MINISTRY OF DEFENCE MEMORANDUM IN RESPONSE TO THE HOUSE OF COMMONS DEFENCE COMMITTEE'S REPORT ON THE INQUIRY INTO ARMED FORCES' PENSION AND COMPENSATION ARRANGEMENTS
- The Department undertook reviews of the Armed Forces pension and compensation arrangements with a view to delivering modern schemes that would reflect developments elsewhere and take due account of the particular needs of the Armed Forces. The Department believes that, as part of this process, it was important to seek views from both our Service personnel at all levels and from external bodies. It therefore issued consultative documents last year. The Department has been considering the responses to the consultative document, as well as taking the opportunity to discuss further the issues with some ex-Service organisations. It will give careful consideration to the views of the Committee. However, the Department considers that its proposals are well thought through and, in broad terms, offer a fair and appropriate range of benefits to its Service personnel, recognising the valuable contribution they make to our security and society. The Department intends to maintain the broad principles behind its reviews and to work on refining and implementing its proposals for new pension and compensation arrangements for the Armed Forces.
We welcome the MoD's decision to examine pension and compensation arrangements and regard both reviews as timely and appropriate. However, we found both consultation documents to be woefully lacking in detail; the compensation is particularly weak. It is only in response to our own long list of questions that the detailed information needed to assess the new proposals has emerged from the MoD, and been put in public domain. Those who wished to respond to the consultation exercises were disadvantaged by the lack of detailed information, which should have been provided at an earlier stage. (paragraph 14).
- The Department welcomes the Committee's recognition that the Armed Forces Pension Scheme (AFPS) and the current compensation arrangements for Service personnel are in need of review. The current pension scheme was developed some decades ago and now needs to be reviewed to ensure that the Department has a package of benefits that is fairer and more in line with modern practice, and that will also meet the needs of our personnel and enable us to continue to recruit and retain Service personnel of the quality needed to meet our requirements. The current compensation arrangements include the War Pension Scheme (WPS), attributable benefits under the AFPS, the Criminal Injuries Compensation (Overseas) (CICO) scheme and entitlement to sue under civil law for negligence (under the Crown Proceeding Act 1987). The Department considers that there is merit in simplifying these arrangements and providing a focus that is better related to severity of impairment. The Department remains of the view that its proposals (which primarily replace the WPS and AFPS attributable benefits) offer a fair and simple approach that sits more appropriately with the present day social security structure not available in the early part of the last century when the WPS was devised.
- The Department recognises that the consultation documents issued in March 2001 did not offer a detailed explanation of all aspects of the new pension and compensation arrangements. The aim of the documents was to give the key features of the proposals and invite debate. Technical detail was deliberately kept to a minimum. With respect to the Joint Compensation Review consultative document, consideration was given to including the formula for calculating the Guaranteed Income Stream for loss of earnings but it was felt its inclusion along with a number of examples would have made the document too long and complex. It is acknowledged that this material might have been included in an annex. The Department has maintained a dialogue with some of the ex-Service organisations to explore their areas of concern. It should be noted that considerable work had been undertaken to underpin the consultative documents as evidenced in the supplementary detail provided in the Department's responses to the questions tabled by the Committee.
The MoD has performed poorly in both the time it has taken to produce its proposals and the rigour with which the evaluation has been conducted. We are concerned that this sends a negative message to current and former Service personnel about the value, which is placed on them by the Government. (paragraph 17).
- People are at the heart of the Department's planning and through the Armed Forces Overarching Personnel Strategy (AFOPS) the Department is driving forward a major personnel agenda to support Service personnel and their families. Focusing purely on the remuneration (including pensions) in recent research, the Armed Forces Pay Review Body (AFPRB) found that the UK Armed Forces' package was, overall, amongst the best offered in the countries surveyed. None of the ten countries surveyed offered a more generous package across the board.
