remarry. There are three potential options for this
group:
Pay widow(er)s pensions for life to:
(a) those widowed since 1973;
(b) those widowed since the date of the change
for attributable widows on 31 October 2000; and
(c) those widowed since the introduction
of benefits for unmarried partners on 15 September 2003.
7. We propose that at the very least MoD
should bring forward their proposed measure to introduce pensions
for life for all widows immediately so that no new victims are
created. The precedent for pulling forward a new benefit in the
new AFPS has been set by introducing unmarried partners' benefits
ahead of the rest of the scheme. This measure should include those
who have been drawing a non-attributable widow(er)'s pension since
31 October 2000. This is a modified (and cheaper) version of the
formula used for the war widows. This would remove inequity and
enormous distress from a small group of deserving people. Non-attributable
partners created since 15 September 2003 should be included in
this measure.
SUMMARY
8. The Government have conceded the principle
that widow(er)s' pensions for life are appropriate. They have
introduced them for one type of Service widow(er)s (attributable):
and they plan to introduce them for the other type (unattributable).
If they do not take this one further small step of including existing
unattributable widows they will wilfully create a new group of
disadvantaged and aggrieved people.
Annex D
PENSION TROUGHS
1. Troughs are caused by the Government
of the day imposing upper limits on annual Public Sector pay awards
in order to control escalating inflation and reduce expenditure.
On a number of occasions annual pay awards have been pegged at
a level way below the RPI for that year. This leads to quite unwarranted
distortions in pension rates because they are based on an artificially
depressed final salary for those unfortunate enough to be discharged
at such times. These "troughs" can be vicious; the 1976-77
trough is the classic example but others were also very painful.
2. Another pernicious device that has been
employed on many occasions is to "stage" the annual
pay award, thereby artificially depressing the final salary on
which some leavers' pensions are based. Staging was quite common
in the early nineties and produced shallow troughs that continue
to cause hardship to those affected.
3. Committed Service personnel cannot chose
when they retire because of MoD manning policy and the artificially
low NRA. They therefore have no "choice" and no ability
to organise their careers to avoid an impending trough or staged
pay award. As a result if they happen to be forced to retire in
a "bad" year or too early in a "staged" year
they will suffer for the rest of their lives and so will their
dependants after their death. Short term Government fiscal policy
therefore has quite random, untoward and unfair impact on individuals.
The detailed effects are:
(a) In a year of pay award staging someone
retiring in the first part of the year receives a pension set
on the part award rather than the whole, whereas the person serving
for a few more months receives the full increase. This discriminatory
differential can never be recovered.
(b) In a year when government pegs the Armed
Forces pay award significantly below RPI the person who has retired
the previous year gets a pension rise which is more valuable than
the pay award is to the person who retires in that year. For those
who continue to serve future pay awards usually correct this anomaly
over time; but for the person who retires in the pay restraint
year the seriously damaging adverse effects on pension are permanent.
(c) Armed Forces pay is based on the principle
of comparability (as a trade off for no bargaining power) and
the imposition of such pay restraint policies breaks this essential
link as Armed Forces pay falls below the average earnings index
during the affected years. This translates into a pension based
on pay, which is no longer comparable. The graph attached at Appendix
1 shows this breakage starkly. Whereas the pay rates can catch
up over time through subsequent pay awards, the pension never
can. The chart attached at Appendix 2 shows the impact on people
who retire in pay restraint years also very starkly. This is an
unjust and quite unintentional penalty imposed on pensioners who
have no choice or say.
(d) The AFPS pension code system produces
very stark cliff edges and the inequities are, unusually, very
evident to individuals.
(e) In some other schemes these affects are
mitigated by various devices such as deeming and averaging whereas
no such provision exists for the current Armed Forces Scheme.
NUMBERS AND
COSTS INVOLVED
4. FPS is unable to estimate numbers in
each trough or cost solutions. Recently the Government Actuary's
Department estimated that the cost of rectifying the problems
associated with the 1976-77 trough was £60 million but this
statement was not supported by any justification or background
methodology. We await further information on the assumptions GAD
made in reaching this sum before reaching any conclusions.
POTENTIAL SOLUTIONS
TO CORRECT
INEQUITY
5. We recognise that full retrospective
restitution of pensions "lost" through pay restraint
policies may not be attainable or affordable even though it would
be entirely justified. Some partial solution must be found. We
suggest that pensions should be uplifted from a due date (perhaps
15 September 2003) to rates based on the principle which underpins
Armed Forces pay policy, and hence pensions, ie comparability.
We further suggest that the cost of such uplifting should be measured
by MoD before they, once again, deny it on the grounds of affordability.
With that information available it would then be possible to assess
the viability of other less costly options should that be necessary.
Even a partial solution, such as modest annual increments towards
the comparable rate would be better than the current gross inequity.
6. There is precedent. In 1983/84 the AFPS
was allowed to "deem" higher pay increases for pension
purposes. The Parliamentary Contributory Fund was deemed twice;
in 1980 to take account of the full salary recommended by TSRB
and in 1996 to back date a 26% pay rise to those MPs who left
the House before the pay rise came into effect. As recently as
June this year the Lord Chancellor's pension was effectively deemed
when his pay rise was pegged at 2.25% but his pension was calculated
on the recommended but notional 12.5% rise.
7. There are valid reasons for treating
the Armed Forces exceptionally. Their conditions of service and
lack of any form of representation put them in a uniquely vulnerable
position. Their commitment to their Country is of a different
order of magnitude to that of any other public servants. Pay comparability,
which is breached by pay restraint, is the cornerstone of Armed
Forces personnel's belief in fair treatment by their employer.
8. The MoD has clearly recognised that this
historical divisive arrangement should not be perpetuated and
FPS welcome the changes, which introduce "dynamising",
incorporated in the review of the AFPS announced on 15 September
2003.
SUMMARY
9. The impact of pay restraint policies
on AFPS pensioners is untoward and can be seriously adverse. Armed
Forces pensioners have no way of avoiding such financial penalties,
they endure them for the rest of their lives and so do their widows.
Pay restraint also undermines the whole basis of Armed Forces
pay and pensions, namely comparability.
10. Because these effects are not part of
the AFPS rules, and fiscal policy can never have been intended
to penalise pensioners in the long term a solution should be sought
based upon uplifting pensions from a due date to rates based on
comparability of pay (which underpins Armed Forces pay policy).
This should be costed before any judgement is made by MoD on affordability.
APPENDIX 1
APPENDIX 2
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