New Clause 4 — Full Career Pensions

Orders of the Day — Armed Forces (Pensions and Compensation) Bill – in the House of Commons at 3:34 pm on 6th May 2004.

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'The Secretary of State shall provide mechanisms to ensure that all personnel in this scheme who have completed 35 years service, but are not retained in service after their 55th birthday, receive pension benefits which are based on 66.67 per cent.of their final salary.'.—[Mr. Gerald Howarth.]

Brought up, and read the First time.

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

I beg to move, That the clause be read a Second time.

Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

With this it will be convenient to discuss new clause 5—Early departure—

'(1) Those serving 18 years and having reached age 40 (whichever is later) shall be entitled to a system of Early Departure Payments.

(2) Individuals meeting the requirements of subsection (1) shall receive payments until the preserved pension comes into payment at age 65.

(3) The Secretary of State shall by order set out details of these payments.

(4) The payments will be monitored by the Armed Forces Pay Review Body which will submit to Parliament a report on any changes.'.

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

The last vote was close, and I am sure that the Minister will take the message back to his Department.

The objective of new clause 4 is to allow people to earn a full career pension in the armed forces. Under both the current arrangements and the new arrangements, the armed forces pension scheme is the only scheme in the public sector that does not offer genuine full career benefits up to the public sector benchmark or the limits allowed by the law, even for those who serve a full career. Only a very few—those who join when they are very young or those who reach a senior rank and are therefore allowed to serve beyond the age of 55—can accrue maximum benefits.

It has been calculated that it is virtually impossible to earn more than 62.5 per cent. of one's final salary unless one joins extremely early or one is promoted to a high rank and invited to stay on. It is perhaps a paradox that the Labour Government—should I call them the new Labour Government or the tarnished Labour Government?—are proposing a scheme in which those on the highest salaries command the best final salary pension arrangements, and I am sure that others have also noticed that.

The unusually low normal retirement age of 55 is required not by the armed forces but by the employer for reasons, many of which are entirely legitimate, relating to the age profile of personnel. It is physically demanding and arduous to be a member of the armed forces, and it is therefore right and proper that those services predominantly employ the young and fit, so the unusually low retirement age of 55 is legitimate. The low retirement age is not a perk of the job, and it is not a dispensation to soldiers, sailors and airman to retire at 55 because they have done such a good job. It principally benefits the employer, the Ministry of Defence.

The new arrangements will seriously inhibit the opportunity to earn a full career pension through service. Few servicemen and women join young enough or serve long enough to earn full career benefits, and extending service length while the retirement age is low will exacerbate the problem. It is disingenuous at best to structure a scheme in which more than 90 per cent. of its members are debarred from earning a full career pension without buying additional voluntary contributions. The normal retirement age is a misnomer; it is actually the age at which the full career pension is payable. Allowing personnel to remain in service for 37.5 years would allow them to earn a full career pension at the public sector benchmark and the current limit of the law, but the majority, who are constrained by the normal retirement age of 55, cannot obtain a full career pension.

We believe that the scheme should be altered to allow those who serve a full career to earn full benefits of 66.67 per cent. Options to achieve that include increasing the normal retirement age, increasing the terminal grant, improving the accrual rate—as Members of Parliament have in order to assist ourselves, the fact of which has not been lost on the services—or introducing shared-cost additional voluntary contributions. Such measures are widely available in other schemes for occupations where short careers are common—not only Members of Parliament, but, for example, the police. It really is an issue out there that we have changed our scheme to suit the particular requirements of service to this House. I personally think that those changes are entirely reasonable and appropriate and reflect the fact that most of us provide a service to the House of Commons, but what is good enough for us we should regard as good enough for our armed forces.

The fact is that at 55 the armed forces employee has very limited prospects of earning a second career pension of any comparable value and is therefore uniquely disadvantaged among those employed in the public sector. That experience is shared in this House. Members who leave, voluntarily or involuntarily, at the age of 55 and having served in particularly important Departments such as the Ministry of Defence might well find themselves with handsomely rewarded consultancies or directorships; but for every one of those, I venture to suggest that many others will have been in the foot soldier category and not find such lucrative employment possible. A reflection of that fact of life informs the current scheme and should inform the new scheme.

