Armed Forces

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Mr. Brazier: As was observed the other day, cost-neutrality is a curious idea because it does not take into account the fact that there will be a steady reduction in the size of the occupational pension because of the decrease in the size of the armed forces and a huge reduction in the cost of war pensions. None of that is carried into the equation, whereas the additional costs in terms of longer lives are put into this so-called idea of cost-neutrality.

Mr. Howarth: My hon. Friend makes an important point. We will have a further debate on these matters when we come to issues of longevity, although I am grateful to him for making that observation at an early stage in our discussion of these proposals. The Government had decided that instead of salami slicing the system and fiddling about here and there, they would take the bulk of the savings from the immediate pension arrangements and institute a new substitute system of early departure payments.

I would be grateful if the Minister told us how it can be proposed that the savings will be around one third—about £100 million a year—when the figures I have seen, which were helpfully provided by the Forces Pension Society, indicate that at best the savings are likely to be about 25 per cent. I do not see how those two figures square. As we are the first people to have the opportunity to consider in detail the Government's proposals to replace the immediate pension, it is important that we understand that their figures are right.

I am not at this stage saying that the Government have it all wrong—I do not know—but I cannot square the figures I have seen with the savings that the Government claim. Given the basis on which the review has been conducted in respect of cost-neutrality, if in replacing the immediate pension scheme the early departure scheme does not raise significant amounts of money for the improvements to be made elsewhere, the Government will have a problem balancing their books. So, I hope that the Minister will be able to shed some light on that.

When the Minister wrote to us, he kindly set out the details of his proposed scheme. They were quite clearly written—they were not in obscure English—and relatively easy to understand, for which I am grateful. He said that the need to replace the current arrangements arises for three reasons. This is the first:

''Inland Revenue proposals set out in a recent consultation paper will not allow pension benefits to be paid from a tax approved pension scheme before age 55''.

That is why we have to make the change from a pension-based scheme to an income stream, which is how the Government describe it.

The second reason advanced by the Government is that the

''current IP makes unfair distinctions between Officers and Other Ranks in terms of different accrual rates and qualifying periods, and provides a level of compensation that is no longer considered appropriate given improvements in the transferable skills of those leaving at mid-career since the current arrangements were introduced in 1973''.

I shall have more to say about that in due course.

This is the third reason advanced by the Government:

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''The arguments for redistributing resources from the IP to allow benefit improvements elsewhere in the scheme, notably to dependants' benefits, and to help cover the costs of pensioners living longer''.

As my hon. Friend the Member for Canterbury rightly pointed out, there is also a reducing pool because the Government have cut the armed forces. Therefore, there will be fewer people to be paid in due course, so I am not sure that the argument stands up. There is also a view, as the Minister knows, that it should not be down to current members or those who will be members of the scheme to pay for increased longevity. The Government should make some contribution.

Mr. Caplin: On that last point, has the hon. Gentleman had the opportunity to consider how much—in pounds—he thinks the Government should contribute?

Mr. Howarth: No, not yet. This is a complex area because it involves actuarial calculations. I am told that the definition of an actuary is one who finds accountancy too exciting, and I am not an accountant, never mind an actuary. As the Minister knows, this issue was addressed in the Select Committee and there was a feeling that the armed forces were being required to pay for increased longevity. We have been calculating how best to arrive at a balance and how we apportion responsibility for who pays what. A pension is deferred income; the pension is contributed to by the employer and by the employee—it a question of getting that balance right.

It is fundamental to recognise the fact that the new early departure payment scheme is not designed for the benefit of the employee; it is a manning tool. It is a device that enables the Government to pull through those whom they have spent money on in training and whom they wish to retrain as well as a means by which those whom they do not want to retrain—those who are perhaps less agile or surplus to requirements—can be released from the service of the Crown. The scheme is therefore entirely for the Government's benefit.

The fact that in framing the scheme the Government have had regard to the difficulties faced by those who are heaved out before they have served a full career and are therefore entitled to a full career pension—which they will not get in any case unless they are a four-star general or of equivalent rank—and have, as a responsible employer, recognised the fact that they have some obligation should not distract us from the main objective, which is to ensure that the Government get into the armed forces the people they need. They need specialists on whom they have spent a lot of money in training, but they may not need squaddies of 45. The scheme enables the Government to weed those people out.

The Select Committee expressed particular concern in its report, as it did not have the advantage, which this Committee has, of seeing the proposals that have been tabled as to how the payments would be uprated for inflation. According to the MOD website, the Minister has said that

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''while the precise shape of the new EDP is still to be worked through with the three Services, we do not propose to uprate payments in line with the Retail Price Index (RPI) from age 55, as now. However, there is a possibility that income payments would be increased later in life when second careers are less likely.''

I think that I am right in being able to welcome the fact that in the letter that the Minister sent on 2 February to the Chairman of the Defence Committee, he made the point that it is now proposed to uprate the payments from age 55 in line with the RPI. However, the entitlement to an annual payment of 50 per cent. of the individual's accrued preserved pension entitlement will remain the same for those leaving at age 40, the 18 years' service point and

''between the ages of 40 and 55, will not attract index-linking for inflation''.

