Select Committee on Defence Written Evidence

Annex A

Letter from Government Actuary Department to the Ministry of Defence on the Armed Forces Pension Scheme New Pension Scheme Costing (November 2003)

  As requested we set out below results of our costings to show the consolidated effect of the new pension scheme, and the increased costs expected due to pensioner longevity improvements. These costings were originally provided to you in July and now reflect the benefits agreed. There have been no changes to the costings since my calculations in July other than the finalisation of the minor details in the benefit structure.

CALCULATION METHODOLOGY

  In order to compare the long term costs of the new pension scheme and the existing arrangements we have valued the schemes using the new entrant contribution method. This method assesses the cost of the scheme for a portfolio of new entrants expressed as a level percentage of pay over their expected working lifetimes. This method is therefore a suitable approach to comparing the cost of different arrangements applying for new entrants after an introduction date.

  All financial and demographic assumptions follow those being used for valuations of the AFPS, although the effect of changes in pensioner mortality assumptions since the 1997 valuation is identified separately. In particular the financial assumptions adopted follow those usually adopted for assessing the costs of the public service schemes—ie an allowance for investment returns of 3.5% per annum above price inflation, and general salary growth of 1.5% per annum above inflation.

MORTALITY ASSUMPTIONS

  As we have discussed previously there is a well reported trend towards increased longevity within the UK. Actuarial assumptions have in the past tended to underestimate the long term trends for improvements and the most recently published standard tables predict significant degrees of improvement. The assumptions used in these costings were designed to be a best estimate of future mortality levels using the projection information currently available. They take a middle path that neither follows previous conservative underestimates nor swings out to a radically optimistic view.

  The assumptions used for the 1997 valuation of the AFPS imply that the average life expectancy of personnel (excluding ill-health retirements) at age 60 was 21 years for Officers and 18 years for Other Ranks. The analysis of mortality rates of current pensioners indicates that these rates are broadly in line with those assumptions. However mortality improvement is expected to continue into the future so it is appropriate to increase the longevity assumptions when considering new entrants to the new pension scheme.

  The key areas to consider are how much future improvement should be allowed for, and how the differential between Officers and Other Ranks might be expected to move. In framing these assumptions the intention should be to make a best estimate of future patterns rather than to adopt deliberately prudent or optimistic assumptions. Mortality extrapolation models are clearly very useful but they have limitations because they need to consider how far medical advances will continue and the interaction of lifestyle and employment patterns together with changes in critical illnesses and diseases.

  With regard to the differential between Officers and Other Ranks personnel the current scheme experience supports the differential assumed in the 1997 costings. It is reasonable to assume that a differential will continue to be experienced between the two groups but my view is that this will close slightly over time due to improvements in medical care for personnel, the increasing role of technology and general medical care standards. The assumption for this differential is much less significant to the overall costings than the extent of mortality improvement incorporated.

  In order to determine appropriate assumptions we have compared mortality assumptions provided in the latest actuarial tables—the PA(92) tables[32]—together with those adopted for the other public sector schemes and for population projections more generally. You should note that population wide mortality rates are not particularly useful as you will always expect pension scheme members to have better than population wide mortality even when allowance is made for service lifestyles.

  I believe a basis derived from the PA(92) tables projected forward to 2040 is a reasonable basis for assessing the costs of the new and existing schemes for new entrants as it will be about 40 years before they retire. I believe that some differential between Officers and Other Ranks will be maintained, but that the gap will close. I have therefore incorporated a mortality differential for Officers by using rates which apply for Other Ranks who are two years younger (in other words this effectively assumes that Officers are expected to live about two years longer than Other Ranks). These assumptions are a reasonable long term view of longevity rates including an implicit allowance for the small numbers of female service personnel who have lighter mortality than males. The effect of these assumptions is to assume that at age 60, Other Ranks will have a life expectancy of just less than 26 years with Officers assumed to live approximately 2 years longer.

BENEFIT CHANGES

  The scheme that we have valued is that set out in the original consultation document with the following amendments:

  Lump sum on death in service increased to 4 times salary.

  Partner's benefits payable to unmarried members in a substantial relationship.

  Spouse's and partner's benefits increased to 62.5% of members pension benefits.

  A deferred pension age of 65 for those who leave service before the NPA point.

