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Armed Forces (Pensions and Compensation) Bill

Armed Forces (Pensions and Compensation) Bill

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Standing Committee B

Tuesday 10 February 2004


[Mr. Win Griffiths in the Chair]

Armed Forces (Pensions and Compensation) Bill

Clause 1

Pension and compensation schemes: armed and reserve forces

Amendment proposed [3 February]: No. 1, in

    clause 1, page 1, line 3, after 'establish', insert 'and modify'.—[Mr. Gerald Howarth.]

8.55 am

Question again proposed, That the amendment be made.

The Chairman: I remind the Committee that with this we are discussing the following:

Amendment No. 2, in

    clause 1, page 1, line 3, after 'schemes', insert

    'in accordance with the provisions of Schedule [Armed Forces Pension Scheme].'.

Amendment No. 3, in

    clause 1, page 1, line 5, after 'for', insert 'defined'.

New schedule 3—'Armed Forces Pension Scheme Membership—


    1 The new AFPS is a defined benefit scheme which is non-contributory. It has common terms for both officers and other ranks with a normal retirement age of 55.

    2 All members of the regular Armed Forces will automatically be members of the AFPS from their first day of service regardless of age. Exceptions to this are:

    (1) Personnel who are eligible, but elect not to join the AFPS;

    (2) Reservists who are members of the reserve Forces Pension Scheme;

    (3) Where a member has completed less than two years reckonable service and leaves, he or she may either be bought back into the State Second Pension (S2P), or allowed to transfer notional pension rights to another pension arrangement, thereby relinquishing membership of the AFPS.

    Opting out of the AFPS

    3 Membership will not be compulsory. A Service man or woman may opt to join the S2P, a personal pension scheme or Stakeholder pension during his or her period of service. Any period of service completed whilst an individual has opted-out of the AFPS will not count towards benefits available under the AFPS. However, there will be no employer contributions paid by the Ministry of Defence for such alternative arrangements (other than those required under National Insurance terms for contracting in and out of the State Second Pension) and no personal contribution to the AFPS that can be refunded.

    4 An individual who opts out will continue to be eligible for Attributable benefits under the new Armed Forces Compensation Scheme.

    5 Members will not be required to make a direct contribution from pay in respect of benefits payable under the AFPS. However, the independent Armed Forces Pay Review Body (AFPRB) currently makes an adjustment to comparator pay (an abatement

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    of 7 per cent. since 2001) to reflect the extent to which AFPS benefits are better or worse than those offered in a range of comparator occupations.

    Pay and Service

    Pay for Pension Purposes

    6 The highest pensionable earnings will in most cases be in the final 12 months of service before retirement. However, the last three tax years will also be considered, with pensionable earnings in years one and two increased by inflation and, if giving a higher figure than that in the last 12 months, used as the basis for the pension calculation.

    Reckonable Service

    7 For the new AFPS reckonable service will be all service, as defined below, from the date of joining the AFP Scheme:

    (1) Full pay service in the Armed Forces of the United Kingdom.

    (2) Periods of full pay for the purposes of training.

    (3) All paid leave.

    (4) All paid maternity leave.

    (5) Any period in which a woman member is in receipt of statutory Maternity Pay, even when the Maternity Pay continues beyond the end of a pensionable commitment.

    (6) Paid paternity leave.

    (7) Paid adoption leave.

    (8) Notional years of service credited as a result of a transfer value payment from another pension scheme.

    (9) Notional years of service credited as a result of the purchase of an Added Years Additional Voluntary Contribution (AVC).

    (10) All subject to a member's reckonable service not exceeding 40 years.

    8 Reckonable service will not include:

    (1) Service forfeited by desertion unless such service is subsequently restored.

    (2) Any period for which pay is forfeited for reasons related to service discipline.

    (3) Military imprisonment or detention if greater than seven days.

    (4) Service in respect of which a pension is already in payment.

    Qualifying Period

    9 The current scheme has a qualifying period of two years service of entitlement to a preserved pension, to avoid burdensome administration of very low value pensions. No final decision has been reached on whether the vesting period in the new scheme will be changed; this will be dependent on the final decisions on the Government's proposals for pension simplification and will take account of a range of other factors. Current arrangements allow for a cash equivalent premium to buy back into the State Second Pension or a transfer value to another occupational scheme to be made in respect of those who do not serve the two-year qualifying period and are compatible with the Government's current proposals.

    Member Benefits

    Benefits where the member leaves service at or after the Normal Pension Age of 55

    10 A member leaving service at or after the normal pension age of 55 will be awarded a pension with immediate effect, with both a pension and a tax-free lump sum of three times pension. The pension paid will be based on accrued reckonable service at the point of retirement. There is an upper limit of 40 years of accrual at a rate of 1/70th of pensionable pay for each year of full service to allow longer-serving members to continue accruing benefits. Measures will be provided to allow those with less than 37 1/2 years service at age 55 to achieve a full career pension of two-thirds of salary.

