Further memorandum from the Ministry of
Defence (27 November 2003)
Clarification of the overall costs of the new
scheme and its effect on the Accrued Superannuation Liability
Charge issue is requested. (Q3-4 and Q15)
The Ministry of Defence's prime objective in
the reviews was to produce a new scheme broadly equal in value
to the current one and this was the position with the proposals
that we put out for consultation in March 2001. Since then, and
as a quite separate exercise, the periodic recosting of the current
scheme has taken place, to take account of changes in actuarial
assumptions. This includes factors such as changes in the point
at which people leave the services and the effect this has on
the cost of benefits but, most significantly, the increasing expectation
of life across the UK. This recosting showed that the cost of
the current scheme had increased from 22% of the current pensionable
pay bill to 24.5%. Each percentage point of the pay bill is worth
some £50 million. However, the recosting is based on looking
at the expectation of life of new entrants currently coming into
the scheme. In terms of the overall cost of the scheme, taking
account of the full spectrum of ages of current scheme members,
it therefore most accurately reflects a scheme cost some years
away, after the retirement of existing, more mature Service personnel
who cannot expect to benefit to the same extent from improving
life expectancy. The Department is therefore in the process of
negotiating with Treasury and the Government Actuary's Department
how this recosting should most reasonably be reflected in the
immediate reassessment of the cost the Department pays for the
accruing scheme liabilities which will take effect from April
2005. The Department would expect the figure to be somewhat less
than the 2.5% increase, but it will nevertheless represent an
additional pressure within the Defence budget which will be met.
Will some of the cost savings the Ministry of
Defence will be making under the new pension scheme go to pay
for pensioners' improved life expectancy, rather than to improve
the benefits available under the scheme? (Q9)
In a commercial scheme, the increased cost would
commonly be dealt with either by increased contributions from
scheme members or by a reduction of benefits elsewhere. It is
considered reasonable that members should bear some of the burden
of the increased costs given that they will benefit through longer
enjoyment of a pension in retirement. In its own work, the Department
has taken the view that, in broad terms, it is people in the new
scheme who, being younger on average, will stand to gain most
from the increases in expectation of life. In redesigning the
new scheme, the Department has therefore taken the opportunity
to make savings in the Early Departure Payment scheme worth around
1.7% of the Service pay bill to cover the longevity cost. Nevertheless,
this saving will not immediately feed through to the cost of currently
accruing scheme liabilities, because for some time the largest
part of our Service personnel are expected to be on the current
scheme; the only longevity-related saving on the current scheme
will be the change in the age for payment of preserved pensions
for future service from age 60 to 65.
The saving on the new scheme has been taken
predominantly from the redesign of the early departure benefits
which will replace the current Immediate Pension. We consider
this to be reasonable given that longer expectation of life is
being accompanied by an improved fitness to work for longer; this
is reflected in the Government's recent policy initiative on longer
working lives[27].
In the case of the Armed Forces, we also consider that those Service
personnel reaching the age at which Early Departure Payments would
become payable will have much better transferable skills for achieving
a successful second career than their counterparts in 1973, when
the current scheme was designed. It has never been the objective
of the benefits paid at full career that a Service person should
be able to retire at age 40 with a full pension, allowing immediate
retirement, and, overall, the Department now considers it reasonable
to reduce the value of the benefits paid to those leaving the
Services at mid-career; this is reinforced by the fact that the
change from an Immediate Pension to an Early Departure Payments
scheme will give greater flexibility in the design of the phasing
of payments which will enable us to focus them more efficiently
on the periods of greatest vulnerability after leaving the Services.
The redesign of the pension scheme in the light
of public consultation has balanced savings in some areas with
improvements in benefits elsewhere. Savings have been generated
by reducing the value of the Early Departure Payment scheme (formerly
Immediate Pension) and by moving the preserved pension age to
65. These savings have been used to fund improvements to dependants'
benefits (notably the increase to widowe(er)s' pensions), the
provision of unmarried partner benefits, improved death-in-service
benefits and the cost of providing benefits over a longer period
arising from improvements in life expectancy. The Government Actuary's
Department has produced a note setting out the make-up of the
new scheme's costs and this is attached at Annex A.
When will the work on the modelling relating to
the early departure scheme be available, given that it was stated
this would be before the legislative process commenced? (Qs 20,
60 and 62)
Further clarification of the design of the early
departure scheme as outlined in Qs 64-65 and Q77 is requested.
