OFFICERS' PENSIONS SOCIETY
Submission of Evidence to the MoD Review
of the Armed Forces Pension Scheme, 1998 (September 1998)
See list at Annex A.
1. The Council of the Officers' Pensions
Society (OPS) noted the formal announcement in the 1998 Strategic
Defence Review Essay No 9, "A Policy for People" (Reference
A), that the Ministry of Defence (MoD) intended to review the
Armed Forces Pension Scheme (AFPS), with the objective of introducing
"arrangements which will meet the future manning needs of
the Armed Forces in a way that is fair, cost-effective and affordable".
Subsequently, the Minister of State for the Armed Forces wrote
to the President of the Society (Reference B) inviting the Society
to support this initiative. This response is offered in this context
and in response to the earlier informal invitation from the Director
of Service Personnel Policy (Pensions) to submit the views of
the Council to this review. The Society has been pleased to contribute
in a similar way in the past.
2. In 1994, the OPS submitted written evidence
(Reference C) to the MoD Review of the AFPS and also presented
oral evidence to the "Bett" Independent Review Team.
Later, the Society discussed the recommendations of both these
studies (References D & E) with the then AUS (Service Personnel)
and followed this with a formal submission of our views (Reference
F). There have been many significant developments in the fields
of defence, occupational pensions and State pension provision
since 1995, and we now present in this single document our up-to-date
views on the more important issues the review will need to address.
3. The aim of this paper is to set out the
OPS's view on the existing AFPS and the principal features of
a revised Scheme for all ranks for the future.
4. The validity of this submission is based
on the fact that the OPS specifically represents those who are
in receipt of Service pensions ie the Society acts on behalf of
Service pensionersnot just the 53,000 retired and serving
military officers and officers' widows who are members of the
Society, but all ex-Service men and women, regardless of rank,
and their dependants. To this end, the OPS is represented on the
Executive Committee of the Confederation of British Service and
Ex-Service Organisations, and is regarded as the lead body on
matters relating to Service pensions and benefits.
5. The OPS Council's collective, and in
several cases very recent, Service experience and involvement
in commercial and public affairs mean that the Council is also
alive to the needs of serving people, and to the realities of
pressures on public finances. That said, we do not wish to usurp
the authority and responsibilities of the Finance, Planning and
Management Group (Service Personnel), (FPMG(SP)), and the Services
Personnel Policy Board. However, the Society has a specific duty
to represent the feelings of those who have completed their military
careers, many of whom feel unfairly treated and have strong views
on their pension arrangements.
6. This submission is set in the context
of the following recent developments and announcements:
(a) The Strategic Defence Review (SDR), The
OPS welcomes the assurance that the SDR was, from its inception,
a policy led process, that "people issues" were kept
at the heart of the Review, and that the attitude to people was
in keeping with a "whole life" philosophy. The priority
and attention given to Service pensions, and the approach now
taken in this review of the AFPS, must be consistent with these
(b) Government Review of Pensions. The OPS
also welcomed the launch in July 1997 of the Government's wide-ranging
review of pensions and we support the Government's general goal
that pensioners should share fairly in the increasing prosperity
of the nation. We call for this to be satisfied for Service pensioners
through the structure of the AFPS.
(c) Uniqueness of the Armed Forces. As recently
as 3 February 1998, the Government (through a Department of Trade
ministerReference G) reaffirmed in Parliament that the
Armed Forces are "a unique group of workers because of the
work they do, the hours they put in and the places in which they
operate". This argument enabled the Government to exclude
the Armed Forces, and only the Armed Forces, from the legislation
for a national minimum wage. The current AFPS embodies unique
features so there is also no case for its provisions to "read
across" to other public service schemes.
(d) Putting Right What is Unfair. The Prime
Minister pledged that a new Labour Government would "make
fair what is unjust". In this context it is appropriate again
to note the statement made by the then Secretary to the Cabinet
in his address to the 1992 AGM of the Civil Service Pensioners'
Association, namely "The mark of a civilised employer is
the manner in which he provides for his retired employees".
To these ends, the driving spirit which has shaped this submission
is the search for fair treatment for today's as well as tomorrow's,
Service pensioners and their dependants.
7. From the draft terms of reference, we
note that the review is also to "take specific account of
public sector policy in the provision of pensions". Although
we have framed our response on our understanding of general public
sector pensions policy, we would value being informed of the main
tenets of the policy of which this review will take account.
8. The Society's philosophical starting
point is, therefore, that the pension and compensation arrangements
for Service personnel and their dependants should be at least
equivalent to best practice in the public service, especially
in so far as attributable death and injury benefits are concerned.
