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Standing Committee B
Tuesday 24 February 2004
[Mr. Win Griffiths in the Chair]
New clause 2
Re-employment of armed forces
(a) the Secretary of State determines for reasons of general personnel management that a person shall cease to be employed as an active full time member of the armed forces and therefore grants that person Early Retirement Income in accordance with Schedule [Armed Forces Pension Scheme], and
(b) the person concerned is re-employed for service under the Crown, including for service with the armed forces in another capacity,
such re-employment will be permissible without abatement of Early Retirement Income.
(2) In this section ''reasons of general personnel management'' means decisions reached by the Secretary of State in his absolute discretion as to future requirements of numbers in particular roles and ranks.
(3) In certifying reasons of general personnel management as the grounds for granting Early Retirement Income the Secretary of State's decision shall be conclusive and binding grounds for excluding the Early Retirement Income in this case from rules otherwise applying to pensions.'.—[Mr. Gerald Howarth.]
Brought up, and read the First time.
Motion made, [this day], That the clause be read a Second time.
The Chairman: I remind the Committee that with this we are taking the following: New clause 9—Early departure payments—
'A system of Early Departure Payments (EDPs) for those serving 18 years and having reached age 40 (whichever is later) will be payable until the preserved pension comes into payment at age 65.The Secretary of State shall by order set out details of these payments.'.
New clause 26—Early departure payments (No.2)—
'Any Early Departure Payments (EDPs) established under section 1 of this Act as part of the Armed Forces Pension Scheme shall include the following provisions—
(a) there will be a qualifying period of service for the EDP, common for Officers and Other Ranks.
(b) the EDPs will be payable from age 40, but only on completion of 18 years of service (the 40/18 point);
(c) it will be paid to those leaving from that point and, as now, personnel will be eligible whether they leave for Service or personal reasons;
(d) from the 40/18 point, there will be immediate entitlement to a tax-free lump sum equivalent to three times the individual's accrued annual preserved pension value;
(e) in addition, at the 40/18 point, there will be an entitlement to an annual payment of 50% of the individual's accrued preserved pension entitlement. This payment will remain at the same level for those leaving at that point and, between the ages of 40 and 55, will not attract index-linking for inflation;
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Mr. Gerald Howarth (Aldershot) (Con): Welcome back to this scintillating Committee of ours, Mr. Griffiths. We assure you of an interesting and enjoyable afternoon.
(f) for each year by which the individual's retirement is deferred after completing the 18 years of qualifying service, the value of the annual payments will increase by 1.66% up to age 55, at which age the annual payment will be 100% of the preserved pension entitlement. Until age 55, this payment will remain unchanged and will not attract index-linking for inflation;
(g) from age 55, the payments will be adjusted to take account of the changes in the Retail Price Index (RPI) since the point at which the EDP was originally taken and thereafter on an annual basis until the preserved pension comes into payment at age 60.
(h) existing policy on abatement will apply to Early Departure Payments if a recipient is subsequently reemployed in the public services.
(i) a preserved pension will be paid from age 60 onwards, with its value adjusted fully in line with RPI from the last day of service. At this point, a pension lump sum of three times the individual's preserved pension entitlement will also be paid.'.
Shona McIsaac (Cleethorpes) (Lab): Another broken Tory promise.
Mr. Howarth: You will be pleased to know that I did not hear that sedentary intervention, Mr. Griffiths. I am sure that if I had heard it, I would thoroughly disapprove of it.
I was dealing with a key aspect of the early departure payments scheme, known as the EDPS, and want to seize the opportunity to correct the record. I inadvertently misled the Committee over the index linking of payments between the ages of 40 and 55. I suggested that the current immediate pensions scheme provided for inflation adjustment during the period when the immediate pension is taken, up to the age of 55, but it does not. The new scheme is four-square with the existing scheme. I shall return to the re-employment of those who have left the service.
As I said before lunch, we welcome the announcement that the Minister made when he provided us with the papers setting out the details of this exciting scheme, which he gave to us by way of a letter to the Chairman of the Defence Committee on 2 February. It is particularly welcome, given that as recently as last month, the Government responded to the Select Committee's report and said that no decision had yet been taken on the issue. Clearly, a lot of footwork has been done, and it is fair to say that we welcome that announcement. There will be inflation uprating for those who reach pension age at 55. Perhaps the Minister will clarify that they will be in the EDPS until they receive their preserved pension, currently at the age of 60, and at the age of 65 in the future. The difference is that from the age of 55 to 65, it will be uprated annually to take inflation into account. The Minister nods, so I can welcome that, too. This is a very helpful Committee.