- The Department acknowledges that less progress has been made in finalising its proposals than forecast following the review of Armed Forces pension and compensation arrangements. It is recognised that the small review team was set a major challenge to conduct both reviews in parallel, but this is considered justified given the linkage between the two areas. It should be recognised, however, that the work on pensions and compensation is part of a wide and challenging programme across the personnel area and the Department must also resource work on Service pay, allowances, housing, welfare, training and education.
- As was explained in the Department's memorandum to the Committee, following the consultation period and analysis of the responses there are a number of issues now being given careful consideration, including unmarried partner benefits and the early Immediate Pension. This reflects a response to a genuine seeking of views. The Department sees the consultative process as a vital facet of its development of a way forward and will continue to consult ex-Service organisations such as the Forces Pension Society (FPS) and Royal British Legion (RBL).
- As set out in our memorandum to the Committee, the Department does not consider that the recent delay will affect the timetable for introduction as this will be determined by the timescales for the introduction of the new Joint Personnel Administration System which will provide the IT framework for the pension scheme and for the closely associated systems for personnel data.
ARMED FORCES PENSION SCHEME REVIEW
We believe that the MoD has a responsibility to Service personnel, which goes beyond that of a normal employer. (paragraph 22).
- The Department recognises its particular responsibility as employer of those serving in the UK Armed Forces given the open-ended nature of their commitment and the particular demands associated with a career in the Armed Forces. The AFOPS sets out clearly the Department's commitment.
- The Department's commitment to fair treatment of its personnel is demonstrated through the involvement of the Independent Review Body in pay determination. In addition to basic pay (which is based on broad comparability with pay levels in civilian life for jobs of equivalent weight), Service personnel are paid the x-factor which is currently set at 13% of basic pay. This is paid in recognition of the differences between conditions of service for the Armed Forces and civilian life. It forms part of pensionable pay even though the factors for which it is awarded in most cases cease on leaving the Armed Forces.
- The required mobility of Service life is also recognised through the payment of a range of allowances including Boarding School Allowance (to support continuity of education), assistance with relocation, family travel concessions to promote family unity and the Get You Home (Early Years) travel arrangements for young Service personnel to keep in touch with their families.
- The Department understands the pressures created when serving away from home and the new operational welfare package is designed to ameliorate these. Support to Service families is also an important aspect of Departmental policy and the provision of accommodation and the introduction of the Service Families Task Force (to tackle cross-Government issues affecting them) demonstrate this. In addition, Resettlement Training provides support and new skills to help Service personnel with their transition back to civilian society.
- Pension and compensation provisions are similarly designed to provide benefits tailored to the specific issues faced by Service personnel. The Committee has recognised the value of the payment of an early Immediate Pension to those Service personnel who do not serve a full career. It ensures security of income when they return to civilian life, and, as such, is unique to Service personnel. The AFPS also allows for a full pension at a relatively early age of 55 reflecting the age at which fitness requirements can no longer be met. The AFPS is a defined benefit scheme which offers certainty for Service personnel and their dependants. The new proposals have improved death-in-service benefits and widows/widowers benefits and improved ill-health benefits for those severely incapacitated. These provisions, coupled with the improved attributable benefits for the most severely disabled under the new compensation scheme demonstrate the Department's clear understanding of the unique commitment made by Service personnel and the Department's special responsibility as their employer.
We believe that, in conducting the pension review, the MoD has placed too much emphasis on how the pensions system can be used to benefit the Armed Forces as employers, rather than on ensuring there is proper provision in place for Service personnel as employees, and that this had a negative influence on the proposals it has brought forward. (paragraph 23).
- In conducting its review of the AFPS, the Department has given due consideration to ensuring that the benefits proposed provide appropriate and proper provision for all members of the Armed Forces. However, it would be neither affordable nor justifiable to provide, as advocated by some veterans groups, a package containing the most generous from a range of other pension schemes. The Department's proposals, however, sought to focus on those areas where Service life generates particular needs for our personnel.
