Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 140 - 159)



  140. All of this I entirely understand; I used to work in the occupational pension sector and I know well the perils of comparing unlike with unlike. I merely say that the study that you referred to would have been better done before the statement was made.
  (Mr Ingram) That is an opinion, I would suggest.

  141. I have an opinion, but you have an opinion as well, which is unsupported by actuarial or other advice.
  (Mr Miller) If I may, please? It is not the case that it is unsupported by actuarial examination. The Armed Forces Pay Review Body did involve actuaries in reaching the conclusions they did, and their clear conclusion is that in terms of the benefit to members the Armed Forces scheme is between 6 and 7 per cent better than the comparators.

  142. So, in fact, if we move that along from what the Minister said, there is some expert advice. If that exists we would like to see it to support what the Minister said.
  (Mr Miller) I will need to talk to the Pay Review Body, because they are an independent body.

  Mr Cran: But you will come back to us on this.

  Chairman: We have that information already.

Mr Cran

  143. There are some who would say that this is not a very generous scheme at all, because although it costs 22 per cent of pensionable pay, there is a 7 per cent abatement, so that means the cost to the employer is 15 per cent. Some would say—whether that includes me or not is another matter—that that is very parsimonious indeed by comparison with, let us say, the Fire Service: cost to the employer 23.75 per cent; Police, 21 per cent; Civil Service 16.5 per cent with a members contribution of 1.5 per cent. Where is the generosity here?
  (Mr Ingram) You say you already have that information in terms of the comparator study in all of this. We are not saying that it is the best in every element. I do not think many pension schemes could say that. Indeed, probably those schemes which would make that assertion are probably those schemes in the private sector that are now being examined as being too expensive. Mr Cran, you are only too well aware of what is happening in the private sector; the way in which industry is resiling from this particular cost-element. Remember, it is put within a context of being part of a manning tool as well, and remember also what I said, that if it was a critical issue in terms of that strategy, then we would have to revisit it in a different way. It is because of those aspects that we believe that it is a generous scheme—which may be debatable.

  144. It is indeed.
  (Mr Ingram) It is always going to be debatable and we will never satisfy everyone to the nth degree. Indeed, our own MPs pension scheme—which many would say was exceptionally generous—has been voted on by the House to make it even more generous. Things can always improve. It is the role that is played by that pension scheme. We believe it is generous at the present time, we believe that it is well-received within the Services; we believe that what we are seeking to do enhances the overall delivery in some of the key areas, which will assist in dealing with some of the pitfalls or weaknesses which exist within the present scheme and which are being referred to as matters that need addressing as well as the matters which we have addressed ourselves in all of that. I believe I am not going to convince you on the overall merits of the scheme.

  145. My mind is completely open on the subject. I am a piece of blotting paper waiting for you to write on it. Chairman, I have two other small questions. My experience leads me to believe that every pension scheme has got a collection of schemes by which it compares itself—it, by definition, has to, for all sorts of reasons. What are your comparator schemes? Are they merely the public sector schemes, or do you take a wider view? Do you take no view at all?
  (Mr Miller) We have looked wider but our principal comparators are undoubtedly the public service schemes.

  146. I think I am correct in saying that you have indeed compared yourselves with the private sector, but the details of that have not been published. Am I correct?
  (Mr Miller) We clearly are aware of the levels of benefits which are common in the private sector. In that sense, that has been taken into account in the early stages of the work, but, no, we have not offered it in detail.

  147. Therefore, my final question is: if you do compare yourselves with other pension schemes in the public sector and the private sector, that seems to me to be an on-going thing that you do. Can you not let the Committee have a sight of the information you gathered as a result of that process and the conclusions you have drawn from it?
  (Mr Miller) We could let the Committee have sight of any information that we have available. As you say, it is an on-going process and we are very conscious that the private sector, in particular, is changing quite radically at the moment—and not for the better.

  148. Indeed it is. I, for one, would like to see that analysis.
  (Mr Miller) I will need to offer you a paper on that.

  Mr Cran: Thank you.

