Examination of Witnesses (Questions 80
WEDNESDAY 6 MARCH 2002
KCB OBE, MAJOR GENERAL
CBE AND AIR
80. I will give you an example here. We have
doormen here, for example, who are on a Forces pension and on
a salary possibly they would not actually opt for
(Air Chief Marshal Sir Roger Palin) And they are prepared
to take a lower salary because they have got the Forces pension.
81. If you take the two together, it is quite
(Air Chief Marshal Sir Roger Palin) Yes, but what
I am saying is that there is some research done on this which
the actuaries have done which is certainly worth your researchers
picking out for you
82. In fact our staff are very proactive and
the information is arriving this very afternoon, so we anticipated
what you were going to say.
(Air Chief Marshal Sir Roger Palin) But I think the
second part of Mr Jones' question was whether we need this immediate
pension point at all, which is of course crucial. The MoD will
answer this, that they went through exhaustive modelling of alternative
methods, they will say, because the consultation document says
so, and that they judged that the risk to the manning structure
and all the other regulators that they studied was too great and
would be just as costly.
83. This is the point that I find difficult
to grasp, that somehow you use a pension scheme actually to regulate
(Air Chief Marshal Sir Roger Palin) So do we. It is
84. There must be better ways as in industry
of making sure that you move people through a career path or a
development process other than using the pension scheme.
(Air Chief Marshal Sir Roger Palin) If they stick
with the pension as part of that mid-career package and forcing
people to leave, we feel that there ought to be a whole range
of financial instruments, if you like, from which an individual
can choose, what is best for the individual. Some of it might
be linked to a pension maybe of lower proportion than the immediate
pension now. They have started towards this in suggesting a bonus
scheme. There is no flesh on the bones of a bonus scheme that
they suggest and they will be putting flesh on those bones, but
that is just one way in which you might incentivise people to
stay in longer so that they do not go out in order to take advantage
of the immediate pension and then find themselves a less well
salaried job elsewhere, financial retention incentives of different
sorts, but we do not think that they have done that work, though
we are not sure.
(Major General Gordon) I think it is remarkable, if
I may say so, that the MoD have not carried out a comparative
cost-benefit analysis of alternative methods of meeting their
manning needs, and that is not just me saying that, but the Minister
said that in the House the other day, because without doing such
work, how can they be certain that the immediate pension is the
most cost-effective way of meeting their manning requirements?
I would also support entirely your view that to use part of the
pension as a manning regulator is perverse, particularly if it
leads to a depression of full-career benefits in the way that
we have described. If there was no problem with benefits elsewhere,
we would not have a problem with it either, but because the cost
of the immediate pension is so high and it is borne within the
cost-neutral straitjacket, the distorting effect is very obvious.
85. What I do find odd is if you look at large
companies, certainly the ones I used to negotiate with, they have
systems that actually do mean that people do progress through
the system or do leave at certain points. There must be comparisons
in the private sector or in large public sector bodies where you
have a system which allows people to progress through the career
pattern and there is a way of making sure your age profile is
what you require. I accept they will probably come back and say
it is different because you need younger people, but I do not
think it is beyond the wit of man?
(Major General Gordon) I entirely agree with you,
I have to say.
(Air Chief Marshal Sir Roger Palin) It does happen.
They have engagement structures, trades, trade groups, age and
rank, almost too mathematically precise, that is why so many people
are required to leave at certain ages. In my own Service they
join for 8 to 12 years and if they do not get further service
to the pension point, 22, they are out. This is one of the fundamental
recommendations that Sir Michael Bett made, that all three Services
should move to that sort of structure engagement profile so that
you do know who you want and when. That is what the immediate
pension point is all about, particularly for the Army and Navy,
less so for the Royal Air Force, because of the age factor you
mentioned, because they do require a younger fighting force. They
need lots and lots of people, broadly speaking, to the age of
40 and then they need to slim down that pyramid quite drastically.
