Select Committee on Defence Minutes of Evidence


Examination of Witnesses (Questions 160 - 179)

WEDNESDAY 13 MARCH 2002

RT HON ADAM INGRAM AND MR BARRY MILLER

  160. I am asking you questions, Minister.
  (Mr Ingram) There are also arguments contained within it and premises upon which it is based.

  161. I am trying to help you.
  (Mr Ingram) If you are trying to help me against the Treasury, we are always grateful to receive that type of assistance. The more we can lift the argument about the importance of the Armed Forces overall, and I know that is an issue you share with us, then the better it is for all the people who serve in those circumstances which we ask them to serve on behalf of the country. However, in terms of that approach which is taken, of looking at two schemes where, in the case of the police scheme, 11 per cent is the contribution towards that, yes, if we change the basis of it then you can have uplift in a whole lot of key areas. Please recognise, however, what I am saying here in terms of how we assess this: that we believe this to be a generous scheme (that may be contested); we believe that it meets a whole lot of needs within the Armed Forces community; we are rearranging it in certain areas to deal with some of those specific issues, and there will be an uplift as a consequence of the changes if that is what is then implemented. So we are beginning to address all of that. However, to cherry-pick and say "There is one element, now lift it there; there is another element, now lift it there", means there must be a cost-element to it and that must be met from somewhere.

  Mr Howarth: The point we are making is that you said in your memorandum that cost neutrality was not the starting point. What you are now saying is cost neutrality has to be a point. Let us not pursue that, because genuinely I recognise the role of the Treasury in this and I do feel that the public has got to know that if ministers are on-side in the department that is responsible and the Treasury holds the purse-strings, the nation has to decide on the priorities. One final point, Minister: when you refer to the police, as Mr Cran has just pointed out to you, the cost to the employer of benefits as a percentage of pension payable to the police is 21 per cent; the Armed Forces is 15 per cent. So they are less of a burden on the employer than the police, yet if a police officer is killed in the line of duty his spouse gets five times his pay, whereas the spouse of a serviceman or women killed in action, it is proposed, will get three times.

  Chairman: And the Army is not threatening to strike.

Rachel Squire

  162. Continuing with the issue of cost neutrality, you will be well aware, Minister, that the Forces Pension Society does consider that taking cost neutrality as the basis for the review means that the proposals do no more than rearrange the existing resources, and that yes there will be winners but there will also be losers in the new system. It also seems to us, from the table of costs provided to the Committee by the Ministry of Defence, that retirement benefits are being cut to pay for improvements in survivor and ill-health retirement benefits. Would you agree that that is the case? If so, why does the MoD consider that reductions in retirement benefits are either appropriate or necessary?
  (Mr Ingram) What we have done is identified some of those key areas that have been raised, and dependants' benefits is a prime example and looked at the inequities that exist between officers and other ranks and to try and find ways of smoothing that—to try and find some sort of standard methodology contained within that. It is right to say that in making some winners there then has to be reductions elsewhere—that is the very nature of the way in which the sum of money is being re-allocated—to meet those areas of what we believe to be issues that need to be addressed—widowers' and widows' benefits, and dependants' benefits and other areas—and smoothing out of the relationship in terms of other ranks and officers. So it is addressing some of those inequities that we are seeking to do, and the inevitability of the logic of this is there will be losers within all of that. I do not know whether the argument will then be "Everyone should be a winner out of all of this" and I can understand some who may argue that, but we have to live within a real world in all of this. The way in which we are approaching it—and I repeat the point—is that we believe that we have a generous scheme, we believe it is substantially funded and what we are now seeking to do is to take that funding and better allocate it. That is the philosophy which has been applied and will be applied in all of this. To do it in a different way means we are then into issues of funding. Where does the funding come from? Contribution or by some other input? Our view is that we cannot justify that other approach because it is not (and this may, hopefully, convince Mr Howarth) the key issue that we believe other issues are within the services which we seek to deliver. That becomes the priority of government and the strategy of government. There is nothing inconsistent with that approach across governments.
  (Mr Miller) I wonder if I might just enlarge on this business of reducing retirement benefits. What we have done is slightly defer the Immediate Pension point for the early retirers and reduced the accrual rate in the early stages of the Service, which means someone who retired early will receive, relatively speaking, lower retirement benefits than he would have done. That has paid for both improved benefits to widows, dependants and so forth, but also an improvement in the pension at the full career point, because of course the move to final salary rather than the notional salary, which we base the current scheme on, will result in an improvement for a significant number of servicemen who are serving on the higher pay range.

