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Lord Hodgson of Astley Abbotts: My Lords, I must begin by declaring an interest as a trustee of two final salary pension schemes, and as chairman of one of them. I suspect that this is a peripheral interest to the matters that we are discussing this afternoon but I should like to put it on the record.
We had a characteristically persuasive and sincere introduction from the Minister. A Bill that ostensibly at least sets out to update and improve pensions and benefits for members of our Armed Forces instinctively commands sympathy. As many noble
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Lords said, it may be repetitive and trite to refer yet again to the particular risks that they run on our behalf—it may be trite but it is also true.
Further, when one reads in paragraph 6 of the Explanatory Notes that the Bill is intended to replace or update the Naval and Marine Pay and Pensions Act 1865 and the Pensions and Yeomanry Pay Act 1884, one is bound to conclude that pensions must have moved on a good deal in the intervening 140 years and therefore that an updating is probably well overdue. Similarly, moves to bring up to date the structure of the Royal Patriotic Fund Corporation, to which the Minister referred, seem entirely sensible. So one approaches the Bill with sympathy. However, the closer one looks into the detailed provisions of the Bill, the more inequitable they seem to be and, indeed, the more at odds the proposals seem to be with the Government's own wider pension policy objectives, particularly as regards member involvement, participation and education as expressed in the Government's own pensions White Paper, Simplicity, Security and Choice.
I should like to address my concerns under five main headings: the unique role and position of our Armed Forces; the issues of enabling legislation; the concept of cost neutrality; member involvement and education; and, following the comments of the noble and gallant Lord, Lord Craig of Radley, correction of past inequalities—the "legacy" issues, although not the legacy issue that he raised.
First, I turn to the role of the Armed Forces and the Government's view of them. I have no doubt about the Minister's sincerity. I have heard him speak with conviction and candour about the special nature of service in our Armed Forces and the level of commitment it requires. So what I am about to say is not aimed at him. However, paragraph 11 of the Explanatory Notes to the Bill states:
"Clause 1 is modelled on the Superannuation Act 1972 which governs the Principal Civil Service Pension Scheme (PCSPS), the Local Government Pension Scheme, the Teachers' Pension Scheme and the NHS Pension Scheme".
I do not find that encouraging. As the noble Lord, Lord Morris of Manchester, pointed out, members of the Armed Forces are not like teachers or local government officers or nurses, worthy though such careers are. It is not so much the danger inherent in a service career, though it includes that. More, it is the inevitably shortened career span imposed both by the structure of the Armed Forces—the rapidly narrowing pyramid—as well as by the physical nature of many roles, which means that they cannot be fulfilled by older men and women. So, as was frequently pointed out in debates on the Bill in another place, most servicemen and women serve for much less than a full career. In those debates the Armed Forces Minister tried to argue that this does not matter, because departing members of the Forces find it easier to get civilian jobs, and so can provide for their pension through their second career.
My anecdotal evidence suggests that that is not the whole story. First, while it is true that members of the forces get a job fairly easily, it has proved much harder
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for them to get a job with commensurate responsibility and therefore commensurate remuneration. Too often, I am told, there is a need to trade down, which has an inevitable impact on pension levels. Secondly, my anecdotal evidence suggests that the longer the individual has been serving, the harder it is to get an alternative job, so that those who have given the most to the country and presumably have been the most valuable to the services, find it the hardest to start another career. They therefore suffer the greatest financial shortfall.
In at least one respect, the Government recognise that service men and women are different from those others employed by the state. If this were not so, why would the Government exempt the Armed Forces from the national minimum wage? The minimum wage applies to local government officers, teachers and nurses, but not to servicemen. The Government further recognise the special position of servicemen by the use of the "X-factor". In answer to a Written Question I asked the noble Baroness, Lady Symons of Vernham Dean, she said:
"Unlimited liability for duty is essential to operational effectiveness of the armed forces, and, given their unique status, the Services are exempt from the provisions of the National Minimum Wage Act 1998 . . . An additional element called the 'X-factor' (currently 13 per cent of basic pay) is then added to reflect the overall balance of advantages and disadvantages experienced by members of the armed forces which cannot be taken into account when assessing pay comparability".—[Official Report, 29/11/00; col. WA 133.]
So much for comparability with the Superannuation Act 1972—I see no "X-factor" for teachers, nurses or local government officers.
Further, when one studies paragraph 36 of the Explanatory Notes to the Bill, one reads:
"The long-term pension cost increases are being addressed through the Government's proposals in its paper 'Simplicity, Security and Choice', as well as through increased Departmental contributions for future pension liability".