The Committee would also like to know how the Government has taken
forward its suggestion that the Government should consider targeting
the element of the immediate pension which is intended to compensate
personnel for loss of earnings towards those personnel who genuinely
lose earnings on leaving the Armed Forces?
With the assistance of HM Treasury and Inland
Revenue, the Department is developing a flexible alternative to
the early Immediate Pension, known as the Early Departure Payment
(EDP) scheme. While the precise size and phasing of the EDP payments
is still being worked up with the single Services, the aim is
to deliver a broadly similar structure of payments to the IP,
with a (tax free) lump sum at the point of departure and income
stream payable until age 65 when the preserved pension and pension
lump sum are paid. Under this approach, therefore, individuals
will receive two lump sums. Further work to define the precise
shape of the EDP is being taken forward with the single Services.
The Department will share with the Committee the outcome of this
work which is expected to be concluded as soon as possible in
the New Year.
The EDP also provides a common approach for
officers and other ranks, with the EDP point after 18 years' service,
or age 40, if later (unlike the IP which requires 16 years' service
from officers and 22 years' service from other ranks).
The EDP scheme will not be a pension benefit
and is not, formally, part of the new Armed Forces Pension Scheme.
It will be established as a separate scheme, with its rules set
out in its own secondary (not primary) legislation. The fact that
it is not tied to the normal rules for the calculation of pension
benefits means that there is considerable flexibility about the
options for the shape of the scheme payments, which can be tailored
more closely to the needs of Service personnel and of the Department.
The EDP scheme will be delivered alongside the new AFPS by the
Armed Forces Personnel Administration Agency.
Reducing the value of the Early Departure Scheme
has allowed us to use some of the saving from an area where relatively
few personnel benefit (only 25% reach the Immediate Pension point)
to improve dependants' benefits, where the majority of scheme
members and their families will benefit and to help cover the
increased costs of pensioners living longer. However, Service
personnel who join the new AFPS on the basis of a particular level
of EDP benefits will have reserved rights to that level of benefits.
The Services are content that, like the IP in the current scheme
but with more flexibility to focus payments, the EDP will continue
to play an effective role in helping to achieve an appropriate
manning balance for the Armed Forces, by helping to pull personnel
through to the 18 year point and then offering a reasonable level
of compensation to those who leave.
The cost of extending benefits to unmarried partners
was estimated at £16 million. Is there any further information
on expected cost that can be made available to the Committee?
(Q26)
Clarification is sought on the Ministry of Defence's
work-to-date defining entitlement to unmarried partner benefits?
(Q28)
The cost of extending widower(er)s' benefits
to unmarried partners in substantial relationships under the new
pension scheme is 0.2%[28]
of pensionable pay. The cost was assessed by the Government Actuary's
Department on the assumption that there would be a qualifying
test to establish the relationship was substantial. Assumptions
used for calculating the number of claimants were consistent with
those used for costing unmarried partner benefits for other public
service schemes. It should be noted that these assumptions required
a strong degree of judgement, as relationship models are difficult
to construct due to the limited information available on current
relationship patterns in the Armed Forces and the UK population
more generally.
I gave consideration to various responses to
the consultation including the Select Committee's report of 9
May which recommended such a benefit. I also took account of the
Services conclusion that, if the Armed Forces were to remain a
forward-looking, modern employer reflecting the lifestyle of increasing
numbers of their personnel, as well as of those they were seeking
to recruit, they should extend benefit entitlements to substantial
partnerships. This change of policy was anticipated in the recent
Gulf conflict for conflict-related deaths and was introduced for
all attributable deaths with effect from 15 September this year
under the current Armed Forces Pension Scheme. On the same basis,
all unmarried partners will also be entitled to benefits under
the new compensation scheme.