  163. Just picking up on that and moving on to the issue of the Immediate Pension, you are saying there will be some benefits on the higher pay scales. Yet the Minister was saying that one of the purposes of this whole review has been to try and reduce, shall we say, the gap between what officers are able to gain in terms of Immediate Pension and what those below those ranks are able to gain. There seems to be a bit of an inconsistency.
  (Mr Miller) No. Both groups will in future be on a common basis for the immediate payment, rather than the current situation which means that another rank has to serve for longer for immediate payment than does an officer. They will all have to serve for the same time. As I say, there is some slight delay in the immediate payment point. The other point I was making is that for some of those who retire early there would, indeed, be a reduction in benefits because the accrual rate has been reduced. The current scheme provides for accelerated accrual in the early years and then a much slower rate of accrual for the balance of the Service. We have moved to a common rate right across the Service and the net effect is that there will be some losers amongst those who retire early; amongst those who serve to full career there will be some who gain, and we have been able to fund the improvement in benefits for widows and dependants and so forth.

  164. Can I ask you this: would you say that the purpose of the immediate pension, or one of the prime purposes, is retention? I would say that, in my contact with Armed Services personnel, particularly the Navy, whenever I have asked petty officers and others how long they have been in the Service and so on, they will say, you know, "13 years", "15 years", and then they will almost immediately say, "I am going to stay for another 7 years", or whatever they need in order to qualify for the pension. This is an issue that is constantly mentioned when you ask people about their Service. What do you see as the purpose of the immediate pension? Is it that key issue of retention?
  (Mr Ingram) We would see it very clearly as a manning tool. There is absolutely no question at all about that, and it can assist in encouraging people to remain in Service, because they get to that point where they then get the benefit. There is nothing I would suggest unusual in this approach: all employers, public and private, would probably view their pension policies and schemes as part of their overall remuneration package. If they do not do that then it is an unusual philosophy they would adopt. So it is about attraction and about trying to keep people in place, and we are no different in that particular sense. The immediate pension approach is an integral part of that overall remuneration package, and it has benefits in terms of encouraging the retention aspect to it. It is interesting that some have been arguing a different approach on this but no one is saying that we should abandon that strategy of the immediate pension.

  165. No—well I have not heard anyone but I think another issue that has come up in terms of encouraging people to stay is the use of bonuses, certainly in looking at the Services and the need, for instance, to try and keep experienced highly trained pilots and encourage them to stay longer in the RAF. There has obviously been use of that sort of long Service period being a financial attraction. It appears from your memorandum that no detailed work has yet been done on the possibilities of using bonuses, and one therefore has to ask why not, when this review has been going on for three years?
  (Mr Ingram) What I have tried to do is give the flavour that it is not the critical issue, as it can be elsewhere, in terms of the golden handcuffs or however they are going to be described. We have recently enhanced the air crew retention measures because we have recognised that to be a device by which hopefully we can encourage key personnel—and it is not just pilots but others within that structure—who have particular skills and attributes that we want to retain. Because we have been able to justify it on the basis that there is a problem there and it is a very real problem that has to be addressed and a response is then given to that. In terms of bonuses, if it became the same flavour elsewhere, then the way in which we would have to analyse it is exactly the same. Is it important? Is it a measure which we can now put in place that will get that potential return? We will have critical areas. In one sense all of that is constantly being considered but at the present time not actively considered. It is a concept out there which can be lifted off the shelf at any point if we have a critical area, and then looked at as a possible solution. The danger I would suggest in all of that is we would end up with a plethora of a whole range of different schemes and remuneration packages, and that is not necessarily the best way of tackling the scale of the problem that we then have to address in all of this. I do not know whether that answers your question? It is not written out as a concept, and it is something which we constantly have to give consideration to—whether this is a mechanism which would deliver in a critical area—but the critical area has to be there before we apply it.
  (Mr Miller) I wonder if I might, Minister, say this: although we did not attempt any detailed costings of possible bonuses, we did confront the basic parameters which are, of course, that a bonus in these circumstances would be taxable and therefore, by definition, has to be substantially higher than the gratuity paid to the Serviceman when he retires—never mind something to allow for the fact that he would have an income stream as well. So we are looking at bonuses which would, of necessity, be substantially higher than the gratuity that is paid. The reason for not going into detailed costing is that there seems little point in detailed costing when any assessment of the likely effect of the bonus would be, at best, broadbrush and, arguably, highly judgmental, because one has no scientific way of assessing what effect the figure of X as a bonus would have in terms of the retention or the tendency of people to leave. So it was really faced with this basic problem of accommodating the taxability of bonuses that made us think that we were unlikely to be able to produce an acceptable solution to replace the immediate pension