    Benefits where the member leaves service at or after the early departure point but before age 55

    11 A member leaving service at or after the Early Departure Point (EDP), after 18 years' service or age 40 whichever is later, will be awarded a preserved pension and lump sum, which will come into payment at age 65. In addition, to compensate for loss

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    of earnings, a lump sum award will be paid at the time of leaving the Armed Forces and income payments will be paid (the exact pattern yet to be agreed with the three Services) until the preserved pension comes into payment at age 65. These arrangements will be broadly similar in structure to the current Immediate Pension arrangements, though with some reduction in overall cost to help fund improvements elsewhere (notably to dependants' benefits) and the cost of pensioners living longer. This pension will be uprated for inflation at 65 by the RPI between the member leaving the Armed Forces and his 65th birthday.

    Benefits where the member leaves service before the EDP (except ill-health)

    12 A member leaving service after two years but before the EDP will be awarded a preserved pension consisting of an annual pension calculated as reckonable service x accrual rate (1/70th) x final pensionable earnings, and a tax-free lump sum of three-times annual pension. This will not be paid until age 65.This pension will be uprated for inflation at 65 by the RPI between the member leaving the Armed Forces and his 65th birthday.

    Inverse Commutation

    13 A member can choose to forego all or part of their lump sum in order to enhance his or her pension. The amount forfeited will be actuarially converted to additional pension, payable over the lifetime of the pensioner. The individual can opt just to improve their own pension income or to also improve that of their spouse or partner and the calculation will therefore be done on an individual basis.

    Early payment of preserved pension

    14 Where a member with a preserved pension, who is not in any pensionable employment, becomes incapacitated through ill-health and is permanently incapable of undertaking any further full-time employment, application can be made for the preserved pension to come into payment early.

    15 Any award will be subject to the MoD's Medical Adviser being satisfied with the medical prognosis and an independent assessment may be required. The award will be calculated on actual reckonable service with no enhancements, but will be uprated for inflation from the point of payment.

    Ill-Health Benefits

    Non-attributable ill-health benefits

    General Invaliding Benefits

    16 A Member serving within the Armed Forces with reckonable service of less than 2 years will have no entitlement to an award in the case of non-attributable invaliding.

    17 A member serving within the Armed Forces who is invalided with reckonable service of at least two years may be awarded an ill-health pension or gratuity. The benefits will be calculated according to the level of ill-health.

    18 Invaliding pensions will be index-linked as soon as they come into payment.

    19 The ill-health pension benefits will be calculated according to the level of ill-health.

    Tier 1

    20 Members invalided out of the Service because they are unable to do their Service job, but whose earnings capacity in civilian life is not affected, will be awarded a gratuity. The gratuity will be related to the member's salary and the number of years served. The gratuity will vary with the length of service, calculated as 1 months' pensionable pay for each year's service with a minimum payment of six months' pensionable pay and a maximum payment of two years' pensionable pay. The purpose of the gratuity is to help the member adjust to his/her new circumstances. However, if the member has passed the EDP, he/she would receive an Early Departure lump sum and income payments (see section 3) up until age 65 when the preserved pension comes into payment.

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    Tier 2

    21 Members who are invalided out with an impairment that significantly affects their earnings capacity in civilian life will be awarded a pension lump sum and an ill-health pension enhanced by one-third of their remaining service (based upon the normal retirement age of 55).

    Tier 3

    22 Members who are invalided out of the Service with a serious disability which renders them permanently incapable of any further employment will be awarded a pension lump sum and an ill-health pension enhanced by half of their remaining service (based upon the normal retirement age of 55) with a minimum pension guarantee of 20 years' accrued pension.

    Attributable ill-health benefits

    23 Attributable ill-health benefits will not be provided under the new AFPS.A separate Compensation Scheme has been set up which awards lump sums for pain and suffering and a Guaranteed Income Stream (GIS) for loss of earnings capacity. See separate framework document on the new Compensation Scheme for details.

    24 It should be noted that when the GIS is calculated the level of ill-health pension is taken into consideration and the GIS abated to avoid double compensation.

    Death Benefits (Lump Sums)


    25 The scheme administrators will award a death in service benefit. A member may nominate a person to receive such a benefit and there will be provision for such nominations to be anonymous where there are personal sensitivities. If there is no currently valid nomination, scheme administrators may pay a Death-In-Service benefit to a spouse or registered partner (in the latter case subject to confirmation that a substantial relationship was extant at the time of death) or, where there is no spouse or registered partner, to dependent children. Where none of the above applies, a death-in-service benefit may be paid to the Member's estate.