Moreover, provision for public servants should generally reflect
developments in private sector pension practice. It is submitted
that this represents a legitimate expectation of Service men and
womencurrently serving personnel, their successors and
also those already retired.
9. We now offer our main views on the existing
AFPS and on the AFPS for the future as they apply to existing
and future Service pensioners.
Anomalies and Inequities from the Past
10. Our main proposition is that it is insufficient
for the MoD review team to conduct an appraisal of the existing
AFPS simply to create a better régime for the future. We
contend that it would be morally wrong to identify existing inequities
and their consequences, only then to ignore the plight of those
who are suffering. It is of no comfort to certain groups of Service
pensioners only to have it acknowledged that their pension arrangements
are unfair: they want what is unfair put right! In particular,
the Government's oft quoted defensive argument that, in principle,
there can be no retrospective changes to the AFPS has been breached
so frequently that it is not a sustainable justification for inaction.
11. To this end, the Society continues to
seek, as its main priorities, early easement for those Service
pensioners who are suffering under the following three headings:
(a) Pre-1973 Service Widows one-third rate
Forces Family Pensions,
(b) Post-retirement marriage Service widows'
Forces Family Pensions, and
(c) Pay Restraint/"Pension Troughs".
Although the detail of these three issues is
well known, we offer comments on each here, and more detail in
the relevant Appendices to Annex B.
One-third/one-half rate widows' pensions
12. In 1973, when it became the norm to
pay a widow a pension of half her deceased husband's occupational
pension, instead of one-third, the rules of the AFPS were changed.
Thereafter, new entrants enjoyed a half-rate pension for their
widows and those serving on 31 March 1973 were given the opportunity
to "buy in" their previous service to qualify their
widow for a full half-rate pension. From 1973 onwards, the new
provisions are seen as fair and proper. But, the absurdity and
unfairness of the situation is that those whole plight prompted
the change in provisionthat is those who completed their
service before the block date, who did not have the opportunity
to buy-in and whose widow's entitlement remained at one-thirdwere
the very people to whom the new provision did not apply. Ironically,
these elderly widows are predominantly of the Second World War
generation: indeed, many of them themselves served in uniform
during the War with no pension entitlement. The living expenses
of these elderly Service widows are no less than those of younger
widows who now receive a one-half rate pension.
13. As recently as 17 July 1998, the then
Secretary of State for Social Security stated in Parliament, (Reference
"This House rightly places great emphasis
on the concerns of older peoplepeople who have worked hard
all their lives either out at work or bringing up a family: the
generation who fought in the war. They are entitled to security
in their retirement. They deserve dignity in their retirement."
We now call for this high-minded principle to
be put into practice. We should point out that the OPS is not
seeking an increase in the pensions of those Service widows whose
husbands did not, for whatever reason, buy-in when they had the
opportunity to do so.
Post-retirement marriage widows' pensions
14. Similarly, in 1978, the provisions of
the AFPS were changed to allow widows of a post-retirement marriage
to receive a pension based on any service her late husband gave
on or after 6 April 1978. Those whose husbands either completed
their military careers before the block date, or gave some of
their reckonable service prior to the block date are, again, left
permanently disadvantaged, notwithstanding the principle was conceded
over 20 years ago. This issue has borne particularly harshly on
the Armed Forces because of the restrictions placed on young officers
marrying, the frequency of unaccompanied overseas postings and
the relatively early compulsory retirement age. The prevailing
rules result in, for example, the grossly unfair situation where
a widow does not receive a Service pension in spite of many years
of marriage to a Serviceman who gave a full career service to
Pay Restraint/"Pension Troughs"
15. Although probably neither originally
intended nor even envisaged, whenever the Government imposes a
short-term pay restraint measure, there is a permanent and ever-increasing
adverse effect on the pensions of those who retire while such
a measure is in force, and also on the pensions of any dependants.
Because of the nature of the AFPS, pay restraint has a significantly
greater impact on Armed Forces pensions than on other public service
pensions. Deeming of recommended, but not yet introduced, pay
rates for pension calculation purposes solves this gross unfairness.
But, Servicemen were last allowed deeming in 1984; since then
Service pension rates have been calculated from pay rates in force
on the date of retirement.