  166. I have just one other small question which is whether the abatement system is fair, given that only a minority of personnel leave the Services each year and qualify for an early immediate pension, and yet everybody pays for that to happen?
  (Mr Ingram) My answer, shortly, would be yes. If we thought differently then we would be tackling it in a different way. Barry may be able to give a more detailed answer in terms of the valuations made and the attitudinal surveys and the focus group approach on all of this.
  (Mr Miller) Frankly, it is a feature of any pension scheme—some people benefit more from elements of a pension scheme than others. What one is doing, whether it is a contribution or an abatement, which it tends to be with a flat rate across the board, is paying for the average. The fact is, just taking the basics, somebody who dies within, say, five years of retirement does far less well out of his pension scheme than someone who survives for twenty or twenty-five years

  Rachel Squire: A point well made.

Syd Rapson

  167. Looking at the individual Services, there appear to be different and relative levels of fitness, et cetera, and I was wondering about the retention incentives. Are they different for each Service? Should there be a different approach to fit personnel needs or their requirements rather than a one size fitting all? Are all the Services the same, or should there be some consideration of different approaches?
  (Mr Miller) I am not quite sure, Mr Rapson, what you are after. The fact is yes, there are different fitness standards in the three Services. The three Services also differ, of necessity, in terms of the point at which they may well find it necessary to dispense with the Services of some individuals. Clearly, for example, the infantry requires a much higher level of fitness than, for example, the Royal Electrical and Mechanical Engineers, as they were. That would be adjusted and I am taking examples deliberately within one Service. They will have a different approach to these things. What we have done is attempt to construct a pension scheme that will cope with the extremes of the likely requirements of the Services.

  168. So one size fits all is about average, you think? I was just thinking that there might be a greater incentive needed to encourage certain elements of the forces to stay in and take the package rather than at the moment, where if you see it as a means of retaining people as a benefit some Services look at it differently? Whether they want to stay in longer or leave earlier, they are fed up? Do you think there is a bland average for everyone that fits all?
  (Mr Miller) No, I do not for one moment think there is a bland average for everyone. I think the pension scheme inevitably charts a mean path between the alternatives. We then tend to rely on other manning devices to do the fine tuning and, as I say, this is not an issue between the Services: it can be an issue within a given Service.

  169. Has there been any discussion with the Treasury about the bonus payments and how they fit into overall pay policies, and whether we should raise or lower them? Any discussion at all?
  (Mr Miller) We have made no proposals to the Treasury on bonuses. As I said earlier, having realised that bonuses would be taxable and therefore substantially greater than the gratuity, we did not feel there was much mileage in that particular way forward.

  170. Talking about the information, we are worried about how Service personnel found out the information and what arrangements you have made for them to understand that complexities of the schemes. What arrangements will the MoD put in place to ensure the Armed Forces personnel have sufficient information about the new pension scheme? For example, will they receive individual projections on future pension entitlements under both the existing and proposed schemes to enable them to decide which is best for them? Part of my earlier role as a shop steward was to interpret regulations and tell my people what it was all about, and I did not understand it. Without shop stewards in the Armed Forces, how will the MoD as a good employer make sure they understand complexities and are not persuaded to go the wrong way?
  (Mr Ingram) I think this is an important issue and we do recognise that a lot of the material is not best placed and probably a bit out of date. Clearly, if and when the new scheme comes into place, we have a responsibility on us as a Department to try and make this as clear and informative as it possibly can be without it being over complex, because even very experienced people trying to assess some of this find it difficult and there are occasions when there is a requirement to go to an independent financial adviser. If, say, the choice was to move from the existing scheme to the new one for an existing member of the Armed Forces, that has to be the individual's judgment, so there is an onus upon us to make sure that they are fully up to speed with every aspect of this—the complexity as well as the simplicity of it, as best as that can be explained. We recognise at the end of the day, if it is a transitional judgment that has to be made, it is a matter for the individual and best advice would be given but it cannot be independent advice. We cannot then say, "It is best for you to do this". That has to be taken on the basis of all the information that we so provide. We are putting a lot of effort and energy into looking at how this can be done and how we communicate that, both in written material and on the internet and other ways we can spin out or play out all that information. Anyone who tries to understand the pension scheme knows how difficult it is, and all we can say is we will do our best to take the very best practice in the explanation of all of this.