Work by the Department on the wider issue of
unmarried partner benefits has included consideration of how such
a relationship should be defined. A working group involving all
three Services was established in 2001 and, in developing their
recommendations, they took account of the work by other countries[29]
and other public service schemes. The Review team's consideration
of the question of whether and if so how benefits should be extended
to unmarried partners took advantage of this work, not least in
developing a set of criteria for assessing whether a relationship
was substantial. A provisional set of criteria was agreed
for implementation of the change in March. These reflected closely
the guidelines for the Civil Service Scheme and have been used
in adjudicating a number of claims resulting from the current
operation in the Gulf. They have since been refined and an agreed
set of guidelines has now been sent to be promulgated as a Defence
Council Instruction (DCI). The latest guidelines do not require
a set list of criteria to be met. Rather, they set out a range
of indicative criteria and require a broad judgement to be made
against the evidence submitted. The guidelines are being kept
under review in the light of developing practice elsewhere and
wider policy changes. The draft DCI showing the criteria is at
Annex B.
Clarification is sought on the level of savings
arising from the change of the preserved pension age from 60 to
65.
Explanation is sought on why the MoD is raising
the preserved pension age for existing scheme members without
consultation. Paragraph 69 of the Government's Green Paper "Simplicity,
Security and Choice: Working and Saving for Retirement" published
in December 2002, states that "the Government will . . .
consult on how and to what timescale the higher pension age and
any associated enhancement to benefits could be extended to existing
employees".
The Government Actuary's Department's (GAD)
latest costing on the saving made by moving the preserved pension
age to 65 in the new AFPS is 1% of the Service pay bill
(see Annex A). At this stage the GAD is unable to cost possible
savings that might arise from the introduction of this change
in preserved pensions in the current AFPS, as there has
been no final decision by Government on how such a change might
be applied to current public service pensions schemes and from
what date any such change might be effective. However, the Committee
will wish to note that the savings are likely to be low, given
that benefits up to that date will still be paid at age 60.
The new Armed Forces Pension Scheme adopts age
65 as the age at which the preserved pension is paid. This reflects
the Government's Action on Pensions agenda[30]
which, as part of the policy on longer working lives, proposes
a normal public service retirement age of 65. For the new Armed
Forces Pension Scheme, this will affect all those opting to transfer
to the new scheme and those joining the Armed Forces after 6 April
2005. In common with other public service schemes, for those remaining
on the current scheme, it will affect all benefits accruing from
future service from a date yet to be decided. The normal pension
age for the current and new schemes will remains at age 55. I
consider that these proposals fully accord with the Governments
Green Paper.
The Department considers that, in the event
that this policy is introduced, there is no specific requirement
to consult current members of the Armed Forces regarding the change
to preserved pensions, as accrued rights are not affected. However,
members of the Armed Forces have been told of the change through
the internal communications process. The detailed arrangements
for introduction of the change will be established in the light
of legal advice. Members already retired with a preserved pension
will not be affected.
Is there any further information available on
how the Government intends to ensure that military medical and
other records provide as full and accurate a picture as possible?
(Q80-84)
The medical record keeping protocols, which
are common throughout the three Services, will ensure information
required in support of claims is more readable and more easily
accessible. In the 10 years since the last Gulf conflict, the
MoD has introduced a number of fundamental improvements to medical
record keeping. On deployment, an Operational Medical Record is
used to record all health events that occur (where deployed).
Personnel leaving the Services are now given a summary of their
medical history, which they can give to their GP to provide them
with a more complete medical history. The establishment of the
Central Health Records Library at Shoeburyness also means that
ex-Service personnel, and their civilian medical practitioners,
can now gain better access to both primary and secondary care
records after they have left the Armed Forces. Currently, work
is being undertaken on the Defence Medical Information Capability
Programme (DMICP) which will provide the Defence Medical Services
(DMS) with a modern and efficient information system that is coherent
across primary, secondary and dental healthcare boundaries and
is applicable for both peacetime and operational use. It will
ensure the inclusion in Service medical and future personnel records
(under the future Services Joint Personnel Administration system—JPA)
of well-documented health, incident and exposure information to
support the "balance of probabilities" standard of proof.
The Department will make these records available in support of
any individual wishing to make a claim. However, if there is a
demonstrable failure of the Service record-keeping system affecting
a claim, account will be taken of the individual's own testimony
and any other evidence related to the claim. If it appears likely
that the claim is reasonable, then an award will be made. All
decisions by the Department will be appealable to a fully independent
tribunal.
The proposals include two forms of compensation
for loss of earnings: ill-health benefits through the pension
scheme on the one hand, and a Guaranteed Income Stream through
the compensation scheme on the other. Why is it necessary to have
these two benefits to achieve essentially the same purpose? The
ill-health benefits will be assessed on the basis of the individual's
earning capacity in civilian life; the Guaranteed Income Stream
on the basis of tariffs associated with particular injuries, which
may affect different individuals' earning capacities rather differently.