  The replacement of Immediate Pensions below age 55 by a series of Early Departure Payments. The precise shape of these streams has yet to be finalised but we have assumed that a pattern will be developed which would save 2% of pensionable pay from the standard terms of pension benefits at the IP point.

  Final pensionable salary calculations to include an allowance for dynamisation in the calculation. (although the cost of this provision is not considered to be significant).

RESULTS

  The costs of the existing and new schemes have been calculated as follows:

Table 1

COMPARISON OF THE COSTS FOR EXISTING AND NEW SCHEMES UNDER REVISED AND 1997 VALUATION MORTALITY ASSUMPTIONS

	Cost of scheme expressed as a level % of pensionable salary
	1997 Valuation Mortality assumptions	Revised Mortality assumptions
(a)  Existing scheme	22.0%	24.5%
(b)  Scheme proposed in original consultation exercise	22.0%	24.1%
(c)  Saving from deferral of pre IP preserved pension age from 60 to 65	0.9%	1.0%
(d)  Additional costs beyond b) for the following improvements:   see Note (2)
—4 times death benefit	0.1%	0.1%
—Partners pensions	0.4%	0.2%
—Spouses' benefits increased by 25% see Note (3)	1.0%	0.6%
—Continued accrual over 35 years see Note (4)	<0.1%	<0.1%
(e)  Additional savings if benefits for exits between IP point and age 55 restructured	Assumed 2.0%	Assumed 2.0%
(f)  Total cost of revised scheme including restructured benefits below age 55.	20.3%	22.0%

NOTES:

   (1)   In calculating the figures it has been assumed that Officers account for 25% of total pensionable pay and Other Ranks comprise the remaining 75%.

   (2)   The effects of these improvements are cumulative in the order shown ie as an example, spouses' benefits are increased by 25% after allowing for partners pensions. Totals are affected by rounding errors.

   (3)   Partners' benefits are also increased to 62.5% of member's pension.

   (4)   For members who continue in service, continued accrual up to 37 1/3 years will apply to spouses' benefits and partners' pension and up to 40 years for the member's normal pension and lump sum. Any enhancement formulae for death in service and ill-health will be limited to 35 years' prospective total service, so members who have completed 35 years service or more will not receive an enhancement.

   (5)   A cost of 1% of pensionable pay (as at 31st March 2003) is roughly equivalent to a cost of £50 million.

  The final scheme design costs are set out in Appendix A. [33]You should note that the change in mortality assumptions has the effect of reducing the relative costs of spouses' benefits. This effect has been seen in the calculations for other public service schemes and reflects the fact that the average date of spouses' pension commencement will be deferred under the revised mortality assumptions.

IMPACT ON ACCRUED SUPERANNUATION LIABILITY CHARGE (ASLC) RATES

  The results indicate that an increase in ASLC rates paid by the MoD[34] is appropriate as soon as this can be factored into budget plans. The rate of 24.5% has been calculated using mortality assumptions projected some way into the future as these are appropriate for new entrants. The rate appropriate for existing personnel could be set marginally lower as they may not be expected to have quite such longevity improvements. The precise rate and timing should be discussed with HMT and your budget colleagues.

  In the medium term once the new scheme is introduced the lower rate of 22.0% would apply to new entrants, together with any costs or savings resulting from staff that transfer to the new scheme. The reduction in rate down to 22.0% would be very gradual as the proportion of personnel on the new arrangements will build up gradually and will also tend to be at the bottom levels of the promotion and pay structures. It may be the order of 10 years before the majority of members (measured by pension accrual costs) are pensioned under the new scheme.

  It should be noted that the effects of improved longevity and other cost pressures will be felt throughout all occupational pension schemes. All defined benefit schemes will need to consider the impact in increasing costs. These can be expected to lead to budget pressures via increased employer contributions with potentially some mitigation by higher member contributions or reductions in scheme benefits.

