Clause 1 - Pension and compensation schemes: armed and reserve forces

Armed Forces (Pensions and Compensation) Bill – in a Public Bill Committee on 10th February 2004.

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Amendment proposed [3 February]: No. 1, in

clause 1, page 1, line 3, after 'establish', insert 'and modify'.—[Mr. Gerald Howarth.]

Question again proposed, That the amendment be made.

Photo of Mr Win Griffiths Mr Win Griffiths Labour, Bridgend 8:55 am, 10th February 2004

I remind the Committee that with this we are discussing the following:

Amendment No. 2, in

clause 1, page 1, line 3, after 'schemes', insert

'in accordance with the provisions of Schedule [Armed Forces Pension Scheme].'.

Amendment No. 3, in

clause 1, page 1, line 5, after 'for', insert 'defined'.

New schedule 3—'Armed Forces Pension Scheme Membership—

Introduction

1 The new AFPS is a defined benefit scheme which is non-contributory. It has common terms for both officers and other ranks with a normal retirement age of 55.

2 All members of the regular Armed Forces will automatically be members of the AFPS from their first day of service regardless of age. Exceptions to this are:

(1) Personnel who are eligible, but elect not to join the AFPS;

(2) Reservists who are members of the reserve Forces Pension Scheme;

(3) Where a member has completed less than two years reckonable service and leaves, he or she may either be bought back into the State Second Pension (S2P), or allowed to transfer notional pension rights to another pension arrangement, thereby relinquishing membership of the AFPS.

Opting out of the AFPS

3 Membership will not be compulsory. A Service man or woman may opt to join the S2P, a personal pension scheme or Stakeholder pension during his or her period of service. Any period of service completed whilst an individual has opted-out of the AFPS will not count towards benefits available under the AFPS. However, there will be no employer contributions paid by the Ministry of Defence for such alternative arrangements (other than those required under National Insurance terms for contracting in and out of the State Second Pension) and no personal contribution to the AFPS that can be refunded.

4 An individual who opts out will continue to be eligible for Attributable benefits under the new Armed Forces Compensation Scheme.

5 Members will not be required to make a direct contribution from pay in respect of benefits payable under the AFPS. However, the independent Armed Forces Pay Review Body (AFPRB) currently makes an adjustment to comparator pay (an abatement

of 7 per cent. since 2001) to reflect the extent to which AFPS benefits are better or worse than those offered in a range of comparator occupations.

Pay and Service

Pay for Pension Purposes

6 The highest pensionable earnings will in most cases be in the final 12 months of service before retirement. However, the last three tax years will also be considered, with pensionable earnings in years one and two increased by inflation and, if giving a higher figure than that in the last 12 months, used as the basis for the pension calculation.

Reckonable Service

7 For the new AFPS reckonable service will be all service, as defined below, from the date of joining the AFP Scheme:

(1) Full pay service in the Armed Forces of the United Kingdom.

(2) Periods of full pay for the purposes of training.

(3) All paid leave.

(4) All paid maternity leave.

(5) Any period in which a woman member is in receipt of statutory Maternity Pay, even when the Maternity Pay continues beyond the end of a pensionable commitment.

(6) Paid paternity leave.

(7) Paid adoption leave.

(8) Notional years of service credited as a result of a transfer value payment from another pension scheme.

(9) Notional years of service credited as a result of the purchase of an Added Years Additional Voluntary Contribution (AVC).

(10) All subject to a member's reckonable service not exceeding 40 years.

8 Reckonable service will not include:

(1) Service forfeited by desertion unless such service is subsequently restored.

(2) Any period for which pay is forfeited for reasons related to service discipline.

(3) Military imprisonment or detention if greater than seven days.

(4) Service in respect of which a pension is already in payment.

Qualifying Period

9 The current scheme has a qualifying period of two years service of entitlement to a preserved pension, to avoid burdensome administration of very low value pensions. No final decision has been reached on whether the vesting period in the new scheme will be changed; this will be dependent on the final decisions on the Government's proposals for pension simplification and will take account of a range of other factors. Current arrangements allow for a cash equivalent premium to buy back into the State Second Pension or a transfer value to another occupational scheme to be made in respect of those who do not serve the two-year qualifying period and are compatible with the Government's current proposals.

Member Benefits

Benefits where the member leaves service at or after the Normal Pension Age of 55

10 A member leaving service at or after the normal pension age of 55 will be awarded a pension with immediate effect, with both a pension and a tax-free lump sum of three times pension. The pension paid will be based on accrued reckonable service at the point of retirement. There is an upper limit of 40 years of accrual at a rate of 1/70th of pensionable pay for each year of full service to allow longer-serving members to continue accruing benefits. Measures will be provided to allow those with less than 37 1/2 years service at age 55 to achieve a full career pension of two-thirds of salary.

Benefits where the member leaves service at or after the early departure point but before age 55

11 A member leaving service at or after the Early Departure Point (EDP), after 18 years' service or age 40 whichever is later, will be awarded a preserved pension and lump sum, which will come into payment at age 65. In addition, to compensate for loss

of earnings, a lump sum award will be paid at the time of leaving the Armed Forces and income payments will be paid (the exact pattern yet to be agreed with the three Services) until the preserved pension comes into payment at age 65. These arrangements will be broadly similar in structure to the current Immediate Pension arrangements, though with some reduction in overall cost to help fund improvements elsewhere (notably to dependants' benefits) and the cost of pensioners living longer. This pension will be uprated for inflation at 65 by the RPI between the member leaving the Armed Forces and his 65th birthday.

Benefits where the member leaves service before the EDP (except ill-health)

12 A member leaving service after two years but before the EDP will be awarded a preserved pension consisting of an annual pension calculated as reckonable service x accrual rate (1/70th) x final pensionable earnings, and a tax-free lump sum of three-times annual pension. This will not be paid until age 65.This pension will be uprated for inflation at 65 by the RPI between the member leaving the Armed Forces and his 65th birthday.

Inverse Commutation

13 A member can choose to forego all or part of their lump sum in order to enhance his or her pension. The amount forfeited will be actuarially converted to additional pension, payable over the lifetime of the pensioner. The individual can opt just to improve their own pension income or to also improve that of their spouse or partner and the calculation will therefore be done on an individual basis.

Early payment of preserved pension

14 Where a member with a preserved pension, who is not in any pensionable employment, becomes incapacitated through ill-health and is permanently incapable of undertaking any further full-time employment, application can be made for the preserved pension to come into payment early.

15 Any award will be subject to the MoD's Medical Adviser being satisfied with the medical prognosis and an independent assessment may be required. The award will be calculated on actual reckonable service with no enhancements, but will be uprated for inflation from the point of payment.