16. The problem does not only exist in the
past: it is prevalent now. Service pay awards have been staged
in four of the last five years. Thus, it appears now to have become
the accepted practice, by the present Government as well as the
previous administration, to disregard the long-term consequence
for those whose pensions are permanently depressed by the short-term
expediency of pay restraint. The staging of pay awards in 1998
occurred despite the harsh words the Chairman AFPRB wrote in his
last report to the Prime Minister (Reference I):
"We are seriously concerned that this practice
(of staging pay awards) has deprived our Service men and women
of a substantial proportion of their recommended annual salaries
and is permanently damaging to the pensions of those who retire
between stages. We urge that this is not repeated. This year our
discussions with Service personnel revealed widespread anger at
17. Not only should deeming of pay rates
for pension calculation purposes be allowed in future if it proves
necessary to impose pay restraint measures, some easement of the
position of the victims of the worst "pension troughs"
of the past should be given urgently. The "pension trough"
phenomenon stands out as a blatant and obviously unfair aspect
of the AFPS, and the positions of those trapped are getting progressively
18. Other matters which bear on existing
Service pensions are described in detail in Annex B
to this paper. We conclude this section on existing pensioners
with the call for any financial savings which might emerge as
a result of changes in the existing pension arrangements to be
used first to ease such instances of unfairness.
19. We feel that the aim of this further
review of the AFPS must be to identify the features of a revised
or replacement scheme to meet the needs of the Armed Forces, and
also the legitimate expectations of Servicemen and women, in a
changing world, in a fair and cost-effective manner. It must take
account of the outcome of the ongoing MoD Compensation Review
and must not perpetuate the shortcomings of the existing Scheme.
20. Affordability. It is our contention
that pay and pensions reviews should be determined essentially
on the basis of appropriateness rather than arbitrarily decided
levels of affordability. In any case, the affordability of a new
AFPS would need to be considered as a long-term issue and in a
different light from the affordability of a pay award, especially
if there happened to be particular budgetary pressures in the
short term. Also, in extremis, what is said to be the affordable
maximum could preclude the introduction of appropriate pay and
pension provisions. Accordingly, whilst being mindful of the cost
of its proposals, the MoD Compensation and AFPS Review Teams should
not be constrained by arbitrarily imposed cost levels. Once presented,
it is for the Government to decide which recommendations it can
afford to implementand to what degreeand which it
cannot. Otherwise the management needs and the legitimate expectations
of Service men and women will not be met, with inevitable consequences
for recruiting, manning and retention.
The Scheme Structure
21. Funding. We contend that improvements
in the provisions of the AFPS which have been made in the last
two and more decades have almost invariably resulted from a requirement
to comply with national or European legislation. Even Redress
of Grievance Procedures and the recently introduced Internal Disputes
Resolution Procedures cover only present AFPS provisions. The
fact is that the Armed Forces' top management is effectively powerless
to bring about overdue changes in the provisions of its own uniformed
employees' occupational pension scheme. On the other hand, the
"Bett" Independent Review called for personnel policies
and practices to be flexible and capable of change to match future
and often unforeseen needs. The OPS Council has long maintained
that the present "pay-as-you-go" part-Treasury/part-MoD/part
individual funded system remains a major impediment to the freedom
to change the existing AFPS. Bett's clearly preferred option for
the future AFPS was that it should be funded, for reasons of flexibility
and, importantly, for reasons of long term affordability and cost
savings. The Society remains strongly in favour of the adoption
of an independent, funded AFPS for the future. Moreover, a reduction
in the Government's unfunded pension scheme liability would be
in the public interest in the longer term.
22. Contributions. The Society found the
recommendation (No16/1R 8.19) of the MoD's internal Review that
a new AFPS should be non-contributory for consistency with existing
pension arrangements impossible to justify, given the Defence
Secretary's 1989 statement in Parliament (Reference J)
that "although the scheme is formally described as non-contributory,
it in fact involves an effective contribution from a Serviceman's
salary". We can only repeat that retired Service men and
women, and their dependants do not regard past adjustments and
abatements in the calculation of their pay as notional, but see
themselves as having contributed to their own pensions and also
the pension they expect to be awarded to any surviving spouse.
We, therefore, call for the new AFPS to be a clearly visible contributory,
23. Ownership and Involvement. The sought
after genuine interest and involvement in pension arrangements
by those now serving, and their successors, will be encouraged
only through the sense of ownership promoted by acknowledged contributions.
And only through the freedom of a contribution-based, funded scheme,
to which Service men and women have actually contributed while
serving can we expect reasonable assurance that the purchasing
power of pensions will not stand still with time, as now, but
that in retirement these people will share the forecast increased
prosperity with the rest of the community. In sympathy with our
line on funding and contributions, we again strongly advocate
the establishment of a Board of Trustees, representative of the
Scheme's membership, to oversee the AFPS.