The new clause would place on the Secretary of State a requirement to provide a mechanism to deal with that. We did not spell out what that mechanism should be, but left Ministers with the flexibility to devise a scheme that uses some of my suggestions to enable the intent of the new clause to be met.

I mentioned the parliamentary scheme, but let me for the record remind the House that the police service scheme's accelerated accrual rate in the last 10 years of service could be replicated for the armed forces. The Government are fond of saying that considering comparable public sector schemes is part of their benchmarking exercise in trying to come up with the right solutions for the armed forces pension scheme. The police are an example of a public service that is similar to the armed forces, as police officers also—all too often, sadly—put their lives on the line for the security of our nation. The police service's scheme recognises the particular difficulties that its employees face. That gives the Minister something to go on, and I hope that he will accept the new clause.

New clause 5 would add to the Bill the provisions of the early departure scheme, details of which were given to Members only during our considerations in Standing Committee—they were not available on Second Reading. The new clause sets down the bare bones to give the scheme specific parliamentary protection and to leave it less vulnerable to ministerial manipulation—although, in fairness, the Defence Committee thought that the scheme had enough flexibility to enable Ministers to manage the business of manning control in the armed forces.

The immediate pension scheme is a not inexpensive benefit that accounts for about a third of the pensions budget. That substantial amount of expenditure has meant that benefits for full career servers and their dependants were depressed well below the benchmark and modern good practice.

The Ministry of Defence proposes to change from the immediate pension scheme to the early departure scheme for three principal reasons. First, it will improve the benefits for full career servers and their dependants in the overall cost-neutral constraint that applies to the Bill. Secondly, it will comply with Green Paper proposals on the wider subject of pensions, which will make it illegal to pay a pension to someone who has not reached the age of 55. Thirdly, it will remove the inequities between officers and other ranks that are inherent in the immediate pension scheme and are caused by different accrual rates for qualifying periods.

Both the immediate pension and the early departure schemes were and are designed as manpower control tools to improve retention. That is a matter for principal personnel officers and is not pensions business, but the efficacy of the proposed early departure scheme as a manpower control tool is speculative. We simply cannot judge its effectiveness today. We know the current effect of the immediate pension scheme on retention and, to a lesser extent, recruitment. However, the proposal contains an element of leaping in the dark. The early departure scheme will be used for manning control and we shall not know for probably 20 years whether it will prove efficacious in Ministry terms in retaining the skills that we need to keep.

Photo of Angus Robertson Angus Robertson Shadow SNP Spokesperson (Defence), Shadow SNP Spokesperson (Foreign and Commonwealth Office) 4:00 pm, 6th May 2004

The Government are not taking a leap in the dark when we consider the examples that the Ministry of Defence has worked through to compare the early departure scheme payments with the immediate pension scheme payments. Under the new scheme, the amounts are halved per annum. That is the effective difference for all ranks. Does the hon. Gentleman believe that that will make the new scheme more attractive to those who are currently serving? Will they wish to change to a scheme that will mean the effective halving of their annual income?

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

The hon. Gentleman makes a good point. He is right that the new scheme puts especially those who leave early at a disadvantage. As the Under-Secretary said earlier, those who are currently serving and remain in service on 6 April next year will have to decide for which scheme to opt. They must determine whether to choose the new scheme and substantially reduced benefits. They will have to trade that against, for example, the welcome salary multiplied by four for death in service under the new scheme. Again, that is equivalent only to the provision that the House makes for its Members and therefore, although it is welcome, it is not exceptional.

As I said in Committee, I envisage some difficult conversations in military households throughout the land, especially when Her Majesty's armed forces are called on to undertake war-fighting operations or dangerous peacekeeping operations. There will be pressure on soldiers from wives who say, "If you are killed and you stay in this scheme, I get one and a half times your salary, but if you opt for the new scheme and you are killed, at least the children and I will get four times your salary." Against the current background, that will be a compelling argument because it is relevant today, but not perhaps in 15 years, when the person becomes entitled to an early departure scheme payment.

