Main Estimates

ME 02

Supplementary Memorandum from the Ministry of Defence

Introduction

1. This Memorandum covers the Estimate for the Armed Forces Retired Pay and Pensions for 2010/11. The Scheme’s spending plans for this financial year are based on the expected take up of pensions of retired Service personnel. The Estimate covers only the payment of pensions. The costs of administering the Scheme fall to the MoD Main Estimate.

2. The employer’s charge to the pension scheme is met by payment of a Superannuation Contribution Adjusted for Past Experience (SCAPE), calculated as a percentage of military pay based on rank. The SCAPE contribution made by the MoD partially funds the payments made by the Armed Forces Pension Scheme (AFPS) in year. Funding from the Consolidated Fund is required to meet the difference between the payments to pensioners and the amounts receivable from MoD. In addition, funding is required to finance movements in working capital including increases or decreases in bank balances.

3. The AFPS is a demand-led service and is therefore Annually Managed Expenditure (AME); as a result there is no Spending Review settlement to base the Estimate upon. However, plans data for the 2009/10 financial year was published in the Government Expenditure Plan 2008/09 (Section IV of the Defence Plan 2008 to 2012 (Cm 7385)). This has been updated to take account of any changes since July 2008. This is shown in Table 1.

4. This Estimates Memorandum should be read in conjunction with the Main Estimates.

Summary of Resources Sought in the Estimate:

5. The AFPS Main Estimate requests provision of:

a. Net Resources within the Request for Resources £6,708 M

b. Net Cash Requirement £1,740 M

Table 1

Detail of Changes to the Estimate since Publication of Cm 7385

Detailed explanation of the changes:

6. The calculation of current service cost and interest on scheme liability is affected by:

a. The discount rate – this has changed from 3.2% real to 1.8 % real effective from 31 March 2010;

b. The interest rate on scheme liabilities has fallen from 6.04% to 4.60%.

The overall affect of these adjustments results in an increase in both the pension scheme interest charge and the current service cost (payments from the scheme).

7. The increase of £191M in current service cost is due to the discount rate change and the associated change to the factor agreed by the Government Actuary’s Department.

8. The change in the interest rate has also resulted in a decrease of £9M for interest on the scheme liability from that originally anticipated. This is a non-cash charge.

9. Other changes have decreased the resource requirement by net £128M. This is mainly due to higher SCAPE receipts than previously anticipated (£95M).

Table 2

Comparatives with previous years.

Table 3

Average number of Pensioners in Scheme

Ministry of Defence

June 2010