86. I think there are other ways of doing it
other than using pension schemes.
(Major General Gordon) A standard sort of occupational
pension scheme does not use any of the pensions' aspects to manage
its manpower in and out.
Mr Jones: Some local authorities tried to start
to do that in the early 1980s.
87. And still do!
(Major General Gordon) If you want to push people
out early you simply give them a fixed term of six years, or whatever,
and then you push them out with a gratuity, or whatever you want
to give them, then their accrued pension rights are portable into
their next career, that is the more normal method. If you want
to keep them for some reason or other then golden handcuffs are
widespread in the private sector.
(Air Chief Marshal Sir Roger Palin) The contention
from the Services, not the Royal Air Force, is that in order to
pull these people through to that magic point financial incentives
of the normal sort are not enough, it is the pensionability, the
pension they can draw at that age, that persuades the chap who
might leave at the age of 30 or 32 to stay on until the age of
38 or 40.
88. That does not wash with me.
(Air Chief Marshal Sir Roger Palin) That is their
contention. The Royal Air Force are different, I think the Royal
Air Force would argue, much as I did 10 years ago, the immediate
pension points are darn useless because it encourages people to
leave, air crew, expensively trained senior NCOs, and people like
that, who you want to retain. You want to retain them for a full
career because they are your fighting capability. The three Services
need to move together or want to move together.
89. Given that you say that it is indefensible
to use this as a manning tool what do you propose in its place?
Can I ask a more technical question, given this is principally
a problem for the Royal Navy and the Army, does their budget have
to bear the cost of that or does it just come out of MoDs overall
pool of funds?
(Air Chief Marshal Sir Roger Palin) The second question
first, and James will correct me if I am wrong, basically it is
the Paymaster General, the Treasury, who bear the cost of public
sector pension schemes. The MoD makes a paper transfer, accrued
liability, whatever it is called, of a proportion of that each
year from its defence budget.
(Major General Gordon) Yes. In the accounts of the
MoD, which is audited by the Auditor General every year, it is
recorded. I can give you the document if you wish to read, it
is not very technical.
90. We have that.
(Air Chief Marshal Sir Roger Palin) It shows that
the MoD makes a block transfer of cash, which is a percentage
of the pay bill, it is currently 22 per cent of the pay bill,
which accounts for the employers accrued liability for the pension
91. In other words, it is a general MoD transfer,
it not a cost attributed specifically to the Army.
(Major General Gordon) Not to any particular Service.
Of course it does bear on the MoDs total budget.
(Air Chief Marshal Sir Roger Palin) Yes, I think so.
I do not know how far they have gone in breaking down their budgets.
I dare say it is disaggregated down to individual levels, so a
person employing people knows the full cost of employing those
people. At the end of day if there is new money it either comes
from the Exchequer or it comes from within the defence budget,
which means there will be something less they can afford within
the defence quota.
92. Going back to my first question, if it is
indefensible as the manning tool how do you propose that we should
(Air Chief Marshal Sir Roger Palin) I think what we
said is it was indefensible if the effects of it depress full
career benefit because the man who commits himself for longer
has his gross pay discounted by the AFPRB abatement for longest
and gets the comparatively poorest return, that is indefensible.
93. We have that message pretty firmly.
(Air Chief Marshal Sir Roger Palin) If they brought
those full career benefits up and if the Ministry continues to
think that the immediate pension is the best manning tool they
can come up with to solve the structural problem
(Major General Gordon) They should pay for it.
(Air Chief Marshal Sir Roger Palin) That is not for
us to judge.
94. You bring the full-term career Serviceman
up to standards and leave the existing immediate pension arrangement?
(Major General Gordon) That is really not for
us to say. If the MoD judged that the IP is the best tool then
they need to fund that in a different way, not at the expense
of the full career pension, that is what is indefensible.