Angus Robertson is right. A staff sergeant who leaves the service at the age of 40 on a pensionable salary of £30,820 will get a lump sum of nearly £30,000 under either scheme, but his annual pension will effectively be halved. His early departure payment at the age of 55, uprated for inflation, would be about a quarter or a third less than he would receive under the immediate pension arrangements. The overall saving to the Government that has been calculated in that case would be about £57,000. Equally, it has to be said that if that same staff sergeant retired at the age of 54—which is much less likely, as they tend not to stay on that long—there would be a cost to the Government of £56,000. Given the present profile of service, however, it is much more likely that the Government will save money.

I do not wish to labour these issues, because they were extensively debated in Committee, but concerns have been raised in the Defence Committee about the early departure scheme. We can see the purpose of it. It is true that it will deliver £100 million a year in savings to the Ministry of Defence, which could be redeployed elsewhere, but it will disadvantage some of those who are currently serving and will be serving. The issue will cause considerable grief in households up and down the land, and the least that the Minister can do is to ensure that the scheme is put in the Bill. I look forward to hearing his comments when he winds up this debate.

Photo of Rachel Squire Rachel Squire Labour, Dunfermline West

I welcome the details that the Government have provided on the early departure scheme since the Select Committee produced its report and since our Second Reading debate. I was not on the Standing Committee, so I would like to take this opportunity to ask the Minister a couple of brief questions. First, given that the early departure scheme will not attract index linking to inflation, how does the Ministry plan to deal with the fact that the real value of the scheme will apparently decrease over time? Secondly, what consideration has been given to the possibility of payments to personnel differing substantially over time in the early departure scheme, possibly leading to grievances and disputes between personnel who find themselves receiving very different payments?

Photo of Colin Breed Colin Breed Shadow Minister, Defence

I should like to make a couple of points in support of the two previous speakers. I just do not believe that it is beyond the wit of the MOD to address the full career pension issue. The current concerns seem totally disproportionate to the likely cost involved. If the Government could address some of the issues that are engendering criticism and objections without it costing them a significant amount within their total budgetary constraints, I hope that even at this late stage they will consider doing so, and give us an indication accordingly. The percentage difference is relatively small, and the measures seem likely to apply to so few people that the issue ought not to be such a running sore for some.

Secondly, in relation to the early departure scheme, I want to mention the issue of erosion over a period of time. Thankfully, we live in low-inflationary times. I pay tribute to the Government for that—it is very welcome indeed, notwithstanding the slight interest rate rise earlier today—but many of us are beginning to grow used to it. However, we are discussing schemes that will have effect long into the future—who knows what will happen then?

We do not want to make the mistake, which was made in the past, of producing a so-called pension trough. It appears to me that we held back during a period of high inflation and wage restraint, so we have had the trough going forward. That subject has been debated. Without any index linking and without a clear indication of how the Government would address that particular potential problem, the early departure scheme runs the risk of experiencing exactly the same difficulty in a few years. If we are to learn from the past, perhaps we should envisage that the pension trough issue will arise again if we go into a period of high inflation, and undergo some pay policy restraint. We must face up to the issue, even if it is not totally apparent in today's inflationary climate.

Photo of Angus Robertson Angus Robertson Shadow SNP Spokesperson (Defence), Shadow SNP Spokesperson (Foreign and Commonwealth Office)

I want to make a brief contribution on a subject that I raised in an intervention, which involves the early departure scheme and, in particular, how it might impact on communities that are perhaps viewed as more peripheral and which have a low-wage economy. Some of those communities also have a significant military footprint, which is certainly the case in my constituency, where a third of all service personnel north of the border are stationed.

The early departure scheme is not an academic exercise. It is a real, important issue affecting the income of many people, particularly in lower ranks, when they make decisions on their future and where they see themselves and their families living. Mr. Howarth is right that many people will have to make a difficult decision on whether to remain in the current scheme or to transfer to the new one.