    26 Where the death of a member occurs whilst he or she is in service, a lump sum gratuity of 4 times pensionable pay will be payable to his or her nominee.

    Death in Deferment

    27 Where a Service person has left the Armed Forces with a preserved pension, and subsequently dies before the pension comes into payment, this will be treated as a death in deferment. A gratuity equal to the preserved lump sum, uprated by pensions increases, will be payable to the nominee or otherwise.

    Death within Five Years of Retirement

    28 Subject to final decisions on the new taxation regime, where a death occurs within five years of the pension coming into payment, a lump sum payment equivalent to the balance of five years' worth of pension at its current rate less the lump sum received on retirement may be payable to the widow(er) or registered partner. For example, if a member died six months after a pension first came into payment, the widow(er) or registered partner might receive a lump sum equivalent to 1 1/2 years pension.

    Dependant's Pension Benefits

    Widows'/Widowers' Pensions

    29 A widow/widower is the person to whom a member is legally married when he/she dies. A former wife or husband is not eligible to receive a widow/widower's pension. Registered unmarried partners are also eligible to receive a widow/widower's pension subject to the relationship being substantial at the time of death. These pensions are payable for life. This measure shall also apply to all existing non-attributable widows.

    30 Death-in-service

    Where a member dies in service, any eligible widow(er) or unmarried partner will receive a pension of up to 33.33 per cent. of the member's pensionable pay (equivalent to two-thirds of pension).This pension accrues over a period of up to 37/3 years (at an accrual rate of 1/112ths of pensionable pay for each year of service). Pensionable service is calculated as if the member had been invalided out of service at Tier 3 (pension enhanced by half

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    of member's remaining service, based up on the normal pension age of 55) or, if greater, uses the member's actual pensionable service up to 37/3 years. There is a minimum pension guarantee of 20 years' accrued pension.

    31 Death-in-Retirement (or deferment)

    Where a member dies in retirement or before a preserved pension becomes payable, any eligible widow(er) or unmarried partner will receive the pension of up to 33.33 per cent. of the members' pensionable pay (equivalent to two-thirds of pension). This pension also accrues of 37/3 years (using an accrual rate of 1/112ths of pensionable pay for each year of service).However, pensionable service is based on the member's actual service plus service brought in through AVCs.

    Children's Pensions

    32 In the event of the member's death children's pensions may be payable in respect of natural or adopted children and other children where the member was the legal guardian and the child was financially dependent on the member. This would include children who are born or become eligible after retirement.

    33 Where a pension is payable to a spouse or unmarried partner, an only child will normally receive 25 per cent. of the member's pension entitlement; two or more eligible children will normally share equally 37.5 per cent. of the member's pension entitlement. Where no pension is payable to a spouse or unmarried partner, normally an amount equal to the member's pension entitlement will be divided equally among his or her eligible children, with no child receiving more than one third of the member's entitlement.

    34 A child's pension may cease when the child reaches age 17. However, it may continue, or be restored, whilst the child is in full-time education. It may also continue if it is determined that the child is incapable of earning his or her own living due to a mental or bodily infirmity and where the condition was diagnosed before the child reached the age of 17. Decisions are at the discretion of the scheme administrator. Where a child is eligible for several AFPS children's pensions (for example from several parents) only the two pensions of highest value may be awarded.

    Transfers in and out

    35 This section will apply to members who leave service with a preserved pension, or have not accrued two years qualifying service (but see para 2.4), and to members who join or re-join the new AFPS after having accrued pension benefits in another pension arrangement. Pension credits arising from a pension share may not be transferred in or out.

    Transfers in

    36 A member who joins or re-joins the new AFPS with pension benefits in another pension arrangement may apply to have those benefits transferred to the new AFPS, provided that the member applies within 12 months of joining the scheme. Transfers-in will not be accepted where an individual is under notice of invaliding or of discharge in some other way.

    37 An individual who elects to transfer pension rights from another pension arrangement into the new AFPS will be credited with reckonable service in the new AFPS in respect of those transferred pension rights, calculated using tables prepared by the Government Actuary's Department.

    38 The transfer value tables will be applied to the transfer value to give periods of reckonable service for personal pension, lump sum and widow(er)'s/partners' benefits. The length of reckonable service credited may, however, be restricted where the limits imposed from time to time by the Inland Revenue for approved occupational pension schemes or under AFPS rules for maximum reckonable service would otherwise be exceeded.