APPENDIX A

SUMMARY OF COSTS OF BENEFITS UNDER THE EXISTING AND THE NEW ARMED FORCES PENSION SCHEME

	Cost of scheme expressed as a level % of pensionable salary
BENEFIT	Existing Scheme	Existing Scheme with revised actuarial assumptions (4)	New Scheme
Retirement:
Pension	12.8	15.2
			14.3 (2)
Lump Sum	2.4	2.4
Preserved Benefits:
Pension	2.5	3.7	2.7
Lump Sum	0.7	0.7	0.7
Ill-health Benefits	1.2	1.2	1.6
Spouse's Benefits	2.3	1.2	2.3
Death in service (lump sum)	0.1	0.1	0.4
Total	22.0	24.5	22.0

NOTES:

   (1)   In calculating the above figures it has been assumed that Officers account for 25% of total pensionable pay and Other Ranks comprise the remaining 75%.

   (2)   Early retirement packages are still to be finalised. Cost shown is the amount provided for retirement pensions and lump sums and early retirement packages.

   (3)   A cost of 1% of pensionable pay (as at 31 March 2003) is roughly equivalent to a cost of £50 million.

   (4)   The effect of revised actuarial assumptions is an increase in the cost of the scheme due to the allowance for increased longevity. This increased longevity allowance reduces the value of spouse's benefits as it delays the point at which the member is assumed to die and the payment to their spouse commences.

Annex B

Defence Council Instruction (Joint Service) No.  /03

ARMED FORCES PENSION SCHEMES—ATTRIBUTABLE BENEFITS FOR UNMARRIED PARTNERS OF SERVICE PERSONNEL

CHANGE OF POLICY—ATTRIBUTABLE BENEFITS FOR UNMARRIED PARTNERS OF SERVICE PERSONNEL

INTRODUCTION

  1.  This instruction informs you of a change of policy announced by the Government on 15 September 2003 and effective from that date, whereby attributable benefits equivalent to those available under the Armed Forces Pension Scheme (AFPS) or Reserve Forces (Attributable Benefits etc) Regulations (RFAB) may be paid to unmarried partners where there is a substantial relationship. The purpose of this instruction is to announce details of the scheme changes ahead of a further DCI, which will provide more detailed guidance relating to the partnership nomination scheme (see paragraph 11).

BASIC RULES

  2.  With effect from 15 September 2003, pension benefits equivalent to a widow's or widower's will be awarded to unmarried partners of Service personnel, where deaths are due to ( "attributable" or significantly hastened by), service and where there is a substantial relationship.

  (a)  The unmarried partner attributable benefits will be paid when death occurs in service or in retirement subject to the conditions that apply to widow and widow(er) benefits.

  (b)  Payments will be equivalent to those paid to a spouse only with respect to attributable death; unmarried partners will not be eligible for the benefits due to a widow(er) where the death is not due to service, until the introduction of the new AFPS sometime after April 2005, and then only for those deciding to transfer to that scheme.

  (c)  The scheme will not pay unmarried partner pensions to other adults such as: dependant family members (for example, parents, grandparents, brothers or sisters), friends, people in a purely financial relationship (such as flatshare or a joint purchase of property), or people in a casual relationship.

  3.  For the purpose of this instruction "Partner" means someone (same sex or otherwise) with whom an individual has an established and exclusive relationship of dependence or interdependence, and one that is intended to continue indefinitely.

ABATEMENT

  4.  Where a partner receives payments to cover the same loss from other sources such as, personal or occupational pension benefits or common law settlements, their AFPS or RFAB attributable benefits may be abated to take account of these payments. The benefits will not be affected by any personal accident insurance.

CHILDREN'S PENSIONS

  5.  The payment of Children's pensions are not affected by this instruction as they can be paid to the child (or guardian), irrespective of the marital status of the parents. Further details can be found in the appropriate scheme rules:

Army—The Army Pensions Warrant 1977, Part Four, Section 14, paragraph 222.

Royal Air Force—The Queens Regulations for the Royal Air Force, Chapter 41 paragraph 3073.

Royal Navy—The Naval and Marine Pay and Pensions Order 2002, Schedule X, section one, paragraph 14.

WAR PENSION SCHEME (WPS)

  6.  The introduction of attributable benefits to unmarried partners under the AFPS and RFAB does not affect the benefits provided under the War Pension Scheme. The War Pension Scheme does not, as a general rule, pay benefits to unmarried partners. The one exception to this is that it pays benefits to those unmarried partners who lived as the spouse of a member of the Armed Forces, providing the death was due to Service and the dependant had been wholly or substantially maintained by the Service person for a period beginning six months prior to the member joining the Armed Forces and continuing up to the date of death. The dependant would also have to be caring for the member's child.