Politicians are often accused of not having a particularly long-term view. I want to try to break that mould in a small way in addressing this scheme and how it may impact in 10, 20 or even 30 years' time. That is what we must do in considering the issue. I want to paint a theoretical picture, although I would be grateful if the Minister confounded me and reassured me that my fears are misplaced.

According to some trade union estimates, the area that I represent—Moray—has the lowest average wages in Scotland, although central Scotland has areas of significant poverty and low wages. It is also a fact that many hundreds, if not thousands, of service personnel take early retirement at an age when they can still enjoy a second career. They do so with great happiness. Moray is a tremendously beautiful part of the country with a high quality of life and there are job opportunities, but, because of the nature of the market, those jobs are not particularly well paid.

One reason for many of those service personnel being able to remain in the community to which, often, they have moved from elsewhere in Scotland or down south is that they have a cushion that is provided through the immediate pension scheme. I am concerned that, if those who enter the service or choose to go into the early departure scheme see that annual payment effectively halved, a significant number might choose not to remain.

The House should remember that I am painting a picture of what things may be like in 10, 20 or 30 years' time. The population projection for my constituency is a decline of up to 38 per cent. by 2018, so the potential double-whammy of significant population decline and economic disincentive caused by the new scheme will not help the area.

I have raised the issue with the Minister, and he has signalled an interest in and understanding of the question. I am keen for him to signal that he understands that there may be a significant impact on communities in Scotland, and I imagine that that is the case not only in Moray but in Fife and around the Clyde. Is he confident that the new early departure scheme arrangements will not have a negative impact on the number of retiring personnel who wish to stay on and contribute in an important way to local economies, such as those in Moray, Fife, the Clyde or elsewhere in the UK?

Photo of Mark Francois Mark Francois Opposition Whip (Commons) 4:15 pm, 6th May 2004

I want to make two brief points in this debate. I should declare an interest, as I am the president of the Rayleigh branch of the Royal British Legion—and proud to be so—and I am in the process of applying to become an associate member of the Rayleigh branch of the Royal Naval Association, which is based in part on the fact that my father, Reginald Francois, served in the Royal Navy in the second world war.

I wish to address my remarks mainly to new clause 4. First, I want to follow up the point made by my hon. Friend Mr. Howarth about the comparison with the pension scheme that Members of the House enjoy. I am pleased that the Ministry of Defence has decided to match the four times death-in-service benefit, which I am sure will be popular among service personnel and their families, and it is appropriate that there is now equanimity between the benefit that we enjoy and the benefit that those who are prepared to fight on behalf of our country will enjoy.

It is important to remember that, relative to the MOD's scheme, our pension scheme is contributory, which is not always brought out when it is reported in the press. Members who chose the option of fortieths will now be paying 9 per cent. of their gross salary, so it is a fair comment that we are chipping in from our salaries under our scheme. I entirely understand why those in the services, who are very sensitive to changes in their pension arrangements, for reasons to which I will refer in a moment, would look with understandable scrutiny at our scheme, and perhaps would not be slow in making comparisons with any changes that relate to them. If I were a serviceman, I would be doing exactly the same, and it is right that we in the House should acknowledge that understandable desire to match in some respects what we have.

That leads on to my second point, which I have raised previously in the House in other contexts: the importance of retention in the armed forces. Arguably, people in this day and age are much more sensitive to pensions and changes in pensions than perhaps they were 10 or 20 years ago. The pensions market and the structure of pensions have changed a great deal in that time. There has been the business of Equitable Life and other problems in the pensions industry, which I will not rehearse again this afternoon. Suffice it to say that, because of a number of those changes and events, people now pay much closer scrutiny to their future pension than they might have done two decades ago, and that affects their career planning. In the context of this debate, that also firmly affects the decisions that they and their families make about whether, as they approach middle age, they retain their post in the armed forces or move on to seek an alternative career. Ministers must therefore be careful before they change any of the arrangements, as they may start to see a knock-on effect on retention if they get some of the issues wrong.

