REFERENCES

  See list at Annex A.[6]

INTRODUCTION

  1.  The Council of the Officers' Pensions Society (OPS) noted the formal announcement in the 1998 Strategic Defence Review Essay No 9, "A Policy for People" (Reference A), that the Ministry of Defence (MoD) intended to review the Armed Forces Pension Scheme (AFPS), with the objective of introducing "arrangements which will meet the future manning needs of the Armed Forces in a way that is fair, cost-effective and affordable". Subsequently, the Minister of State for the Armed Forces wrote to the President of the Society (Reference B) inviting the Society to support this initiative. This response is offered in this context and in response to the earlier informal invitation from the Director of Service Personnel Policy (Pensions) to submit the views of the Council to this review. The Society has been pleased to contribute in a similar way in the past.

  2.  In 1994, the OPS submitted written evidence (Reference C) to the MoD Review of the AFPS and also presented oral evidence to the "Bett" Independent Review Team. Later, the Society discussed the recommendations of both these studies (References D & E) with the then AUS (Service Personnel) and followed this with a formal submission of our views (Reference F). There have been many significant developments in the fields of defence, occupational pensions and State pension provision since 1995, and we now present in this single document our up-to-date views on the more important issues the review will need to address.

THE AIM

  3.  The aim of this paper is to set out the OPS's view on the existing AFPS and the principal features of a revised Scheme for all ranks for the future.

CREDENTIALS

  4.  The validity of this submission is based on the fact that the OPS specifically represents those who are in receipt of Service pensions ie the Society acts on behalf of Service pensioners—not just the 53,000 retired and serving military officers and officers' widows who are members of the Society, but all ex-Service men and women, regardless of rank, and their dependants. To this end, the OPS is represented on the Executive Committee of the Confederation of British Service and Ex-Service Organisations, and is regarded as the lead body on matters relating to Service pensions and benefits.

  5.  The OPS Council's collective, and in several cases very recent, Service experience and involvement in commercial and public affairs mean that the Council is also alive to the needs of serving people, and to the realities of pressures on public finances. That said, we do not wish to usurp the authority and responsibilities of the Finance, Planning and Management Group (Service Personnel), (FPMG(SP)), and the Services Personnel Policy Board. However, the Society has a specific duty to represent the feelings of those who have completed their military careers, many of whom feel unfairly treated and have strong views on their pension arrangements.

CONTEXT

  6.  This submission is set in the context of the following recent developments and announcements:

(a)  The Strategic Defence Review (SDR), The OPS welcomes the assurance that the SDR was, from its inception, a policy led process, that "people issues" were kept at the heart of the Review, and that the attitude to people was in keeping with a "whole life" philosophy. The priority and attention given to Service pensions, and the approach now taken in this review of the AFPS, must be consistent with these general themes.

(b)  Government Review of Pensions. The OPS also welcomed the launch in July 1997 of the Government's wide-ranging review of pensions and we support the Government's general goal that pensioners should share fairly in the increasing prosperity of the nation. We call for this to be satisfied for Service pensioners through the structure of the AFPS.

(c)  Uniqueness of the Armed Forces. As recently as 3 February 1998, the Government (through a Department of Trade minister—Reference G) reaffirmed in Parliament that the Armed Forces are "a unique group of workers because of the work they do, the hours they put in and the places in which they operate". This argument enabled the Government to exclude the Armed Forces, and only the Armed Forces, from the legislation for a national minimum wage. The current AFPS embodies unique features so there is also no case for its provisions to "read across" to other public service schemes.

(d)  Putting Right What is Unfair. The Prime Minister pledged that a new Labour Government would "make fair what is unjust". In this context it is appropriate again to note the statement made by the then Secretary to the Cabinet in his address to the 1992 AGM of the Civil Service Pensioners' Association, namely "The mark of a civilised employer is the manner in which he provides for his retired employees". To these ends, the driving spirit which has shaped this submission is the search for fair treatment for today's as well as tomorrow's, Service pensioners and their dependants.

  7.  From the draft terms of reference, we note that the review is also to "take specific account of public sector policy in the provision of pensions". Although we have framed our response on our understanding of general public sector pensions policy, we would value being informed of the main tenets of the policy of which this review will take account.

  8.  The Society's philosophical starting point is, therefore, that the pension and compensation arrangements for Service personnel and their dependants should be at least equivalent to best practice in the public service, especially in so far as attributable death and injury benefits are concerned. Moreover, provision for public servants should generally reflect developments in private sector pension practice. It is submitted that this represents a legitimate expectation of Service men and women—currently serving personnel, their successors and also those already retired.