ELIGIBILITY

  7.  For an application for eligibility to succeed the partnership must satisfy all of the following criteria:

—  Death Attributable to Service—The death must have been caused, or significantly hastened, by Service in the Armed Forces. In more detail:

—  The incident leading to death should have occurred in the course of and as a result of undertaking a military duty; it should also have arisen from an activity that could resonably be regarded as appropriate to the completion of that duty.

—  The death was the result of a disease or condition, caused by an exposure that was a result of service, where service significantly increased the normal risk of contracting that disease or condition.

—  The death was the result of a terrorist attack, specifically directed against members of the Armed Forces.

—  Substantial/Established Relationship—Whether or not a relationship was substantial will be assessed on a case-by-case basis against a range of criteria that would include such factors as: children dependent on both partners, financial dependence or interdependence (for instance a shared bank account or regular payments by deceased partner into your account or vice versa); shared commitments such as a mortgage, evidence of common ownership of valuable property (a house or a car for instance), prime beneficiary of respective wills, shared accommodation. Decision on eligibility will be based on a broad assessment of the substance of the relationship—not all of these criteria would need to be met for entitlement to exist. To succeed, under this heading, sufficient documentary evidence will need to be submitted against these criteria to demonstrate that the partnership was substantial (in the way that would normally be expected of a marriage). Annex A details the criteria and examples of the documentary evidence required.

—  Exclusive and Free to Marry—The word "exclusive" is intended to mirror the requirement in UK law that a person who is already married cannot enter into marriage with another person. Just as a person cannot be married to two people at the same time, so a scheme member and/or unmarried partner cannot be in two exclusive relationships at the same time. There would be no entitlement where either partner was in a marriage that had not been legally dissolved (ie where there was a legal spouse on either side). Free to marry means that either partner is legally able to marry an individual in law (or would have been able to if you and your partner had not been the same sex). Annex B details those relationships which are too close to allow a marriage, or therefore an unmarried partnership. A claim would equally fail where there was a second unmarried relationship that could lay equal claim to satisfying the criteria.

STANDARD OF PROOF

  8.  The balance of probabilities Standard of proof (as used in civil courts) will be used to assess claims.

APPLICATIONS

  9.  Any unmarried partner wishing to make a claim that he/she is the partner of a serving officer or other rank, should apply in writing to the single Service Pension Awarding Branch (PAB). Application forms are available from, and should be returned when fully completed to, the appropriate PAB.

CONTACT POINTS

  10.  Single Service Pension Awarding Branches

    SO2 Pensions (C)

Pay, Pensions and Personnel Administration

Armed Forces Personnel Administration Agency

Centurion Building

Room 3103

Grange Road

Gosport

PO13 9XA

(Telephone: [phone])

ARMY PENSIONS

    Pay, Pensions and Personnel Administration

Armed Forces Personnel Administration Agency

Kentigern House

65 Brown Street

Glasgow

G2 8EX

(Telephone: [phone])

RAF PENSIONS    Pay, Pensions and Personnel Administration

Armed Forces Personnel Administration Agency

Building 250

RAF Innsworth

Gloucester

GL3 1 EZ

(Telephone: [phone])

PARTNERSHIP NOMINATION SCHEME

  11.  A further instruction will be issued giving details on a partnership nomination scheme for unmarried partners. In nominating their partner, Service Personnel will need to provide a valid declaration form, signed by themselves (the scheme member), and the nominee (the partner), and witnessed by a third party (unrelated to either of the partners). They will also have to include evidence to substantiate their partnership. The intention of introducing a nomination scheme is twofold:


—  To provide more "peace of mind" to the Service personnel that, providing the basis of the relationship does not change significantly, the nominated/accepted partner will be eligible for partner benefits should the Service person predecease the partner.

—  To facilitate early payment of pension benefits on death (it is envisaged that the short-term pension would be paid immediately to ensure that the partner's income remained unaffected. The more valuable lump sum would be paid following confirmation of the relationship).