- The Department looked carefully at developments in other pension schemes when drawing up its proposals for a new AFPS, to compare provisions and the career patterns that drive them. As a result, improvements to death-in-service and ill-health benefits have been proposed. But it is also apparent that the kind of defined benefit scheme which the Department proposes to retain is becoming less common and that many employers are now moving away from such arrangements towards defined contribution schemes (where the risk is placed on the individual scheme member rather than the employer in terms of final benefits). The Department considers that Service personnel deserve a scheme that offers a clear, guaranteed range of benefits for themselves and their dependants, and that the uncertainty of the defined contribution scheme is not appropriate.
- The current AFPS offers attractive benefits, including the payment of an early Immediate Pension and full career pensions paid at age 55 (subject to reckonable service). The new proposals preserve these benefits and in addition the following have been proposed:
- For fairnessEqual treatment for Officers and Other Rankswho now have a common Immediate Pension point and have to serve the same number of years to receive a full career pension. Reckonable service is now taken from the day of joining, rather than from age 21 for Officers (and age 18 for Other Ranks).
- Modern practicea move away from representative pay for rank and years of service to a pension based on final salary.
- DependantsImproved death in service benefits, to take account of improvements elsewhere in the public sector, and widows pensions for life.
We believe the MoD has dismissed the possibility of contributions without properly considering it. There would inevitably be obstacles to overcome in introducing such a system, but there is no reason to assume, without properly examining them, that these would be insuperable. We recommend that the MoD look again at the issue of making the Armed Forces Pension Scheme an overtly contributory scheme. (paragraph 37).
- The Department notes the Committee's recommendation and will give the issue further consideration. The Department considered a range of approaches in developing proposals for the new AFPS. This included a funded or unfunded scheme, a defined benefit or defined contribution scheme and a contributory or non-contributory scheme. The Committee is correct that there would be significant difficulties in introducing a contributory scheme alongside a non-contributory scheme. For example, in the Department's view, this might require different pay scales for the two pension schemes depending on the balance of cost to the individual and the benefits provided. This would add significantly to the administrative complexity and the cost of paying Service personnel and could be expected to last for 40 years. Different pay rates for the same job, albeit linked to different pension arrangements, would not be easily explained to personnel who focus on headline pay rates. This could affect morale, recruitment and retention.
- The Department recognises that some veterans organisations consider that such a change would lead to pension improvement. However, pensions form only one part of the overall remuneration package and any improvements in one area would be considered in the broader process of setting the total comparable remuneration package.
We are not convinced that the Armed Forces Pension Scheme, even under the proposed new arrangements, could be regarded as generous either by comparison with other public sector schemes, or with what is appropriate to the special status of the Armed Forces. (paragraph 46).
- The Department has compared the AFPS with a number of public sector schemes and a table at Annex A, produced by the Government Actuary's Department, demonstrates that, in a significant number of areas, the benefits offered by the AFPS are better than the average on offer and in a number of cases the most generous; for some of the key comparators the member also has to make a significant contribution. The Department, therefore considers that the AFPS compares favourably with other public sector schemes and that the structure of the benefits offered are appropriately targeted to meet the particular needs of our Armed Forces. Nonetheless, in the light of views expressed in the consultation phase, the Department is looking at ways in which the current proposals might be amended to address some of the concerns raised.
The net effect of the new pension arrangements is that those who are not killed or injured during their military service are penalised so that the benefits for those who are can be increased to acceptable levels. We welcome the proposed improvements to dependants' and ill health benefits but regard it as unacceptable that these are achieved by reductions in benefits elsewhere in the pension scheme. (paragraph 55).
- The Department is pleased to note the Committee's recognition of the improved ill-health benefits offered by the new AFPS. The Department does not accept the assertion that all those Service personnel not medically retired will be worse off.
- The improvement to dependant's benefits will benefit all Serving personnel, not just those who die or are injured in service. Widows will keep their pensions for life and children of post retirement marriages will be entitled to benefits. The decision to introduce greater fairness by having common benefits for Officers and Other Ranks disadvantages some but brings advantage to othersnotably Other Ranks serving to the Immediate Pension Point(IPP) or on a full career engagement. Both Officers and Other Ranks benefit from the change to make service reckonable from the date of entry rather than from age 18 (Other Ranks) and 21 (Officers). The introduction of a final salary scheme to replace the current system of representative pay (where years of service and rank determine the value of a pension rather than pensionable pay of the individual) will benefit those who have served longer in rank or whose jobs have a higher weighting, although not those on below average salaries.
