New clause 19 - Full career pension

Armed Forces (Pensions and Compensation) Bill – in a Public Bill Committee at 10:15 am on 26th February 2004.

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'A member who serves 35 years but less than 371/2 years because of service limitations imposed by the Secretary of State shall have his benefits increased to 662/3 per cent. of final salary by one or more of the following:

—He shall be granted additional years to accrue for pension purposes.

—He shall be granted a beneficial accrual rate in his later years of service.

—He shall be granted an improved lump sum on retirement.'.—[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.

We discussed full career pensions at length during our first sitting, and I do not intend to repeat too much of what I said then. The argument was advanced forcefully.

The new clause would increase the full career pension to the public sector benchmark of 662/3 per cent., which is the maximum permitted by the Inland Revenue. The new armed forces pension scheme is the only public sector final salary scheme that will prevent its members from earning a full two-thirds of final salary pension, even if they serve the usual full career of 35 years. That is structurally unsound, and fails to recognise the servicemen's unique commitment. The employer imposes a 35-year maximum on a career because they require a younger-than-usual work force. It is an employer benefit, not a perk of the job. The effect is that after 35 years of service, the 50 per cent. pension with the lump sum added in cannot be higher than 621/2 per cent., compared with the 662/3 per cent. that is the norm in all other pension schemes in the public and private sectors. The Minister wants to make an exception the other way. All other public policy is to have a final salary of 662/3 per cent. In this case, however, it will be 621/2 per cent. So this has no ramifications, we have to understand, for the wider public sector.

Photo of Colin Breed Colin Breed Shadow Minister, Defence

Surely if it did, there would be significant savings in the other public pension schemes, which could perhaps be used more beneficially elsewhere?

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

The hon. Gentleman makes an extremely good point. It will be interesting to see whether the Minister proposes that. I suspect that he will not.

The employee is compensated in other schemes with the same constraints. For example, the parliamentary scheme has a very fast accrual rate throughout to deal with this issue. The police scheme has an accelerated accrual rate in the last 10 years of service. The proposed police scheme has an exceptional lump sum of four times the pension. Other schemes grant additional years at the end of service. The employer, in this case the Government, restricts their employees' pension earning capability.

At 55, the employee has very limited prospects for continuing to earn a second pension of comparable value. Obviously some people will qualify, but many will not. The employer, again the Government, has a duty of care, which they should recognise. By selling our servicemen short, the Minister has abrogated this responsibility. The number of servicemen who continue to serve until they are 55 is very small and amounts to fewer than 5 per cent. of the total. These are people who have committed almost all their working life to their country. This is one of the greatest flaws of the new scheme, and it does not stand easily with the Government's sentiment that we have the best armed forces in the world when we withhold

from them an entitlement to earn a full career salary by a significant margin. Despite what the Minister said on the first day of our proceedings, I hope that he will reconsider the issue.

Photo of Eric Joyce Eric Joyce Labour, Falkirk West 10:30 am, 26th February 2004

I want to make a brief point about the nature of accrual rates. It is a complex business and I want at least to simplify the matter for myself, let alone for the rest of the Committee.

The accrual rate in the Army is quite fast in the early years and slower in later years—a convex shape followed by a concave. As people come to the end of their service, they are discouraged not only by the problem explained by the hon. Gentleman, but also from making additional voluntary contributions because they receive a relatively low rate of return in later years. I have not done the calculations, but I suspect that it makes as much sense in the very late years to put money into other investments as it does to buy additional voluntary contributions. That is a pity because people will not only leave, albeit early, with a somewhat smaller proportion of their final earnings, but they will be inhibited from buying the last few years, as they can under the current system of AVCs.

Unlike the Opposition, I do not propose to ladle lots of extra costs on to the Government, and I wholly recognise the requirement for the changes to be cost-neutral. However, it would be worth while the Government considering how to make the scheme more attractive, whether under the current system or some other system, for people to contribute in the late years given that the accrual rates are much lower.

I would be reluctant to make a significant change to the shape of accrual, although that would seem the logical thing to do. The shape may need to be more complex, but I would want to maintain the benefit that accrues to people who leave early. The logical thing to do is to shift the shape of the accrual curve so that it would become more like the curve that applies to the police scheme. They have a higher accrual rate in later years, which encourages people to stay on. In effect, the accrual rate in the Army is intended to encourage people to leave—it is rather like a manning control point. I do not want to impose extra costs on the Government. I simply want them to reflect on how to encourage people to make AVCs towards the end of their careers.