  12.  Nominating a partner for the payment of pensions benefits will not be compulsory; if the partnership has not been registered prior to death, an application can still be made and the benefits awarded provided that the scheme administrators judge that the eligibility criteria have been met. However, where nomination of a relationship has not taken place, the payment of any benefits would be delayed.

  13.  Until the partnership nomination scheme is introduced, individuals should advise their partners of where to make a claim in the event of their death.

Annex A to DCI

CRITERIA USED TO ASSESS PARTNERSHIP

  Administrators of the Armed Forces Pension Scheme or Reserve Forces Attributable Benefits Scheme will take into account any evidence which an applicant considers demonstrates the substance of his/her relationship. The following list gives examples of the types of evidence which would support a claim:

(a)  If the applicant's partner has no independent income, evidence of regular financial support by the applicant (eg an allotment to a joint account).

(b)  Evidence of a valid will or life assurance policy, valid at time of death, which nominated the applicant's partner as principal beneficiary, or co-beneficiary with children. Evidence that the applicant had made the deceased the primary beneficiary of her/his will would also be regarded as supporting evidence.

(c)  Evidence to show that the applicant and his/her partner were purchasing some form of accommodation together, as joint owners. Also evidence of common ownership of some other form of valuable property, such as a car or land.

(d)  Evidence of a joint savings plan or joint investments of a substantial nature.

(e)  Evidence that the applicant and his/her partner regularly operated a joint account as a couple for which they are co-signatories.

(f)  Evidence of any financial arrangements , which the applicant and his/her partner may have agreed between them (eg personal loan, payment of one or other's debts, guarantor of loan).

(g)  Evidence that the applicant had, at time of death, given the partner access to bank accounts for bill paying purposes or power of attorney during any period of separation, or evidence that the partner had given the applicant such access or power.

(h)  If the applicant and partner were in rented accommodation, evidence that both names appeared on the lease or rental agreement.

(i)  Evidence that the applicant and partner shared responsibility for children.

  There are no specific criteria on the length of the relationship, but it will be taken into account when the case is considered.

Annex B to DCI

GUIDE TO RELATIONSHIPS THAT ARE NOT ALLOWED TO MARRY IN THE UK

  Note: This list is based on the statutory list in the Marriage Act 1949 (section 1, schedule 1) and applies to England and Wales. Slightly different restrictions apply in Scotland. The statutory list may change so the following list is only a guide.

Part 1	Part 1
A man may not marry his:	A woman may not marry her:
mother, adoptive mother,	father; adoptive father,
former adoptive mother;	former adoptive father;
daughter, adoptive daughter,	son, adoptive son,
former adoptive daughter;	former adoptive son;
grandmother;	grandfather;
granddaughter;	grandson;
sister;	brother;
aunt; or	uncle; or
niece.	Nephew
Part 2	Part 2
A man may not marry any of the following female relations unless:	A woman may not marry any of the following male relations unless:
both he and the woman have reached 21; and	both she and the man have reached 21; and
the younger person has never been treated as a child   of the family of the older person before age 18.	the younger person has never been treated as a   child of the family of the older person before age   18.
The daughter of an ex-wife	The son of an ex-husband
The ex-wife of their father	The ex-husband of their mother
The ex-wife of a grandfather	The ex-husband of a grandmother
The granddaughter of an ex-wife	The grandson of an ex-husband
Part 3	Part 3
A man cannot marry:	A woman cannot marry:
The mother of his ex-wife unless both the ex-wife   and the ex-wife's father are dead; or	The father of her ex-husband unless both the ex-  husband and the ex-husband's mother are dead;   or
The ex-wife of his son unless both the son and the   son's mother are dead.	The ex-husband of her daughter unless both the   daughter and the daughter's father are dead.
In either case both people must be 21 or over.	In either case both people must be 21 or over.

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32   These tables were derived from an analysis of mortality of pension scheme administered by life insurance companies. The tables include projections for estimates of mortality rates in future years broken down by age and sex. Back

33   A copy of this table was submitted to the House of Commons Defence Committee, as evidence in advance of the oral evidence session on 5 November 2003. Back

34   The ASLC is the rate of employer contribution paid, and accounted for, each year by MoD. It is intended to represent the cost of benefits accruing each year together with any appropriate adjustment to reflect previous experience. Back

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Prepared 16 December 2003