Letter from the Forces Pension Society
to the Second Clerk (19 November 2003)
INTRODUCTION
1. I write to record a number of observations
about the Minister's evidence presented to the committee on 5
November 2003. I trust that these are of some assistance and that
they may inform your eventual report. As usual I have confined
my remarks to the Armed Forces Pension Scheme and not the Compensation
Scheme—the preserve of the Royal British Legion.
COSTS AND
PROGRESS
2. The committee started this session by
probing the costs of the new scheme and attempting to establish
whether the review had achieved its stated aim of being cost neutral
or whether the Treasury had clawed money out of the scheme in
recognition of the increasing costs of longevity. The Minister
stated that cost neutrality translated into a figure of 22% of
the Armed Forces pay bill but that until the age for payment of
the preserved pension in the current scheme moved to 65 the total
cost of the two schemes running in parallel would be 24.5%. Thereafter
it would revert to 22%. This bland assertion about costs is barely
credible. The Minister repeatedly stated that he was unable to
put figures to various elements of the new scheme:
(a) "In terms of figures it is far too
early" (Q8).
(b) "We do not have a final figure for
the cost" (Q8).
(c) "I am having to caveat some of these
answers because we genuinely do not know" (the costs) (Q26).
(d) "I cannot today place figures on
it" (raising the payment age of preserved pensions) (Q45).
3. After five long years MoD are still unable
to define major elements of the scheme and therefore attribute
costs. These include:
(a) The definition of unmarried partners
(Q28).
(b) The shape of the Early Departure Scheme
(EDS) (Q58 et seq).
(c) The use of the EDS to pay bonuses to
encourage retention (Q77).
(d) Whether or not to pay compensation to
the victims of the improper taxation of invaliding pensions (Q100).
It beggars belief that the Minister is capable
of claiming that the two schemes will initially cost 24.5% of
the pay bill before dropping back to cost neutrality at 22%. He
was unable to provide any concise figures on the costs of the
overall scheme or indeed details of the EDS.
4. Given the throughly unsatisfactory state
of progress evident in paras 2 and 3 above there must be very
considerable doubt about MoD's ability to implement the new scheme
on 6 April 2005. They expect that the enabling legislation will
be taken before Parliament in the next session. Thereafter the
rules the new scheme will have to be written and the appropriate
administrative processes put in place so that the scheme may be
implemented for those new recruits who join the services on 6
April 2005—a mere 16 months from now. This seems to be an
extremely ambitious plan given the present state of development
of the scheme, the chronic lack of detail evident in the Minister's
responses and the fact that the responsible MoD Department is
grossly under-resourced.
KEY POINTS
REQUIRING CLARIFICATION
5. Whilst the members of the committee covered
all the ground that FPS would have wished we were disappointed
with the depth and integrity of many of the Minister's responses.
On all too many occasions he simply did not answer the question.
It would be invidious to suggest that this was obfuscation, indeed
he may simply not yet be the master of his brief, nevertheless
many key points remain unexplained and unexplored.
6. In particular there are two substantial
issues upon which the Minister refused to be drawn. These are:
(a) Full Career Pensions.
(b) Widows Pensions for life for non-attributables.
7. In the case of full career pensions MoD
have proposed a scheme that is structurally flawed and have failed
to provide a genuine full career pension 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 Pubic Sector League table. The unusally low normal retirement
age (NRA) of 55, which is imposed by the MoD for its benefit as
a personnel management tool and not as a perk of the job, will
seriously inhibit the opportunities for actually earning the full
career pension through service. 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 disengenuous
at best, to structure a scheme in which well over 90% of the members
are debarred from earning a full career pension without buying
AVCs. 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 ignored and as a result
the new scheme remains well behind modern good practice.
8. Rachel Squire attempted to quiz the Minister
on this point (Question 20) but he avoided the issue completely
by talking about the modelling of the Early Departure Scheme—an
interesting subject but one that has absolutely nothing to do
with Full Career Pensions. MoD have yet to explain why they propose
a full career pension which is demonstrably the worst in the public
sector.
9. The second outstanding issue that was
not satisfactorily addressed is to do with non-attributable widows.
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 beneficiaries.
10. On being questioned by Mr Crausby (Questions
42 and 43) on this issue the Minister fell back on the line that
he was here to discuss the new scheme and this restriction would
not apply in the new scheme. This is indeed true but by no means
every serviceman will opt to transfer to the new scheme for sound
financial reasons. The effect of this is that in 10 or 20 years
time we will have two types of non-attributable widows, those
who keep their pensions for life and those who lose them on subsequent
remarriage or cohabitation. MoD are deliberately creating another
group of disadvantaged victims when the situation could very easily
be rectified by taking the rules from the new scheme and applying
them now to all members of the current scheme as has been done
for attributable unmarried partners. MoD have yet to produce any
sort of explanation why such a move is impossible and the Minister
ducked the question.
LEGACY ISSUES
12. I appreciate that the Legacy issues,
the genesis of the committee's interest in the pension scheme,
were not intended to be addressed in this session although they
were touched upon. The Minister's answers to Questions 16, 43
and particularly 40 clearly indicate the complacent attitude prevalent
in MoD to these extremely difficult problems. On winding up this
part of the session referring to the legacy issues Rachel Squire
said "I think there are issues here that the Committee may
well be looking to raise again". This society welcomes that
intent. We are firmly of the opinion that solutions can be found
to these problems which do not breach government policy. As a
result of the announcement of the new pension scheme the victims
of the past feel even more aggrieved and MoD should be seeking
compromise solutions within there own policy guidelines as a matter
of urgency.
SUMMARY
13. We remain unimpressed by progress with
the Review. Despite the announcement of the skeleton scheme on
15 September it was clear from the Minister's evidence that it
has yet to be fleshed out in any detail. We believe that MoD should
be pressed to provide answers to a large number of questions.
These include:
(a) Detailed costing assumptions to provide
reassurance that savings have not been hived off by the Treasury.
(b) All details about the Early Departure
Scheme including costings, profile, administrative arrangements,
protection of the funding in the medium to long term and eligibility.
(c) The intention to use EDS money to pay
retention bonuses.
(d) Intentions about publishing transition
arrangements for those who elect to transfer to the new scheme.
(e) Reassurance that the new scheme can be
implemented in a timely manner and that the supporting infrastructure
will be in place by 6 April 2005.
14. The two most important issues that the
Minister failed to address are:
(a) Why have they structured a scheme that
provides Full Career Pensions that are demonstrably the worst
in the Public Sector and anyway cannot be earned by the majority
of scheme members? What are their intentions for rectifying this
flaw before proceeding to primary legislation?
(b) Why have they deliberately taken no action
to avoid creating a new legacy issue in the future, non-attributable
widows in the old scheme?
15. I trust this helps and if there is any
further information you would like, please ask.
| 