95. I want to return to something that you covered
largely when you replied to a question from Syd earlier on, which
is round how Service personnel are informed of new proposals when
they come out, so that they have options to opt in if they choose
to. I am particularly interested in whether you think Service
personnel are generally aware that they, in effect, make a contribution
towards their pension through abatement of pay?
(Air Chief Marshal Sir Roger Palin) I would be very
surprised if the generality of Servicemen were not aware that
their pay is discounted in some way or other to take into account
the pension benefits. I doubt there is any one Serviceman, possibly
even including the senior personnel officers, who understand the
methodology and how it is done and the intricacies and the variations
that lie within it and the anomalies, the discrepancies. I hasten
to say if they do not I hope they never find out because there
are such broad variations that an awful lot of people would say,
"this is unfair, because I am paying a darn sight more than
actuarially I ought to be". Equally there are others that
pay less. At the end of the process the actuaries recommend an
appropriate level, the AFPRB uses its wider judgment, quite rightly,
and, says, "we think it should be there", that is then
published in all the documents, pay levels are depressed by that
amount and that becomes their gross payment. I think they are
generally aware, but not of the mechanics.
(Major General Gordon) I think they are more than
just aware, they look upon it as a de facto contribution,
their base pay is depressed by a pension abatement.
96. Just to go back to the comments that were
made earlier, we are going to end up with a process, we hope,
sooner or later that a decision will be made and something will
be put to Service personnel, they will have an option of staying
with what they have got or going into a new scheme, so comparisons
will start to be made, how can the MoD handle that or avoid them?
There will be some inquisitive individuals, one assumes, who will
really start to pick away and try and get to grips with some of
these issues. That is set against an environment out there where
pensions are being talked about a lot now,Panorama
this weekend was about final salary schemes and those going away.
We have the Fire and Police Services really struggling to fund
their pension schemes and the prospect of whether or not they
will change. It is a more informed public if they choose to be,
and they may choose to be because they have to compare to make
a choice about going into a new scheme.
(Air Chief Marshal Sir Roger Palin) There is a whole
step which has to take place that we have not heard the MoD talk
about too much, presumably there has to be an actuarial reevaluation
of the new scheme, whatever it is, after they have done further
work because it may be they say that five per cent is an appropriate
abatement. For the new scheme you can transfer only pay five per
cent of your pay, but if you stick with what you have you only
pay six per cent. I do not see how the MoD can do the educational
process and give people the option to transfer until they have
done this further step.
(Major General Gordon) In my view the employer
has an absolute responsibility to inform his people better than
the MoD does nowthe MoD's efforts to inform its people now
are, frankly, pretty weak. Having raised expectations all of the
serving members of the Armed Forces will expect to be informed
about what their old conditions were, how the new conditions compare,
not only between each other and with modern practice standards
but also what does it mean for me, the individual, where do I
lie on the curve, which decision should I make, to stay with the
old or transfer with the new. That will all depend on the rank
and length of service.
97. As a society that now covers all Service
personnel and not just officers I could almost liken you to a
(Major General Gordon) Heaven forbid.
Mr Hancock: It is not that bad. You will
have another arm broken!
98. In other walks of life one would expect,
it would be likely that the trade union would end up playing a
role in the educative process and responding to individual members
of the union or in your case individual Service personnel coming
to you and saying, "the MoD told me one thing, I need a voice
I can trust". How are you as a society going to deal with
(Major General Gordon) We are a membership society,
funded entirely by membership subscription and, therefore, have
quite limited resources. Were a member to come to us and ask for
that advice we would do our level best to respond. Two things,
we will be critically dependent on the MoD for factual information
and we will be seeking that from them as soon as the package is
finalised. Secondly, under any no circumstances can we act as
an independent financial adviser, we are not licensed.
99. Anybody who left the Services and was in
an excellent trade union could get that advice from them?
(Major General Gordon) He could, but if he has left
the Services he has no entitlement to any service under the new