Mr Jones

  149. Minister, part of the unique nature of the scheme is the abatement system, which I think currently stands at 7 per cent—or the actuary sets it nearer 6 per cent. How confident are you of the reliability of the scheme, certainly in terms of the abatement figure in the last 20 years, which has actually reduced? Has this made the benefits less competitive compared to the private sector or civilian schemes? The second point is, this issue of abatement does mean—and the Forces Pension Society raised this quite clearly—that it is not clear exactly what people are contributing from their pay. Have you considered introducing a system based on overt contributions to a scheme from the Armed Forces rather than the abatement system which we have at the moment?
  (Mr Miller) In general, the Pay Review Body's assessment has indeed changed over the last few years, coming down from a full 7 per cent to 6 per cent, although they are still abating pay by 7 per cent. That is their judgment, we have no say in that. That is very largely because the level of benefits in the comparator schemes have improved over that period. Clearly, there must now be a question mark over that. We did look at the possibility—and this really touches both on contributions and funding—of going for a funded scheme or a contributory scheme, and came to the conclusion that the benefits to the individual pensioner were not such as would justify the very considerable additional administrative complications that would go along with that approach. Fundamentally, it is the view we took in relation to the funded schemes, where the main reason for funds, of course, is protection against bankruptcy, and government bankruptcy seems a somewhat unlikely eventuality to protect against. Contributions, if you do not have a funded scheme, have a certain element of artificiality about them, and if the whole process is unnecessary and administratively complex, as it would be, we took the view it would be better avoided.

  150. Could you not have a scheme which would actually have a contribution element, or a fund, that was actually guaranteed by government?
  (Mr Miller) We could indeed, but why do we need it? Funds exist in the private sector's pension industry because of the risk that the company will go bankrupt.

  151. One of the contentions of the Forces Pension Society is the transparent nature of people knowing what they actually pay. You talk about administration, but under the proposals you are actually running two schemes, one for new entrants and one for existing people. So is there not going to be an administrative cost in that, in terms of running two schemes side-by-side?
  (Mr Miller) There would be anyway, and if we had gone for a funded, contributory scheme that would be an additional complication to the new scheme. The fact that the Pay Review Body make that adjustment in their assessment is well-known. I would not, for one moment, pretend that every soldier carries it in the forefront of his consciousness every day, but the information is readily available.

  152. Would you not agree that if there was an actual contribution—for example, most people who contribute to a pension scheme actually see each month on their payslip how much they are contributing—you would know what the value is? Under this scheme, as it is worked at the moment, it is very much unclear what the contribution is in terms of what people are paying into the scheme.
  (Mr Miller) It would be more apparent if there was a contribution, yes.

Mr Howarth

  153. Can we come back to this business of cost neutrality and explore that a little bit further. Last year's Review document stated that it is Government policy that improvements in public service pensions should generally be paid for either by savings elsewhere in the scheme, or by scheme members through contributions, clearly implying that you were bound by that policy. You have reminded us this morning that in your own memorandum to us you explained that "cost neutrality was not originally and necessarily one of the ground rules for the pension review". So we clearly have a conflict here; that initially you were telling us that any improvements had to be paid for either by increased contributions or by savings elsewhere, implying, clearly, cost neutrality, and you now, in your memorandum, tell us that actually cost neutrality was not a ground rule. Then you concluded in the statement that you made this morning that "We cannot justify spending more on a new pension scheme". It does seem to me that the department is all over the shop.
  (Mr Ingram) I do not think the department is all over the shop, I think the department is very clear in its approach on this. What I said—and it is in the memorandum as well—was that the cost neutrality aspect was not an original driver in all of this.