  9.  We now offer our main views on the existing AFPS and on the AFPS for the future as they apply to existing and future Service pensioners.

EXISTING SERVICE PENSIONERS

Anomalies and Inequities from the Past

  10.  Our main proposition is that it is insufficient for the MoD review team to conduct an appraisal of the existing AFPS simply to create a better régime for the future. We contend that it would be morally wrong to identify existing inequities and their consequences, only then to ignore the plight of those who are suffering. It is of no comfort to certain groups of Service pensioners only to have it acknowledged that their pension arrangements are unfair: they want what is unfair put right! In particular, the Government's oft quoted defensive argument that, in principle, there can be no retrospective changes to the AFPS has been breached so frequently that it is not a sustainable justification for inaction.

  11.  To this end, the Society continues to seek, as its main priorities, early easement for those Service pensioners who are suffering under the following three headings:

(a)  Pre-1973 Service Widows one-third rate Forces Family Pensions,

(b)  Post-retirement marriage Service widows' Forces Family Pensions, and

(c)  Pay Restraint/"Pension Troughs".

  Although the detail of these three issues is well known, we offer comments on each here, and more detail in the relevant Appendices to Annex B.[7]

One-third/one-half rate widows' pensions

  12.  In 1973, when it became the norm to pay a widow a pension of half her deceased husband's occupational pension, instead of one-third, the rules of the AFPS were changed. Thereafter, new entrants enjoyed a half-rate pension for their widows and those serving on 31 March 1973 were given the opportunity to "buy in" their previous service to qualify their widow for a full half-rate pension. From 1973 onwards, the new provisions are seen as fair and proper. But, the absurdity and unfairness of the situation is that those whole plight prompted the change in provision—that is those who completed their service before the block date, who did not have the opportunity to buy-in and whose widow's entitlement remained at one-third—were the very people to whom the new provision did not apply. Ironically, these elderly widows are predominantly of the Second World War generation: indeed, many of them themselves served in uniform during the War with no pension entitlement. The living expenses of these elderly Service widows are no less than those of younger widows who now receive a one-half rate pension.

  13.  As recently as 17 July 1998, the then Secretary of State for Social Security stated in Parliament, (Reference H):

"This House rightly places great emphasis on the concerns of older people—people who have worked hard all their lives either out at work or bringing up a family: the generation who fought in the war. They are entitled to security in their retirement. They deserve dignity in their retirement."

  We now call for this high-minded principle to be put into practice. We should point out that the OPS is not seeking an increase in the pensions of those Service widows whose husbands did not, for whatever reason, buy-in when they had the opportunity to do so.

Post-retirement marriage widows' pensions

  14.  Similarly, in 1978, the provisions of the AFPS were changed to allow widows of a post-retirement marriage to receive a pension based on any service her late husband gave on or after 6 April 1978. Those whose husbands either completed their military careers before the block date, or gave some of their reckonable service prior to the block date are, again, left permanently disadvantaged, notwithstanding the principle was conceded over 20 years ago. This issue has borne particularly harshly on the Armed Forces because of the restrictions placed on young officers marrying, the frequency of unaccompanied overseas postings and the relatively early compulsory retirement age. The prevailing rules result in, for example, the grossly unfair situation where a widow does not receive a Service pension in spite of many years of marriage to a Serviceman who gave a full career service to the nation.

Pay Restraint/"Pension Troughs"

  15.  Although probably neither originally intended nor even envisaged, whenever the Government imposes a short-term pay restraint measure, there is a permanent and ever-increasing adverse effect on the pensions of those who retire while such a measure is in force, and also on the pensions of any dependants. Because of the nature of the AFPS, pay restraint has a significantly greater impact on Armed Forces pensions than on other public service pensions. Deeming of recommended, but not yet introduced, pay rates for pension calculation purposes solves this gross unfairness. But, Servicemen were last allowed deeming in 1984; since then Service pension rates have been calculated from pay rates in force on the date of retirement.

  16.  The problem does not only exist in the past: it is prevalent now. Service pay awards have been staged in four of the last five years. Thus, it appears now to have become the accepted practice, by the present Government as well as the previous administration, to disregard the long-term consequence for those whose pensions are permanently depressed by the short-term expediency of pay restraint. The staging of pay awards in 1998 occurred despite the harsh words the Chairman AFPRB wrote in his last report to the Prime Minister (Reference I):

"We are seriously concerned that this practice (of staging pay awards) has deprived our Service men and women of a substantial proportion of their recommended annual salaries and is permanently damaging to the pensions of those who retire between stages. We urge that this is not repeated. This year our discussions with Service personnel revealed widespread anger at staging."