We recommend that the MoD follow good practice found elsewhere in pension schemes by offering the option of commutation on retirement, rather than the potentially disadvantageous automatic lump sum. (paragraph 57).
- The Department notes the Committee's recommendation and will give it consideration. The issue of commutation was given considerable thought and a range of options was considered, including voluntary commutation, compulsory commutation and inverse commutation. An examination of arrangements in other public service schemes revealed that most had a pension and lump sum which accrued separately. A notable exception was the current Police and Fire pension schemes which allow for voluntary commutation. Experience shows that most Police, Fire and Service personnel opt to commute the maximum amount tax-free sum permissible under their scheme rules.
- The Department recognised that voluntary commutation would offer flexibility for scheme members to determine their own benefit package to meet specific circumstances. This would offer a higher headline accrual rate and would mirror private sector practice. The disadvantages would be that the rate of commutation could be a source of complaint and there could be increased costs in an area which was not seen to be a priority for scheme members. It was concluded that compulsory commutation offered a more transparent benefit structure (as the scheme member could calculate the level of benefits at leaving), was the baseline option most members would be expected to taketax-free and not contingent on longevityand was more simple. Maximising the lump sum on discharge is known to be favoured by most Service personnel, and few are therefore likely to choose to retain a pension in preference to an immediate tax-free lump sum. However, the Department's proposals offer the flexibility of inverse commutation which allows a Service person to convert the tax-free lump sum into a taxable pension. This provision is offered by the current Principal Civil Service Pension Scheme, but it is not often taken up, confirming the view that the maximum lump sum tends to be the preferred option.
We believe the MoD needs to look at Immediate Pensions in the broad context of a strategic and flexible approach to financial retention incentives. The MoD needs to justify the cost of the Immediate Pension and demonstrate that it is an appropriate component of a modern pension scheme. (paragraph 63).
Our view is that the Immediate Pension remains an important means of recognising the different status of employment in the Armed Forces. (paragraph 66).
We recommend that the MoD continue to examine options for removing Immediate Pensions from the Armed Forces Pension Scheme and operating them as a separate component of Service pay. The more extensive use of targeted bonuses to improve retention in shortage areas throughout the three Services should be pursued with more imagination and urgency. The net effect of these measures would be that, without the distorting effect of Immediate Pensions, greater resources would be available within the Armed Forces Pension Scheme for full career and other benefits. (paragraph 70).
- The Department notes that the Committee's views the Immediate Pension (IP) is an important means of recognising the different status of employment in the Armed Forces. The IP offers security to Service personnel leaving mid-career, with not only a lump sum but also a regular income paid as a pension. It has long been recognised that some Service personnel who leave then with few transferable skills find it difficult to establish a suitable second career which has comparable remuneration to the Services. The IP provides a cushion for some individuals. This will apply for some personnel, notwithstanding current efforts to assist personnel to invest in their lifelong learning.
- The Department undertook considerable work on the IP during the review and considered a range of options, including moving the IP to 45 or to 50, linking it to rank, removing it, and the selected proposal of moving it to 40. In order to deliver maximum operational effectiveness, the Services need sustainable manpower structures that provide the right mix of age, rank, skills and experience. In this context, the Services as an employer see the IP as an important means of pulling personnel in their early thirties through to around age 40 (when they might otherwise have left for a more settled career to meet family needs); it is also valued as a mechanism to provide a reasonable level of security through the pension benefits provided to those to whom the Department does not offer extended careers due to fitness and other requirements. The Department recognises that the IP is not a perfect solution for all of its retention issues, and the availability of an IP at around 40 means that some of those skilled or experienced personnel who could have a longer career may leave. In addition, it is well understood that because of their different manning structure the IP is of greater value to the Army, and to a lesser extent the Royal Navy, and is of lesser significance to the RAF. There is considerable concern that the removal of the IP would have a damaging effect on retention which would then require large sums of money to be targeted on taxable pay-type incentives. The cost would certainly be no less than those of the IP and there could be no reasonable expectation of a saving to fund pension improvements. The Department also sought the views of individual Service personnel as part of the review process. This, together with evidence from exit patterns, Continuous Attitude Surveys and focus groups, supported the important "pull through" value of the IP for the individual. The focus groups in particular highlighted the importance of the IP as a benefit for the individual Service person. The Department has, therefore, concluded that both for employer and for the employee the IP is a valuable retention tool that could not be easily replaced.