That is a departure from the current scheme, where it is upgraded for inflation. That will cause particular concern.

As has been said, this is a potential source of substantial savings for the MOD. It is a hidden cut in benefits because it allows the MOD to reduce the value of early departure payments over time without reducing the headline figure that is paid. I hope that the Government can address that point.

11.15 am

There is also the issue of the pension trough; I hope to be able to table a new clause so that we can discuss it later. As the Minister knows, the real value of an early departure payment to a person who leaves the armed forces just before a period of high inflation can be substantially devalued over a short time, whereas someone who leaves at the top of an inflation curve will receive an early departure payment of higher real value over a longer period. The Select Committee recommended:

''If early departure payments are not protected from inflation, the real value of these payments over time to personnel leaving at different points is likely to differ substantially, as the rate of inflation varies. This may well lead to future grievances.''

I hope that the Government can look favourably on proposals that would prevent the creation of a new set of grievances equivalent to that which arose over the pensions trough. The Government are predicating all their arguments on the basis that there will be a low rate of inflation such as that which we currently enjoy, thanks to the former Chancellor of the Exchequer, my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who set the framework that this Government were happy to remain within until a couple of years ago.

Mr. Caplin: I cannot allow the hon. Gentleman to get away with that. There were double-digit interest rates under Conservative Administrations, and the right hon. and learned Member for Rushcliffe did not give us a golden legacy. Hard work and the independence of the Bank of England, along with other economic measures taken by my right hon. Friend the Chancellor, have created the low inflation that we anticipate will be here for many years to come under this Government.

The Chairman: Order. That evens the score, so we will now stick to the new clause.

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Mr. Howarth: I know that it is a cardinal principle that one does not challenge the referee, Mr. O'Brien, but I am not sure that the score was evened. I thought it was one and a half to one in favour of the Government. The public understand who is responsible for the establishment of the sound British economy. However, in order not to incur your wrath, I will not pursue the point.

It is important to understand the effects that the new scheme will have on individuals. It is one thing to look at the matter in the round and on the basis of headline figures, but quite another to see exactly how it will affect people in their everyday lives. In respect of that, I am again indebted to the Forces Pension Society. It accepts the Government's cost-neutrality constraint and it is not opposed to the principle of the early departure payment scheme, but it has drawn attention to what will happen.

The lump sum at discharge of a staff sergeant who retires at 40 on a pensionable salary of about £31,000 will remain the same, but his annual pension payment under the new arrangement will be about half what it is under the current one. In his case, assuming that he survives to age 75, the saving over the lifetime would be about £72,500, without allowing for inflation. That is where my figure of 20 per cent. comes in.

I understand that the calculated saving under the new scheme, compared with the old scheme, is about 20 per cent., which does not get us up to the one third saving that the Government propose to make out of the scheme. If that same staff sergeant retired at 54, he would receive a higher lump sum payment under the new arrangements, but his annual pension would be about £3,000 less than he would get now.

The Government say that all the proposals have been agreed by the service chiefs. I am not sure whether they are saying that service chiefs are responsible for drawing them up or that service chiefs have put the chop on them. I suspect that it is the latter. However, we are in no position to establish what effect the proposals will have and we will not see it for some time, but given the pull-through effect that the Government are anxious to achieve—the retention of skills that they want to bring on rather than ditch early—I am not sure how valuable it will be.

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Having considered the predicament of the officers, I foresee family tensions. Under the new scheme, a lieutenant-colonel on a salary of about £61,000 who joined at 21 and retired at 40 would get a lump sum payment of less than £50,000, compared with about £55,000 now, whereas his annual pension payment would fall from £18,300 to £8,200. Those are substantial reductions. People will have to pay a big price. Of course, the Minister will not see the effects: he will long since have been picking up his parliamentary pension, which people outside this place might think is more favourable than any other pension scheme.

I know that the Minister is young, but we are talking about people who have recently joined the service and will be eligible to leave in about 20 years. We must consider what will be the effect of these proposals. If that lieutenant-colonel were to retire at age 54, a year before final retirement, he would get roughly the same lump sum payment under the new scheme as now—about £85,000—but his annual pension payment would be substantially less at £21,000 rather than £29,000.

I put it to the Committee, especially the Minister and the hon. Member for Cleethorpes, that the spouses of some servicemen and women will say to them, ''What is going to be the position if you stay on until you are 47? What are your chances of getting a job at 47? You are going to get £14,000 a year pension. What are your prospects of getting a job then? Much better to go now when you are 40. Quit now. Get out into the private sector; get yourself a decent job.'' Between the ages of 40 and 45, or 50, is the most difficult time for people to change career. What the Minister is proposing is a substantial reduction in income for people who are at that stage of life and who have given service to our armed forces.

 

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Prepared 24 February 2004