  17.  Not only should deeming of pay rates for pension calculation purposes be allowed in future if it proves necessary to impose pay restraint measures, some easement of the position of the victims of the worst "pension troughs" of the past should be given urgently. The "pension trough" phenomenon stands out as a blatant and obviously unfair aspect of the AFPS, and the positions of those trapped are getting progressively worse.

  18.  Other matters which bear on existing Service pensions are described in detail in Annex B[8] to this paper. We conclude this section on existing pensioners with the call for any financial savings which might emerge as a result of changes in the existing pension arrangements to be used first to ease such instances of unfairness.

SERVICE PENSIONERS OF THE FUTURE

General

  19.  We feel that the aim of this further review of the AFPS must be to identify the features of a revised or replacement scheme to meet the needs of the Armed Forces, and also the legitimate expectations of Servicemen and women, in a changing world, in a fair and cost-effective manner. It must take account of the outcome of the ongoing MoD Compensation Review and must not perpetuate the shortcomings of the existing Scheme.

  20.  Affordability. It is our contention that pay and pensions reviews should be determined essentially on the basis of appropriateness rather than arbitrarily decided levels of affordability. In any case, the affordability of a new AFPS would need to be considered as a long-term issue and in a different light from the affordability of a pay award, especially if there happened to be particular budgetary pressures in the short term. Also, in extremis, what is said to be the affordable maximum could preclude the introduction of appropriate pay and pension provisions. Accordingly, whilst being mindful of the cost of its proposals, the MoD Compensation and AFPS Review Teams should not be constrained by arbitrarily imposed cost levels. Once presented, it is for the Government to decide which recommendations it can afford to implement—and to what degree—and which it cannot. Otherwise the management needs and the legitimate expectations of Service men and women will not be met, with inevitable consequences for recruiting, manning and retention.

The Scheme Structure

  21.  Funding. We contend that improvements in the provisions of the AFPS which have been made in the last two and more decades have almost invariably resulted from a requirement to comply with national or European legislation. Even Redress of Grievance Procedures and the recently introduced Internal Disputes Resolution Procedures cover only present AFPS provisions. The fact is that the Armed Forces' top management is effectively powerless to bring about overdue changes in the provisions of its own uniformed employees' occupational pension scheme. On the other hand, the "Bett" Independent Review called for personnel policies and practices to be flexible and capable of change to match future and often unforeseen needs. The OPS Council has long maintained that the present "pay-as-you-go" part-Treasury/part-MoD/part individual funded system remains a major impediment to the freedom to change the existing AFPS. Bett's clearly preferred option for the future AFPS was that it should be funded, for reasons of flexibility and, importantly, for reasons of long term affordability and cost savings. The Society remains strongly in favour of the adoption of an independent, funded AFPS for the future. Moreover, a reduction in the Government's unfunded pension scheme liability would be in the public interest in the longer term.

  22.  Contributions. The Society found the recommendation (No16/1R 8.19) of the MoD's internal Review that a new AFPS should be non-contributory for consistency with existing pension arrangements impossible to justify, given the Defence Secretary's 1989 statement in Parliament (Reference J[9]) that "although the scheme is formally described as non-contributory, it in fact involves an effective contribution from a Serviceman's salary". We can only repeat that retired Service men and women, and their dependants do not regard past adjustments and abatements in the calculation of their pay as notional, but see themselves as having contributed to their own pensions and also the pension they expect to be awarded to any surviving spouse. We, therefore, call for the new AFPS to be a clearly visible contributory, funded scheme.

  23.  Ownership and Involvement. The sought after genuine interest and involvement in pension arrangements by those now serving, and their successors, will be encouraged only through the sense of ownership promoted by acknowledged contributions. And only through the freedom of a contribution-based, funded scheme, to which Service men and women have actually contributed while serving can we expect reasonable assurance that the purchasing power of pensions will not stand still with time, as now, but that in retirement these people will share the forecast increased prosperity with the rest of the community. In sympathy with our line on funding and contributions, we again strongly advocate the establishment of a Board of Trustees, representative of the Scheme's membership, to oversee the AFPS.