Optimisation of the AFPS
24. The maximum rates of retired pay/pension
under the AFPS represent 48.5% of the representative pay rates
for rank and length of service. A main conclusion of an independent
study by Union Pensions Services Ltd, commissioned by the OPS,
is that the proportion of Service retired pay/pension paid to
AFPS members at age 55 falls short of providing a full career
pensionwhich is the stated aim of the AFPSwhen compared
with the full career pensions provided by comparable schemes.
For example, at the age of 55, the Police pension scheme pays
52.8% of final pay.
25. The AFPS is presently optimised towards
early leavers, with fast accrual rates leading to the granting
of immediate pensions from age 37 (officers)/40 (other ranks).
However, early pensionability exists to meet the manning requirements
of the Armed Forcesie early pensionability is provided
in the interests of the Services. There is, therefore, no justification
for paying those retiring at higher ages, especially after a full
career, a proportionally lower pension than others in the public
service. The consequences of this arrangement are aggravated in
the case of spouses' pensions.
Levels of Spouses' Pensions
26. Inland Revenue limits allow the granting
of occupational pensions equivalent to two-thirds of salary rates.
Thus it can reasonably be expected that a one-half rate widow(er)s'
pensionwhich is now the normwould equate to one-half
of a two-thirds rate pension. However, this is not the case with
the AFPS. As already mentioned, the maximum rate of retired pay/pension
under the AFPS represent 48.5% of the representative pay rates.
Thus, the maximum rates of Service widow(er)s' pensions are one-half
of only 48.5% and not half of two-thirds of representative pay
rates. Per contra, Police widow(er)s' pensions are calculated
from two-thirds final salary rates, prior to any commutation of
pension. Again, there is no justification for this marked disparity
between the provisions of the AFPS and a comparable public service
Spouses' Pensions for Life
27. The "Bett" study "found
the practice of stopping widows' pensions on re-marriage unsatisfactory"
regardless of whether or not the member's death was attributable
to service and recommended that, "in line with private sector
practice, a widow(er)'s pension should be payable for life".
Since "Bett" reported in 1995, this provision has been
introduced in the public service, namely for Local Government
officers. It should be introduced into the AFPS without delay.
We take the precaution of making the point that it would be inappropriate
for this measure to be introduced only for War Widow(er)s and
not simultaneously for Service widow(er)s.
The Armed Forces Pay Review Body (AFPRB)
28. We consider that the interests of the
taxpayer, the MoD as the employer, and individual Service personnel
are well served by the AFPRB. In principle, we would like to see
a comparable body monitor and make appropriate recommendations
about the AFPS: indeed, we advocate the expansion of the AFPRB's
remit to embrace the provisions of the AFPSat least until
the establishment of a new funded, contributory scheme overseen
by a Board of Trustees. In fact, we suggest that it is logical
for the AFPRB to be involved in the provisions of the AFPS since
the AFPRB's abatement calculation is based on an appraisal of
the worth of the AFPS as compared with other schemes.
29. There is a further, fundamental point
to be made about the abatement to pay. The abatement is calculated
as the additional cost of the AFPS as compared with the schemes
of comparable employments. This means that the entire additional
costs of the special provisions of the AFPS are being met by the
Scheme members. But these additional costs arise, at least in
part, from the special requirements set by the MoD for its uniformed
employees in the Armed Forces. For example there can be no doubt
that the immediate pension provision from age 40 acts as a strong
incentive for skilled and experienced senior NCOs not to leave
sooner. It is inequitable that members of the Armed Forces should
fund these additional costs when it is the employer who sets the
special requirements. There is a prima facie argument for the
MoD itself to bear the additional costs. On this basis, members
of the AFPS are paying an unfair share of the cost of the Scheme
and so the basis of the abatementand its levelneed
to be reassessed. Indeed, elsewhere in the public service the
immediate "pensions" of those who retire voluntarily
before their compulsory retirement age are funded in the interim
by the Government department concerned, in the form of "annual
"All of One Company"/"Band
of Brothers" Philosophy
30. Rates of Service Retired Pay are based
on the concept known as the "Band of Brothers" (Reference
K) viz: "By tradition, members of the Armed Forces with the
same rank and the same number of years of reckonable service retiring
in any year have almost all been awarded the same pension, regardless
of their actual pay either on retirement or discharge, or earlier
in their career".