    39 Where a member has pension rights under the new AFPS that have been credited to another pension arrangement by means of a transfer value payment and those pension rights are subsequently transferred back into the new AFPS, that service will buy the benefits determined by the scheme actuary as equivalent to the transfer payment made to the AFPS. Precise arrangements for transfers-in will be the subject of detailed further work.

    40 Where service credited within the AFPS is less than service served in the exporting scheme, the calendar length of the previous service will count for the purpose of the two-year qualifying period

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    for pension benefits. However, neither actual service in previous employment nor reckonable service credited in the AFPS will count towards the minimum period of service necessary for the award of Early Departure Payments or full pension.

    Transfers Out

    41 A member who ceases pensionable service or opts out of the new AFPS may elect to have his or her preserved pension rights transferred from the new AFPS to have another pension arrangement

    (1) provided that the pension arrangement is approved for this purpose by the Inland Revenue;

    (2) provided that it is prepared to accept the Transfer Value payment.

    42 Application must be made before the member's 64th birthday, or within six months of the termination of a pensionable commitment, whichever is the later. Pensions in payment may not be transferred. Transfer Values for those leaving the new AFPS will normally be calculated using tables prepared by the Government Actuary's Department, the age at the time of the transfer value calculation and the value of the preserved pension credits as at that date.


    Additional Voluntary Contributions

    43 AVCs can be used to top up AFPS benefits where the person's overall pension benefits are unlikely to exceed Inland Revenue limits.

    44 The legislation on additional voluntary pension contributions, governing the requirements to provide and the scope to purchase, should be considered revised during the next year. In the light of those emerging proposals it will be decided what arrangements would be most appropriate for the new AFPS.

    Pensions Increases

    45 All pensions and lump sums awarded under the pension Scheme will be eligible to be increased by analogy with the terms set out in the 1971 Pensions (Increase) Act and appropriate Pensions Increase Orders.

    General Provisions

    Payment of pensions

    46 Pensions will become payable on retirement from the Armed Forces at or after the normal pension age of 55, at any age on ill-health retirement under Tiers 2 and 3 (see section 4) or at age 65 for preserved pensions.

    Diversion of pension

    47 Pension benefits payable under the new AFPS may not be assigned to a third party, except where a court is making an order for financial provision in divorce proceedings. There are also general prohibitions on assignment for occupational pensions in section 91 of the Pensions Act 1995 and, in respect of Guaranteed Minimum Payment rights (which will continue), in section 159 of the Pension Schemes Act 1993.

    48 If a member is unable to manage his or her affairs by reason of mental disorder, the Secretary of State may divert part, or all, of his or her pension to another person or institution for his or her care and maintenance and for the benefit of his or her dependants.

    Forfeiture, Suspension or Withholding of Service Pension

    49 At the discretion of the Defence Council, a member may forfeit their Service pension in the following circumstances:

    (1) Conviction of one or more offences which are:

    (a) Offences of treason;

    (b) Offences under the Official Secrets Act 1911 to 1989 for which they have been sentenced to a term of imprisonment of at least 10 years or to two or more consecutive terms amounting in the aggregate to at least 10 years.

    (2) Conviction of an offence committed in connection with their service as a member of the Armed Forces, including any which the Secretary of State for Defence considers to have been gravely injurious to the defence, security or other interests of the State.

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    50 In exceptional circumstances, a payment not exceeding the amount of the Service Pension forfeited or suspended may be made by the Defence Council to, or for the benefit of, the spouse or other dependants of the member.

    51 At the discretion of the Defence Council, pension benefits may be withheld from a widow(er) or unmarried partner, or if already in payment may be forfeited, if the member's widow(er) or unmarried partner is convicted of the murder, manslaughter or unlawful killing of that member.

    Internal Dispute Resolution Procedures

    52 Complaints against decisions made by the administrators of the new AFPS may be made under the scheme's Internal Dispute Resolution Procedures (IDRP).

    53 Those eligible to complain under these procedures are:

    (1) Serving members of the new AFPS;

    (2) Members of the scheme who have left the Service;

    (3) Dependants of deceased members of the scheme;

    (4) Potential members of the scheme;

    (5) A former spouse with pension credit rights from a pension share;

    (6) Anyone claiming to be in any of the foregoing categories.

    54 There will be two stages to the IDRP. Under the first stage, members of the scheme have the right to complain about a decision made by the scheme administrators. Complaints under this stage will be considered by the appropriate office within the Armed Forces Pay and Administration Agency.

    55 Under the second stage, members of the scheme have the right to appeal to the scheme managers against the decision made on their complaint under the first stage. Complaints under this stage will be considered by the managers of the AFPS.

    56 The details of the IDRP will be contained in Defence Council Instructions and pension scheme booklets.'.


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