Optimisation of the AFPS

  24.  The maximum rates of retired pay/pension under the AFPS represent 48.5% of the representative pay rates for rank and length of service. A main conclusion of an independent study by Union Pensions Services Ltd, commissioned by the OPS, is that the proportion of Service retired pay/pension paid to AFPS members at age 55 falls short of providing a full career pension—which is the stated aim of the AFPS—when compared with the full career pensions provided by comparable schemes. For example, at the age of 55, the Police pension scheme pays 52.8% of final pay.

  25.  The AFPS is presently optimised towards early leavers, with fast accrual rates leading to the granting of immediate pensions from age 37 (officers)/40 (other ranks). However, early pensionability exists to meet the manning requirements of the Armed Forces—ie early pensionability is provided in the interests of the Services. There is, therefore, no justification for paying those retiring at higher ages, especially after a full career, a proportionally lower pension than others in the public service. The consequences of this arrangement are aggravated in the case of spouses' pensions.

Levels of Spouses' Pensions

  26.  Inland Revenue limits allow the granting of occupational pensions equivalent to two-thirds of salary rates. Thus it can reasonably be expected that a one-half rate widow(er)s' pension—which is now the norm—would equate to one-half of a two-thirds rate pension. However, this is not the case with the AFPS. As already mentioned, the maximum rate of retired pay/pension under the AFPS represent 48.5% of the representative pay rates. Thus, the maximum rates of Service widow(er)s' pensions are one-half of only 48.5% and not half of two-thirds of representative pay rates. Per contra, Police widow(er)s' pensions are calculated from two-thirds final salary rates, prior to any commutation of pension. Again, there is no justification for this marked disparity between the provisions of the AFPS and a comparable public service scheme.

Spouses' Pensions for Life

  27.  The "Bett" study "found the practice of stopping widows' pensions on re-marriage unsatisfactory" regardless of whether or not the member's death was attributable to service and recommended that, "in line with private sector practice, a widow(er)'s pension should be payable for life". Since "Bett" reported in 1995, this provision has been introduced in the public service, namely for Local Government officers. It should be introduced into the AFPS without delay. We take the precaution of making the point that it would be inappropriate for this measure to be introduced only for War Widow(er)s and not simultaneously for Service widow(er)s.

The Armed Forces Pay Review Body (AFPRB)

  28.  We consider that the interests of the taxpayer, the MoD as the employer, and individual Service personnel are well served by the AFPRB. In principle, we would like to see a comparable body monitor and make appropriate recommendations about the AFPS: indeed, we advocate the expansion of the AFPRB's remit to embrace the provisions of the AFPS—at least until the establishment of a new funded, contributory scheme overseen by a Board of Trustees. In fact, we suggest that it is logical for the AFPRB to be involved in the provisions of the AFPS since the AFPRB's abatement calculation is based on an appraisal of the worth of the AFPS as compared with other schemes.

  29.  There is a further, fundamental point to be made about the abatement to pay. The abatement is calculated as the additional cost of the AFPS as compared with the schemes of comparable employments. This means that the entire additional costs of the special provisions of the AFPS are being met by the Scheme members. But these additional costs arise, at least in part, from the special requirements set by the MoD for its uniformed employees in the Armed Forces. For example there can be no doubt that the immediate pension provision from age 40 acts as a strong incentive for skilled and experienced senior NCOs not to leave sooner. It is inequitable that members of the Armed Forces should fund these additional costs when it is the employer who sets the special requirements. There is a prima facie argument for the MoD itself to bear the additional costs. On this basis, members of the AFPS are paying an unfair share of the cost of the Scheme and so the basis of the abatement—and its level—need to be reassessed. Indeed, elsewhere in the public service the immediate "pensions" of those who retire voluntarily before their compulsory retirement age are funded in the interim by the Government department concerned, in the form of "annual compensation payments".

 "All of One Company"/"Band of Brothers" Philosophy

  30.  Rates of Service Retired Pay are based on the concept known as the "Band of Brothers" (Reference K) viz: "By tradition, members of the Armed Forces with the same rank and the same number of years of reckonable service retiring in any year have almost all been awarded the same pension, regardless of their actual pay either on retirement or discharge, or earlier in their career".