  171. There is one part of it, inverse computation, which I find extremely difficult to understand—
  (Mr Ingram) How long have you got?

  172. If there is a very good explanation given to personnel to understand it, would you send me a copy?
  (Mr Ingram) Yes.
  (Mr Miller) Just to answer Mr Rapson's specific question: we do envisage that we will give individual projections of what they would get under these schemes.

Chairman

  173. Perhaps the letter you write to lieutenant colonels could be sent, explaining to them why they are going to be £2,500 down on their pension and £8,000 less on their lump sum, and then the special letter to sergeants telling them they are not going to be winners in this game. It would be interesting to know why you chose lieutenant colonels and sergeants to be amongst the losers. It is great for the winners but not so hot for the losers.
  (Mr Ingram) You are taking these from the examples. They, of course, are features of the particular combination of time served and so forth in the examples that were given. It is not necessarily the case that all lieutenant colonels or all sergeants have lost out.

  174. Eighteen years, I think?
  (Mr Ingram) In that particular case, yes.

  175. So you isolate the lieutenant colonels for eighteen years and tell them how they are going to be worse off.
  (Mr Ingram) The point I was making earlier is that we have said that it is recognised that those who retire early will not do as well under the new scheme as under the old, and that is one of the things they will have to take into account when they make the judgment as to whether or not they want to transfer to the new scheme.

Mr Roy

  176. Minister, why can most private sector schemes and the Civil Service scheme offer the option of commuting part of the pension to a lump sum rather than having an automatic lump sum, yet in the Review the MoD says that this would be too complex to administer? It is not too complex for everyone else, so does this not reflect very badly on the MoD?
  (Mr Miller) It is more complex and I think this is one of the issues that we certainly need to give some more thought to before we draw up our final proposals. The fact is, though, that all our experience of commutation is that it is very few individuals who do not take the option of a tax free lump sum. The question really is one of how many benefit against the complexity, but, as I say, one notes what the principal Civil Service scheme has done and it is an area we would need to think about.

  177. But why is it more complex than the comparator Civil Service scheme?
  (Mr Miller) I would not say that it is any more complex for us than for the comparator.

  178. But they can do it and—?
  (Mr Miller) We have not said we cannot do it. We have said it would be more complex and, therefore, we sought to avoid it because very few people do not take the option, but I think we would certainly want to look at this as one of the features. It is one of the things that has emerged from the consultation and it is definitely a point that we would consider.
  (Mr Ingram) Remembering the comment I made, we are still in an input mode at the moment. We have not concluded our assessment of all of this, and that is why I said in my opening statement that the input from this Committee, coming at the time, will assist us in that. It does not mean to say that every recommendation will be automatically accepted before we know what the recommendation is, but the quality of the assessment out there helps us to come to conclusions in some of those areas. It is not signed off on all of these aspects and, therefore, if the case is well made and there is a sustainable argument, then it has to be given a positive consideration.

Mr Crausby

  179. On unmarried partners, you wrote to the Chairman in November to say that you would also need to look again at the position on entitled partners. What costing have you done on the financing of pension benefits for unmarried partners?
  (Mr Ingram) Barry will deal with this but there is a general issue here that this is another example of where, as we have been through this process, we have begun to look at this because it has taken on an increased debatable point as to what should happen. These are very big issues right across the whole of the public sector, and some departments I understand are now beginning to tackle it. We have a particular issue in depth here that we have to look at. It is then how is that going to be costed, how is that going to be funded as well at the end of the day, and there is work still required on this to establish fully where we will end up in terms of what is identified as being the type of partner, what the qualifying criteria would be, and how that is to be met. If it is to be met within the existing scheme, then it means that the benefits that have been paid to new members may have to be modified accordingly. So we have to look at this in that particular way and we have not yet done a total summation of all of that.
  (Mr Miller) We have been in the first instance talking to the Government Actuary about the costing of this. There are discussions still going on. We will need in the process of producing our estimate to get some sort of handle on the number of servicemen who have unmarried partners who would fall within an acceptable definition. We have been giving some thought to acceptable definitions—there are a number of models out there—for example, the Australians—and the aim would be to bring all of this work together in due course to enable us to put a handle on what it would cost. Once we have done that, of course, we are then up against the general policy, and Mr Howarth just now quoted the policy which, of course, applies to the specific issue, not the generality of the pension scheme.


 
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