- The Department uses a range of financial retention incentives (FRIs) designed to target particular shortage areas. However, the IP broadly reflects the general employment pattern which the Department would like to encourage, namely retaining people through their thirties and encouraging significant numbers to leave around 40 to maintain a young fighting force. The Department does, however, recognise that the IP does not fit all circumstances and can occasionally encourage those with skills to leave earlier than hoped. The development of a Bonus Option would allow the Department to test the value of alternative approaches without the high risk associated with abandoning the well-tried IP for an untested alternative. In the meantime, the Department tackles particular retention issues for specialist and shortage skills using targeted FRIs. Recent FRIs include Aircrew Retention, Royal Signals and the Royal Navy Warfare Branch. The packages offered contain both remuneration and non-remuneration measures designed to achieve a return of service. More generally, some other allowances are also recognised as providing retention incentives across the board; these include educational allowances (primarily Boarding School Allowance), Long Service Advance of Pay for house purchase and separation allowance. The Department believes that the best approach is the combination of these retention measures together with the parallel testing of the merits of alternative approaches.
- The Department continues to consider that the payment of a regular income for ex-Service personnel is more appropriately dealt with through pension than redundancy compensation. The Department further considers that all aspects of the remuneration package offered to Service personnel should be regarded as a manning tool and that it is reasonable for retention needs to be tackled through a range of measures including pension provision.
We do not believe the MoD's review of the Armed Forces Pension Scheme has been sufficiently thorough. We welcome the improvements proposed in some areas, particularly dependants' and ill health benefits. However, we reject the MoD's view that these should be funded by reductions elsewhere in the Scheme. We challenge the assumption that the Armed Forces have a generous pension scheme. This has led the MoD to limit its options at an early stage by imposing the constraint of cost neutrality on the review process and we fundamentally disagree with this starting point. It has had the effect of stifling innovation in the whole approach to the pensions review, and what has resulted is therefore what the Minister himself described as `a reshuffling of the pack'. We believe the Armed Forces deserve better than that. (paragraph 71).
- The Department has conducted a detailed examination of the AFPS and considers that the proposals represent a well-balanced and generous package, designed to meet the needs of Service personnel in the 21st century. The Department has looked at modern trends, including the movement towards defined contribution schemes and towards more menu driven benefits packages. However, these were not considered appropriate given the particular demands involved in Service life and the correspondingly high level of assurance of benefits sought by the Department for those serving in the Armed Forces, for their spouses and for their dependants. The alternative view of modern practice, comprising the most generous from a selective range of comparator schemes, would neither be tailored to the particular needs of Service personnel, nor would it constitute an economically sensible way of meeting our recruitment and retention needs. Nevertheless, the proposals are considered to compare very favourably with comparator schemes when considered as a total package rather than in terms of narrow comparisons of specific benefits. The proposals for a new scheme are founded on the principle of fairness through equalisation of benefit structures for Officers and Other Ranks and through the introduction of a true final salary scheme with reckonable service starting from the date of joining the Armed Forces. They also introduce real and substantial improvements for the most vulnerablethose affected by death in service, widows/widowers, non-attributable ill-health retirees and those suffering from substantial attributable disability. The Department considers these changes to be absolutely in line with modern good practice.
1 Armed Forces' Pay Review Body, Thirty First Report 2002 Cmd 5361 (International Comparisons-paras 1.8 to 1.11) Back