Select Committee on Defence Written Evidence


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.


 
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Prepared 16 December 2003