Why these two different methods of assessing whether someone should
be compensated for loss of earnings? (Q85)
Where a Service person's ill-health or injury
is found to be due to service (ie attributable), compensation
is paid. The new compensation scheme has two elements: first,
a lump sum for pain and suffering and, where there is disablement
that is likely to have a significant effect on work (tariff levels
1-11), a Guaranteed Income Stream (GIS). The Committee was provided
with the formula by which the GIS is calculated in a previous
inquiry[31];
it takes account of lost earnings capacity at a current level
of pay, had the individual remained in the Armed Forces until
age 55, as well as their pension income. It is considered appropriate
to abate the GIS paid from the compensation scheme by any pension
(or similar benefit) in payment from the AFPS (whichever scheme
the Service person belongs to). Both are paid to reflect loss
of earnings and it would be inappropriate to compensate for the
same loss of earnings twice over, once from the occupational pension
scheme and once from the compensation scheme, for injury, illness
or death due to service.
An ill-health benefit is paid as part of the
Service person's occupational pension scheme wherever a Service
person is unable to remain in the Armed Forces due to ill-health
or injury (regardless of whether the condition is as a result
of service). This is a common provision in occupational pension
schemes. Both the current Armed Forces Pension Scheme and the
new pension scheme offer ill-health benefits, although they have
different structures. In general, the provision—as befits
an element of an occupational pension scheme—relates to
length of service and rank; there will be a relationship between
the member's earnings and the benefit paid, but the period of
accrued service is also taken into account (with enhancement in
most cases). The ill-health benefits are therefore not primarily
derived from loss of earnings, but rather are based on accrued
pension rights.
Is there further information available on how
the Government intends to ensure that the compensation payments
received by (Service and) ex-Service personnel do not unreasonably
disentitle them from other benefits? (Q91-92)
Work to finalise details on the issue is being
taken forward with DWP. It is important that those who receive
compensation under the AFCS will be able to access, as appropriate,
civilian non-means-tested benefits and associated programmes such
as the New Deal for Disabled People. For the means-tested benefits,
the aim will be broadly to replicate the current statutory war
pensions disregard arrangements.
Under present provisions, War Pension supplementary
allowances cannot be paid in full along with similar benefits
awarded under the social security scheme. For example, War Pensioner's
Mobility Supplement is not paid along with the corresponding Disability
Living Allowance mobility component. This is in line with the
principle of avoidance of double compensation for the same need.
Under the new scheme, this is only likely to be relevant to awards
for loss of earnings. Work on how adjustment might be achieved
is ongoing. The tariff-based award for pain and suffering, does
not provide compensation for pecuniary loss and will not, therefore,
be subject to any such adjustment or deduction.
Is there any further information available on
how the Government intends to inform Service personnel of the
changes to the schemes that are being made? (Q93-96)
The initial announcement on 15 September 2003
informed Service personnel of the broad details of the new schemes
and the longer-term communication plan. Information has been placed
on internet and intranet sites, articles have appeared in the
various Service magazines and leaflets have been issued on an
individual basis.
Communication with Service personnel will continue.
Over an extended period in the run up to the introduction of the
new schemes in April 2005, this will focus on serving personnel
and their families to ensure that they have the necessary information
and understanding to make an informed decision on whether to move
to the new pension scheme or to remain with the current scheme.
This will include more explanatory material on the current and
new schemes, pension benefit statements, briefing sessions and
electronic information. I will ensure that the Committee is kept
in touch with this work.
27 Simplicity, Security and Choice: working and
saving for retirement-Action on occupational pensions. (June
2003). Back
28
The cost of this benefit was originally calculated at 0.4% of
the Service pay bill. However, the revised cost is lower, as scheme
members are expected to live longer and thus their partners will
draw benefit for a shorter period. Back
29
Third Report of Session 2001-02, MoD Ev 126 Annex D. Back
30
Simplicity, Security and Choice: working and saving for retirement-Action
on occupational pensions. (June 2003). Back
31
This reference can be found in the Committee's Third Report of
Session 2001-03 on The Ministry of Defence Reviews of Armed Forces'
Pension and Compensation Arrangements, Ev54. Back
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