31. Thus, current policy and practice mean
that additional paynotably Flying Payis excluded
from the calculation of terminal benefits. The "Bett"
Independent Review recommended that AFPS pension benefits should
be based upon the best 12 consecutive months' earnings over the
last 36 months of service. Subsequently, the MoD decided that
additional pay should not be subsumed into basic pay, but no decision
has yet apparently been made on whether additional pay will be
made pensionable. We have noted two recent significant departures
from the "Band of Brothers" concept. First, there was
the announcement in July 1997 (Reference L)
medical and dental officers' pensions would be based on new medical
and dental pay scales rather than on representative combatant
pay rates. Secondly, there was the announcement in June 1998,
that the retired pay of senior officers would in future be based
on pensionable earnings, ie on the total amount of basic pay received
during the year prior to retirement, or during any 12 months period
within three years prior to retirement, whichever was the higher.
Moreover, for these officers the maximum rate of retired pay is
now to be 50% of pensionable earnings (instead of 48.5% of a representative
32. The Society's position on this issue
is that it is the prerogative and responsibility of the FPMG(SP)
to decide whether, and if so to what extent, they would wish to
see the "Band of Brothers" concept retained as an intrinsic
feature of the Armed Forces pay and pension schemes. At this stage
we merely draw attention to the anomalous situation: we imagine
the issue is being addressed in the design of the new pay structure
to be introduced by 1 April 2000.
33. We have noted the shift by some reputable
British "blue chip" companies from final salary (ie
defined benefit) occupational pension schemes to money purchase
(ie defined input) schemes. This is a fundamental issue and, whilst
we cannot produce detailed modelling of options, it is self-evident
that final salary schemes have the major advantage that they are
guaranteed and individual members can therefore make forward financial
plans with a greater degree of confidence.
34. Given the unique role of the Armed Forces,
the character of military service, and the priority given in the
SDR by the Government to "people issues" and to a "whole
life" approach, we have arguedby virtue of the unique
role of the Armed Forcesthat the provisions of the AFPS
should be at least equivalent to best practice in the public service
and also match general practice in UK private sector schemes.
35. An independent study commissioned by
the OPS has shown that the existing AFPS is not in many respects
as good as others in the public service, especially in relation
to full career pensions, spouses pensions and in-service death
and injury benefits. But the worst aspect of the existing pension
régime is the established unfairness under which many Service
pensioners suffer. These pensioners are bitter; they view cynically
the high-principled cant of politicians and the hackneyed excuses
(especially the breached principle of "no retrospection")
repeatedly used as justification for inaction by successive governments.
We have highlighted the "pension trough" and the pensions
of two groups of elderly Service widows as a priority for easement.
We contend that it is morally improper to allow these, and other,
acknowledged shortcomings to persist. The costs of establishing
equity on these issues are relatively small, especially as they
can be ring-fenced to the Armed Forces in the same way the Government
has been able to do in the case of the national minimum wage.
Furthermore, costs will rapidly reduce with the passage of time.
We know that the money can be made available if the social pronouncements
of the Government are matched by political will.
36. As far as Service widows are concerned,
frustration has led them to seek a solution elsewhere and, as
we have reported, the Society has co-ordinated and submitted,
on behalf of 22 applicants, an application to the European Commission
of Human Rights. We have recently heard that the Application will
be ruled "admissible" on strictly legal grounds. Nevertheless,
the very strong moral case remains undiminished and the Society
will continue pressing for the removal of the unfair arrangements
which apply to these categories of Service widows.
37. Increasingly, the MoD is not seen as
a good and honourable employer. Service people, in common with
those in all types of employment, are taking more interest in
long-term financial planning, including their occupational and
State pension expectations, and are increasingly questioning the
adequacy of the existing pension arrangements.
38. For the future, we have called for a
new AFPS which is responsive to changing military requirements,
wider social norms and the needs of scheme members. It must also
keep the levels of pensions and benefits in line with the increasing
prosperity expected to be enjoyed by the nation generally. So
long as AFPS pensions and State retirement pensions are index-linked
only to the movement in prices, as reflected in the RPI, Service
pensioners will continue to be excluded from sharing in the increasing
prosperity of the nation. (It will be recalled that prior to 1980,
public servants' and State retirement pensions were increased
by the larger of the annual increase in the RPI and the Average
Earnings Index.) We propose that the future AFPS should be funded,
contributory and overseen by trustees. We have mentioned some
of the provisions which should be included in the schemeand,
in an earlier submission to the MoD Compensation Review Team,
suggested some additional benefits. We have deliberately avoided
the issues, such as pensions for partners, which are policy matters
for the FPMG(SP).
39. We hope this contribution will assist
the initial discussions and in the delivery of an appropriate
successor AFPS. We stand ready to make further contributions as
the review moves forward.
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