My hon. Friend the Member for Aldershot dealt very well with the technicality of that, and Angus Robertson made a thoughtful contribution about how such things play out over the long term. I remind the Minister that although recruitment figures for the armed forces remain healthy, almost as many people are leaving at the moment as are joining. The key is the net figure and the overall ability to retain skilled and experienced personnel. That is even more important, because no matter how enthusiastic the recruits, they cannot, at least in the first few years, make up for the experience that the armed forces lose when an experienced non-commissioned officer, such as a colour sergeant in the infantry or a staff sergeant, decides to leave the Army. We face the danger of a gradual hollowing out of our armed forces as more and more experienced personnel leave and are replaced by recruits without experience. That is a worrying trend over the long term, and Ministers must deal with it if they are to be consistent. As I have said, I have raised the point before.

The future pensions of servicemen and women are becoming increasingly important to their calculations and their decisions on whether to stay or go. I issue a plea to the Minister, as others have done: the Government must think very carefully before making any long-term changes. They must be very mindful of the likely effect of such changes on the retention of experienced key personnel. After all, it takes a great deal of time and money to train them. The Government must be extremely careful in everything they do that affects service pensions, because it will begin a knock-on process that may prove very difficult to reverse if Ministers get it wrong.

Photo of Mr Ivor Caplin Mr Ivor Caplin Parliamentary Under-Secretary, Ministry of Defence

I welcomed the speeches of the hon. Members for Moray (Angus Robertson) and for Rayleigh (Mr. Francois). Perhaps the hon. Member for Moray and I could discuss his points in more detail outside the Chamber. I found them especially pertinent, given my ministerial responsibility for veterans. As for the hon. Member for Rayleigh, I was particularly interested in what he said about recruitment and retention. As he and his hon. Friends know, I pay close attention to those issues. The 20,000 people who leave each year become veterans, and it is important for us to look after their interests as well.

Photo of Angus Robertson Angus Robertson Shadow SNP Spokesperson (Defence), Shadow SNP Spokesperson (Foreign and Commonwealth Office)

I appreciate the Minister's invitation to discuss with him the issues that I raised. May I now ask him to put something on record? Does he believe that the new early departure scheme will not have a negative impact on the number of retiring personnel who wish to stay on and contribute, in an important way, to low-wage economies, often in peripheral areas?

Photo of Mr Ivor Caplin Mr Ivor Caplin Parliamentary Under-Secretary, Ministry of Defence

I understand the point that the hon. Gentleman is making—we have touched on it briefly before—but I have done no detailed work on it. That is why I suggested that we discuss it at some point in the future.

My hon. Friend Rachel Squire mentioned index-linking. We have adopted the same approach to the early departure plan as we currently apply to the immediate pension. It is not index-linked, but it will be once a person reaches the age of 55, which seems to us appropriate. My hon. Friend will recall that at one stage there was a slight error on the MOD website; we corrected it in response to the Select Committee's report.

As for my hon. Friend's second point, I do not expect any major changes in early departure plans. As currently happens with the immediate pension, people will sign on for the terms offered to them at the time. I do not envisage any small changes in those terms.

The 66.67 per cent. of final salary mentioned in new clause 4 will obviously have a cost implication, of which I am sure Mr. Howarth is aware. Under the Bill, personnel who serve until the normal retirement age of 55 and have served for 35 years under the new pension scheme will receive pension benefits comparable with those available under the current scheme, which will be paid much earlier than those in most other schemes. As the hon. Member for Rayleigh pointed out, dependants' benefits will be significantly improved. Personnel who wish to improve their pension benefits further will have the opportunity, as they do now, to purchase additional voluntary contributions. The extended accrual period of 40 years will provide sufficient headroom for them to receive benefits up to the current Inland Revenue limits should they wish to do so.

The new scheme has been designed to be equitable, treating officers and other ranks in the same way with a common, even accrual rate. The Select Committee's report applauded us for that. The new clause would benefit only a limited number of personnel who serve a full career, as the majority will have left before the new early departure point—18 years' service, at a minimum age of 40. I feel that it is therefore counter to equality of treatment.

I shall also deal briefly with new clause 5, and I do not think that the hon. Member for Aldershot will be at all surprised by my response. I do not know how many times he has heard this argument, but I do not propose to accept the new clause for the reasons that I outlined on Second Reading and in Standing Committee. Such details should not, in my and the Government's view, be included in primary legislation.