I have looked through this document, which is 167 pages long, and I may have overlooked something, but I can find no mention of the Armed Forces at all. Indeed, when I asked the Minister's colleague, the noble Baroness, Lady Hollis of Heigham, about this in the earlier debate today, she said that Simplicity, Security and Choice did not apply to the Armed Forces. But what I find on page 105, paragraph 59, is the sub-heading "Tax changes to encourage flexible retirement". Paragraph 60 states:
"Currently, tax rules allow people to work and draw an occupational pension, but only where they no longer work for the company that is paying the pension. Often people who would like to carry on working do not want, or are unable, to change employers at this stage in their career. So they end up retiring when they would have preferred instead to stay in work in a reduced capacity, supported by a combination of earnings and pension".
In the Armed Forces, by contrast, there is enforced retirement. So how do the Government square this with the proposals in Simplicity, Security and Choice?
The Minister may argue that there is a proposal under the Bill to replace the immediate pension with early departure payment. Those represent, according to the House of Commons Defence Select Committee report on the subject, at paragraph 50, a saving for the
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state—or, from the other point of view, a reduction in benefit—of £100 million per annum or 2 per cent of pensionable pay. The Minister owes the House a better philosophical and practical explanation of whether the Government accept that the Armed Forces' position is unique. At present, it looks all too much as though the Government are determined to cram the Armed Forces into pension schemes structured for other very different careers, with the Armed Forces losing out on the way through.
My second area of concern is that this is little more than a framework Bill. We have a skeleton but little flesh and blood. This is a familiar rant, and I do not propose to develop it, except in two regards. The first involves the statement in paragraph 11 of the Explanatory Notes:
"The Statutory Instruments made under the Bill and any amending instruments will be subject to Parliamentary scrutiny under the negative resolution procedure".
I note that the Minister said that that proposal persisted unamended. I accept that the details of a pension scheme cannot be put into primary legislation but, in pensions more than in most areas, the devil is in the detail. The Government must think carefully whether the negative procedure is a good enough safeguard in these circumstances, given our ability—or, perhaps I should say, our inability—to amend statutory instruments.
Secondly, while I accept that the detail of pension provision cannot be put into primary legislation, the Secretary of State is taking powers to do far more than amend details. Under Clause 1, for example, the Secretary of State may by regulation change the whole scheme from "defined benefit" to "defined contribution". That is no detail; it is seismic in its effect and impact on serving personnel. I am not sure that the Government have grasped that. They are taking for granted passive acceptance by servicemen and servicewomen.
Next is the issue of advice, guidance and communication for members of the Armed Forces. I accept that pensions are an issue that make many people's eyes glaze over; young, fit and active servicemen and servicewomen will be no exception. That is no reason not to be open and honest and to facilitate the provision of advice. The Armed Forces pension scheme is described as non-contributory but, as I understand it, there is a 7 per cent abatement in each individual serviceman's pay as a contribution towards the cost of pension. It is not shown on the payslip. I will restrain myself from spending too much time on a semantic argument about whether that can be described properly as a non-contributory scheme.
I doubt whether one could get away with that in the private sector. I will wager that if you asked a serviceman what he paid for his pension, he would say that it was free. It is not; it has cost him a 7 per cent abatement—carefully hidden from his view, perhaps, but a cost to him none the less. I understand that the situation is worse than that, because the MoD hides another little wrinkle from members of the Armed Forces. Normally, in the private sector, pensions are
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calculated on gross salary before contributions, whereas service pensions are calculated on net pay after abatement.
I refer the Minister to page 71 of Security, Simplicity and Choice, where paragraphs 105 to 107 contain three important proposals that the Government intend to apply to the private sector. I wish to know whether they intend to apply those to members of the Armed Forces.
The Government profess to be very concerned about consultation with members, at least as regards the private sector. Again, the Government's White Paper lists a number of proposals:
Perhaps the Minister can say how the Government will fulfil that objective as regards the Armed Forces.
I wish to say a word on the remedying of past inequities—the legacy issue. There are several examples, particularly relating to widows' pensions, but I wish to focus on the pensions trough. My colleague in another place Gerald Howarth has received answers to questions that starkly illustrate the depth of the trough and, still more dramatic, the cumulative impact of RPI uprating. Thus the pension receivable by a member of the Armed Forces of the same rank after the same length of service, retiring in the five-year range 1975 to 1979, could vary from £13,800 to £18,400, a difference of over £4,500 per annum or one third.
The difference has come about because of the chance combination of Government public sector pay policy and the existence of a forced retirement date for individuals. I do not exclude my own party for having failed to grasp this when in government but it does now need to be grasped. The Government accept this in principle. Again, I refer the Minister to Simplicity, Security and Choice. Paragraph 47 on Page 27 states:
"What income might individuals want in retirement? In planning for their retirement, most people will compare their projected living standard in retirement to that enjoyed during their working life. The ratio of retirement income to income when in work is called the replacement rate".
So what about the replacement rate for this unfortunate and unlucky group of people?
To conclude, of course I want to see our Armed Forces properly looked after in their retirement. So I welcome the provisions in this Bill which bring their pension provision up to date. But I cannot conceal from the Minister my concern at the line the Government are following, both in broad approach and in detail. I very much look forward to hearing the Minister's response.
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