Issues of principle flow from the changes. The immediate pension arrangement is subject to the protections that apply to pensions. The Government changed it to prevent the payment of pensions generally before the age of 55 and had to invent a new scheme—the EDPS. The Minister argued that it is
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the secondary legislation behind this measure that will give the new scheme the same protection, and that people are therefore protected because the scheme can be altered only by negative procedure. Will he confirm that the EDPS will be protected from internal Ministry of Defence cost-saving exercises and that it will not be possible to raid the pot without the Secretary of State altering the scheme through secondary legislation?
As I said, we are exchanging a pensions scheme, with all the attendant protections arising from pensions legislation, for a new scheme that enjoys no such protection. As a result of parliamentary questions that I tabled, we have been assured that national insurance contributions will not be applied to that income stream. However, we are entering new territory and cannot anticipate how well protected the new scheme will be from attack by the Inland Revenue or elsewhere. What investigations has the Minister undertaken to verify the robustness of his new scheme? Will he assure the Committee that he is confident that it will be secure from attack from elsewhere?
Those are not academic questions. The Government's response to the Select Committee report said that
''divorcing the EDP scheme from the constraints of pension rules allows a more flexible and targeted approach, responsive to manning needs and in particular reflecting the various manning exit points.''
It is important to recognise that the Government accept that the scheme will not come under the constraints of existing pensions rules.
There is also the issue of commutation, which is perhaps not a matter of principle so much as of practicality. The immediate pension, which currently prevails, and the proposed scheme are both designed to provide a pull-through.
Mr. Julian Brazier (Canterbury) (Con): Before my hon. Friend moves on, it is perhaps worth underlining the fact that the current pension scheme in its entirety is ring-fenced and protected. Indeed, people will have the option of remaining in it rather than entering the new scheme. However, the Government seem to be suggesting that the early departure scheme, far from being a fixed entitlement that people will accrue during their service, will be subject to changes to meet manning and no doubt budgetary requirements.
Mr. Howarth: My hon. Friend makes a good point. The Minister heard it and I hope that he will respond. Perhaps we will move on to that issue when we discuss transitional arrangements and whether the protection will continue and the terms of the old scheme will be available to be applied to the new scheme. I understand that that will not be the case and that the question will be a straightforward either/or.
The immediate pension and the new scheme are both designed to provide a pull-through—an incentive to soldiers, sailors and airmen to stay on rather than quit at an age at which a second career might be easier to come by. As the Minister accepted in earlier discussions, housing is an important issue in that context, and one which exercises my hon. Friend the
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Member for Canterbury (Mr. Brazier). Clearly, the lump-sum payment is designed to be available to assist with house purchase. However, if the serviceman is restricted in the amount that he can commute to increase the lump sum available to him, his ability to access the housing market will be similarly constrained. In addition, if he leaves at the age of 40, his early departure payment income will be about half the rate of a counterpart retiring today at the age of 40. He will therefore have a reduced income stream from which to service any debt that he may assume to enter the housing market.
In respect of the commutation, I understand that the Ministry of Defence claims that the new scheme must comply with the Finance Act 1989, which limits the lump sum that is payable. The MOD also points out that the Green Paper proposes limits to the amount that can be commuted—about 25 per cent. of the available pot. It is important that the Government explain to servicemen and women exactly what the new scheme entails and how much they will be able to commute from their pension entitlement to a lump sum.
I understand also that the resettlement commutation is impossible in the new scheme, except at 65, when the second lump sum and the preserved pension come in to issue. That, of course, is quite late in the day. The Ministry has yet to decide whether to offer such a facility, arguing that it will have to wait for the Finance Act, which brings in to being the Green Paper proposals. It also takes the view that the employer has the responsibility to protect servicemen from commuting too much, blowing it and then having to fall back on the charity sector or the state. People are reasonably responsible these days, particularly if they have served in the armed forces: they have a sense of responsibility that is not perhaps shared by everyone. However, we need clarification on that.
Although this is not, strictly speaking, a pension issue, it is none the less an issue that the Ministry of Defence and the Minister himself recognise. I should be grateful if he could address those points. As I said earlier, and as the Government freely acknowledge, the early departure payment scheme is essentially a manning tool for the Ministry of Defence. We cannot at this stage tell what effect it will have on retention, let alone recruitment. We are told that senior military personnel are content to sign up to proposals that they know will provide substantially reduced benefits for their people. We also know that in the consultation document published by the Government in March 2001, the Ministry had concluded that altering the immediate pensions substantially would place manpower planning at risk.
The Minister owes the Committee an explanation as to why ministerial and military minds have been induced to exercise this apparent major U-turn in replacing the immediate pension with the new scheme. It is a gamble: we are looking 20 years ahead, but as I said, it is important for us to challenge Ministers to project themselves forward to consider what conditions are likely to apply in 20 years' time, and how the scheme is going to work. There is an
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immediate test available: the test of how many people decide to transfer from the existing scheme to the new scheme. I do not know what consideration the Minister has made of people deciding to stay in the existing scheme rather than move to the new scheme—it may be a large number. That will give us some indication.