  154. Even though you said that any improved benefits had to be paid for by savings elsewhere, or by increased contributions?
  (Mr Ingram) Yes. That is the way in which it has now been developed because what we are doing is reshuffling the pack, so to speak; to take some elements and modify them to pay for enhancements and improvements elsewhere. I tried to explain in my earlier comments about what the driver in this would have been; that if this had been a major, key issue—before my time but it may well have been revisited in the time in which I have been doing this job—then the arguments would have had to have been advanced to say "We now need more money to do something because the scheme, in terms of the overall assessment and our own internal assessment, is far short of what we believe is necessary. It is a drag on that recruitment and retention strategy." The reality is, though, that if that argument is advanced and money is then given to the defence vote for that purpose, it is then not being given to something else. There is not an open book from the Treasury in all of this. We would have then had to have set our demand against other priorities. However, that is not the way in which it has been approached. That could well have been the way in which that would have been approached because the cost of pensions—by the very nature of the numbers we are dealing with—is likely to be heavy. In those ways it could have become an issue. The other aspect they could have looked at could have been on the contribution side and, going back to the earlier approach, to say "Is this another way in which enhancements can be made in all this?" That would have been quite a significant departure from the current approach, but it would have been a way of dealing with some of those issues.

  155. I think the public, and certainly the Armed Forces, would be appalled if they felt that the Treasury was saying to defence ministers "You can have this amount of money, you can either spend it to defend our country to pursue our military interests and our political interests around the world—in which case we rely upon the men and women of our Armed Forces to lay down their lives for their country, potentially—or you can have more money to improve their pension scheme".
  (Mr Ingram) I did not use that emotive analogy. That is your interpretation.

  156. That is what you have told us, in effect, is it not?
  (Mr Ingram) That may be how you interpret that. What I am saying is that in any set of relationships, if money is being made available, if we are making a bid against the centre across the broad reach of the Armed Forces, then we have to justify our case. By your argument, there should simply be an open pot from which the Armed Forces can draw. That does happen in terms of times of emergency or in times or crisis—not a wholly open book, everything has to be justified in terms of extra expenditure, and there has been quite exceptionally extra expenditure because of events in Afghanistan. So the Treasury (ie, the Government) shows a willingness to deal with the immediacy of those particular problems, but it must be part of the overall assessment of what we are doing, in terms of whether it is pay or whether it is pensions, and that then becomes a cost which we are saying is something that has to be justified against all the other demands across the broad reach of Government. If people are appalled by that (and I assume you may well be appalled by that) I would ask them to look at the real world and not at the world of rhetoric.

  157. Minister, I assure you I am trying to help you. I am not trying to do you down, I am trying to help you with the Treasury. It does seem to me that you have got a case to make to the Treasury and we want to help you make that case. The stark way in which I put it seemed to be reasonable. If you are saying that this has got to be cost neutral in order to ensure that there will be resources for the hardware, let me take you back to what your predecessor said in 1998. He said: "We need to ensure that the Armed Forces scheme is in line with the best modern practice". In other words, this was not a cost-neutral approach, this was an approach to say "Look, the Armed Forces pension scheme needs to be reviewed and we need to review it in the light of the comparators." Some points have been put to you already indicating that there are unfavourable comparators—although Mr Miller cites unspecific examples which show this is a more favourable scheme than others. Let me put this to you: if you take one of the most important things, death-in-service benefits, at the moment the spouse of a Serviceman killed in action would get up to two times their salary. The spouse of a Serviceman killed in training would get one to one-and-a-half times. It is proposed that that should increase to three times, which obviously we welcome. However, the wife of a policeman killed on duty would get five times their salary, and in the private sector four times salary is normal. If it is your desire to produce a pension scheme which is going to be comparable with best modern practice, I have given you one example—and a dramatic example—of where this scheme is inadequate by comparison with other key areas.
  (Mr Ingram) Both the schemes you refer to are contributory schemes, and I cannot remember the figure off the top of my head—

  158. These guys contribute, Minister. Do not say they do not contribute, they contribute by abatement.
  (Mr Ingram) I do not know whether, Mr Howarth, you are developing your own policy as part of this. I understand you are—

  159. I am here as a Member of this Committee, Minister.
  (Mr Ingram) I am interested to know whether it is a spending commitment which has been made to you because you set out your arguments at length trying to justify—

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