Select Committee on Defence Appendices to the Minutes of Evidence


APPENDIX 6

Further Memorandum from the Ministry of Defence (11 December 2000)

ARMED FORCES PENSION SCHEME

  The Armed Forces Pension Scheme is the only pension scheme for regular members of the Armed Forces. Everyone who joins the regular forces automatically becomes a member of the AFPS, but membership is not compulsory. It is an unfunded non-contributory scheme. That said, pension benefits are taken into account when setting Service pay. The scheme's legal basis is contained in three Service Prerogative Instruments which derive their authority from the Queen. The terms and conditions of the award are set out in the Prerogative Instruments. The main benefits of the scheme are:

    —  An immediate pension for officers at age 38 or after 16 years, for other ranks at age 40 or after 22 years (whichever is the later), based on representative pay points.

    —  Normal retirement age of 55. Preserved benefits for those leaving service before the IP point available from age 60.

    —  Officer's pensions based on a 34-year accrual period with accelerated accrual until immediate pension point. Other ranks based on a 37-year accrual period.

    —  Reckonable service commences from age 21 for officers and age 18 for other ranks (or date of entry if later).

    —  Death in service lump sum for spouses of 1-1½ times representative pay, plus pension of 50% of ill-health pension the member would have received had he retired in ill health at the date of death.

    —  Death in retirement spouses pension of 50% of the pension the member was receiving at the time of death.

FUNDING

  The AFPS does not have a fund like some private sector schemes. The benefits payable under the scheme are defined by the regulations in force at the time an individual served, and paid from Annually Managed Expenditure (MoD Vote 2). The Department pays contributions known as Accruing Superannuation Liability Contributions (ASLCs) to the Exchequer to cover the future pensions liability of the existing workforce. The Government Actuary's Department reviews the rate of ASLC from time to time and adjusts it for the future, if the future liability changes. At the moment the ASLC rate takes no account of the past cost of pensions. The ASLC payments, currently 33.8% of the pay bill for officers and 18.2% for other ranks, are paid from the Department's Expenditure Limits (Vote 1).

  The Department has recently agreed with HMT to a new funding regime for the AFPS. The main difference is that divergence between forecast liabilities and actual experience will now be a factor when the GAD set the ASLC rate, and the new system is called Superannuation Contributions Adjusted for Past Experience (SCAPE). SCAPE will continue to be paid from DEL (Vote 1) but after it is introduced (probably within the next two years), the GAD's assessment will consider whether the previous contributions were sufficient to meet the future liabilities. Adjustments might be required because:

    —  Retrospective changes to pensions benefits had been introduced.

    —  Patterns of discharge or promotion had altered.

    —  People were living longer than had previously been expected.

  If the level of pay increases, the total payments from SCAPE will increase, but not the SCAPE assessment. The legacy of pensions liability from the past will not be included in the new assessments.

  As previously, the SCAPE payments will be paid out of Vote 1 and the pensions out of Vote 2. Pensions will continue to be paid in accordance with the regulations which were part of the underlying terms and conditions of service at the time which the individual served. Technically, the ASLC/SCAPE contributions are transferred to Vote 2 to offset the cost of the pensions bill, but there is no other scope to transfer funds for any other reason between Votes 1 and 2.

FUTURE TRENDS IN EXPENDITURE

  Expenditure on the AFPS (from Vote 2) is likely to increase for a few years levelling off in about 20 years time. This is because people are living for longer and because modern pensions are more generous than previously. So whilst we are expecting the number of pensioners to decrease over the next 15-20 years, the pensions of those who die are smaller than the immediate pensions and deferred pensions which are coming into payment. The forecast cost of Vote 2 pensions for the next five years is:

TABLE 1—FORECAST COST OF AFPS ACROSS FIVE FINANCIAL YEARS

  
2000-01
2001-02
2002-03
2003-04
2004-05
Gross Expenditure
£2,257.2m
£2,355.5m
£2,397.4m
£2,418.1m
£2,441.8m
Gross Expenditure (uplifted for inflation)
£2,257.2m
£2,442.7m
£2,548.2m
£2,634.5m
£2,726.7m


The new SCAPE proposals will ensure that the future pensions' liabilities are fully funded. Pensions liabilities for those already retired (including future deferred pensioners) will not affect the level of SCAPE charge. The SCAPE charge may increase in future if pensions benefits increase, or if our current forecasts about retirement and longevity turn out to be wrong. This would have to be met from within the MoD's DEL.


 
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