  31.  Thus, current policy and practice mean that additional pay—notably Flying Pay—is excluded from the calculation of terminal benefits. The "Bett" Independent Review recommended that AFPS pension benefits should be based upon the best 12 consecutive months' earnings over the last 36 months of service. Subsequently, the MoD decided that additional pay should not be subsumed into basic pay, but no decision has yet apparently been made on whether additional pay will be made pensionable. We have noted two recent significant departures from the "Band of Brothers" concept. First, there was the announcement in July 1997 (Reference L[10]) medical and dental officers' pensions would be based on new medical and dental pay scales rather than on representative combatant pay rates. Secondly, there was the announcement in June 1998, (Reference M[11]) that the retired pay of senior officers would in future be based on pensionable earnings, ie on the total amount of basic pay received during the year prior to retirement, or during any 12 months period within three years prior to retirement, whichever was the higher. Moreover, for these officers the maximum rate of retired pay is now to be 50% of pensionable earnings (instead of 48.5% of a representative pay rate).

  32.  The Society's position on this issue is that it is the prerogative and responsibility of the FPMG(SP) to decide whether, and if so to what extent, they would wish to see the "Band of Brothers" concept retained as an intrinsic feature of the Armed Forces pay and pension schemes. At this stage we merely draw attention to the anomalous situation: we imagine the issue is being addressed in the design of the new pay structure to be introduced by 1 April 2000.

Benefit System

  33.  We have noted the shift by some reputable British "blue chip" companies from final salary (ie defined benefit) occupational pension schemes to money purchase (ie defined input) schemes. This is a fundamental issue and, whilst we cannot produce detailed modelling of options, it is self-evident that final salary schemes have the major advantage that they are guaranteed and individual members can therefore make forward financial plans with a greater degree of confidence.

FINALE

  34.  Given the unique role of the Armed Forces, the character of military service, and the priority given in the SDR by the Government to "people issues" and to a "whole life" approach, we have argued—by virtue of the unique role of the Armed Forces—that the provisions of the AFPS should be at least equivalent to best practice in the public service and also match general practice in UK private sector schemes.

  35.  An independent study commissioned by the OPS has shown that the existing AFPS is not in many respects as good as others in the public service, especially in relation to full career pensions, spouses pensions and in-service death and injury benefits. But the worst aspect of the existing pension régime is the established unfairness under which many Service pensioners suffer. These pensioners are bitter; they view cynically the high-principled cant of politicians and the hackneyed excuses (especially the breached principle of "no retrospection") repeatedly used as justification for inaction by successive governments. We have highlighted the "pension trough" and the pensions of two groups of elderly Service widows as a priority for easement. We contend that it is morally improper to allow these, and other, acknowledged shortcomings to persist. The costs of establishing equity on these issues are relatively small, especially as they can be ring-fenced to the Armed Forces in the same way the Government has been able to do in the case of the national minimum wage. Furthermore, costs will rapidly reduce with the passage of time. We know that the money can be made available if the social pronouncements of the Government are matched by political will.

  36.  As far as Service widows are concerned, frustration has led them to seek a solution elsewhere and, as we have reported, the Society has co-ordinated and submitted, on behalf of 22 applicants, an application to the European Commission of Human Rights. We have recently heard that the Application will be ruled "admissible" on strictly legal grounds. Nevertheless, the very strong moral case remains undiminished and the Society will continue pressing for the removal of the unfair arrangements which apply to these categories of Service widows.

  37.  Increasingly, the MoD is not seen as a good and honourable employer. Service people, in common with those in all types of employment, are taking more interest in long-term financial planning, including their occupational and State pension expectations, and are increasingly questioning the adequacy of the existing pension arrangements.

  38.  For the future, we have called for a new AFPS which is responsive to changing military requirements, wider social norms and the needs of scheme members. It must also keep the levels of pensions and benefits in line with the increasing prosperity expected to be enjoyed by the nation generally. So long as AFPS pensions and State retirement pensions are index-linked only to the movement in prices, as reflected in the RPI, Service pensioners will continue to be excluded from sharing in the increasing prosperity of the nation. (It will be recalled that prior to 1980, public servants' and State retirement pensions were increased by the larger of the annual increase in the RPI and the Average Earnings Index.) We propose that the future AFPS should be funded, contributory and overseen by trustees. We have mentioned some of the provisions which should be included in the scheme—and, in an earlier submission to the MoD Compensation Review Team, suggested some additional benefits. We have deliberately avoided the issues, such as pensions for partners, which are policy matters for the FPMG(SP).

  39.  We hope this contribution will assist the initial discussions and in the delivery of an appropriate successor AFPS. We stand ready to make further contributions as the review moves forward.

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