As the hon. Gentleman rightly acknowledged, I gave the Standing Committee two detailed notes on the early departure plan and put copies in the Library. He was kind enough to say in Committee that they were "clearly written" and "relatively easy to understand". I take that as a compliment for a Ministry of Defence document of that type. The documents will form the basis of the separate statutory instrument setting out the scheme rules. However, it is important that I point out that the early departure plan is not part of the new pension scheme, as the benefits paid under it are not pension benefits.

I have no particular difficulty with some of the separate points made in new clause 5. Indeed, the first three subsections simply repeat details that were set out in the notes that I published previously. The only new point is in subsection 4, which seeks to embrace the early departure plan within the scope of the independent, external validation review of the new pension scheme that we debated earlier.

As I have just said, EDP benefits are not pension benefits, and that is a large part of their attraction to our armed forces. They have allowed us to develop more flexible arrangements that, I hope, will better meet the needs of our service personnel while providing the savings to fund significant improvements to widows' benefits and to help offset the rising cost of longevity. However, I want to make it clear that we plan for the AFPRB to look at the level and broad design of the EDP within its quinquennial review and as part of its broad remit with respect to remuneration.

I do not intend to accept the new clauses, but I hope that what I have said reassures the House. Perhaps we can move on.

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

I am delighted to hear that the Minister has found another purpose for the AFPRB, which serves further to undermine his earlier argument against my proposals. I certainly welcome the fact that he has suggested that the early departure payments scheme should be extended to the AFPRB for its consideration. I am sure that the House will welcome that.

I appreciate the support of all the Members who have said kind words about the new clauses. In particular, I recognise the point that my hon. Friend Mr. Francois made and that the Minister rightly picked up. The litmus test is what the scheme will do for retention. We cannot be sure what it will do, because the jury is still out. The backing of the Scottish nationalists has extended the range of support for the new clauses, so the Government should listen carefully because support for them is coming from across the House.

I take the point that the Minister makes about not including the provision in the Bill, but I am sorry that he feels unable to do that. I also think that he is being unfair on the issue of the full career pension. There is simply a difference of view between us. He rightly said in Standing Committee that there was a cost implication, and I fully accept that there may well be. Cost implications surround the issue and one of the tricks is to find a way of giving the best possible service to our armed forces that is consistent with exercising a proper constraint on public expenditure. The Minister and his Department know the arguments just as much as I and my party know them. However, we all feel that our deliberations should be determined by what is best for our armed forces. Clearly, nobody has a blank cheque—I have no more of a blank cheque than the Minister has—but the issue that we must bear in mind is what is in the best interests of our armed forces.

My hon. Friend the Member for Rayleigh described the pensions that we receive as Members of this House as contributory, the implication being—I know that he did not mean it—that the armed forces do not contribute to theirs. There is widespread resentment throughout the armed forces at the idea that their pension is a perk—a free gift from the Ministry of Defence and the Government. It is not. As Rachel Squire knows better than anybody else, members of the armed forces pay for it. When considering salaries, the Armed Forces Pay Review Body discounts the amount that, in its view, service personnel are getting as value for their pension. The value of that abatement is currently 7 per cent.—it was 11 per cent.—so the idea that the armed forces do not contribute must be scotched once and for all. They receive a lesser salary than they would get if the appropriate contribution to meet the worth of their pension were deducted from their salary.

Photo of Mark Francois Mark Francois Opposition Whip (Commons) 4:30 pm, 6th May 2004

The point that I was trying to make is that although the media often acknowledge that members of the armed forces contribute to their pensions, they do not always acknowledge that Members of Parliament contribute to theirs. I was simply trying to make that point in the interests of balance. Service personnel rightly chip into their own pensions, and we thank them for it.

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

My hon. Friend has put that point firmly on the record.

Unfortunately, time is running out and we have other important business to attend to. I hope that the Minister has noted our concerns, particularly in respect of full service career pensions; I suspect that these matters will be taken up in another place. We will simply have to wait to see how the early departure scheme works out, but in the interests of moving on, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.