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

I addressed the main purpose of new clause 19 at columns 54 and 55 of the Committee's second sitting, on 10 February. However, let me repeat my four main points, just for clarification. First, the Inland Revenue limit of 66.7 per cent. of salary is a maximum, not a target. Secondly, the limit is likely to disappear from April 2005. Thirdly, few people in the armed forces scheme are affected—the figure is about 10 per cent. of officers and 2 per cent. of other ranks. Fourthly, everyone can make additional voluntary contributions under the new scheme to increase the value of their benefits up to the equivalent of 40 years' service. I shall return to the point raised by my hon. Friend the Member for Falkirk, West (Mr. Joyce) in a moment.

In addition, armed forces personnel can earn pension benefits from the first day of service under the new scheme, as I said on Tuesday. Under the current scheme, the starting age for benefits is 21 for officers and 18 for other ranks. I hope that I am being helpful when I say that the hon. Member for Aldershot is slightly missing the point. Under the new pensions scheme, people will be able buy added years through AVCs to bring the value of their pension up to 66.7 per cent. of their final earnings, which my hon. Friend mentioned, and there is certainly every expectation that they would do that.

I have two final points. I think that the hon. Member for Aldershot suggested that other public service pension schemes had accrual rates of 66.7 per cent. at full career, but I am pretty sure that that is not the case. If my memory serves me correctly, the current civil service scheme—not the new one—does not have a full accrual rate of 66.7 per cent. Perhaps I can check the figures and circulate a list.

Although the current career structures and fitness requirements make it difficult to employ personnel for longer in our armed forces, we have designed the new pension scheme arrangements in recognition of the fact that that may change. Meanwhile, pensions that accrue a lower percentage of final salary than other schemes—the point my hon. Friend the Member for Falkirk, West made so well—are paid at an exceptionally early age. The reality is that most personnel who leave with a full pension at age 55 will be able to take further employment and to build up significant additional benefits. That returns us to our debate on the skills and abilities of members of our armed forces and the transferability—if I can call it that—of those skills to new careers. There is no question that that is a considerable benefit. I hope, therefore, that we will not need to proceed further with new clause 19.

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

First, I am grateful to the Minister for letting us see other schemes and the way in which they operate. I noted that he said the existing civil service scheme does not provide for 662/3 per cent. Does he mean the new scheme—the one now in operation—or the previous scheme?

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

Sorry, I thought I made myself clear. There is a current, or old, scheme and a new scheme, which is the subject of the documentation. The old scheme does not provide 662/3 per cent. I think the new scheme does, but I will have to check as I am not an expert on the civil service scheme.

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

I am sure that the Minister's officials will be delighted that he is going to check on their scheme. I am sure that will endear him to them.

If what the Minister thinks to be the case is the case, then he makes the point for us. If the existing civil service scheme provides for less than 662/3 per cent. and the new one provides 662/3 per cent., then there should be parity for the armed forces. However, I am grateful for his offer, which is helpful.

The Minister said that the starting age for qualification for pension entitlement will be 18. We accept that, but it does not obviate the fact that few people will be able to qualify for the full 662/3 per cent.

He defends that on the grounds that today's armed forces acquire skills that have a transferability value into other employment. I am sure that he is right. Our servicemen and women have always acquired skills over the years that in most cases make them attractive to future employers. However, that arrangement was patchy in the past and will continue to be so. There will be some who do frightfully well and some who do not. It is rather like ex-Members of this place. As a former Labour Member of Parliament said to me, ''There is nothing as ex as an ex-MP.'' Some do very well and command huge fees for after-dinner speeches; others do not do so well. The question is where to strike the balance.

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

Just to clarify matters, the first day of enlistment could be before someone is 18 and benefits would start to accrue from then. That is what I said on Tuesday.

Photo of Gerald Howarth Gerald Howarth Shadow Minister (Defence)

That is entirely fair and I accept that. It still means that few will qualify for the full 662/3 per cent., but the case has been made.

The hon. Member for Falkirk, West made an extremely useful contribution by making it clear that because of the need to maintain the youthfulness of the armed forces—particularly the Army, which is the biggest employer—the accrual rate operates more swiftly in the early years than later on. He made the point that the AVCs that the Minister said would be available for people to buy were not as worth while as perhaps they might be.

It is still an unsatisfactory state of affairs, but there is not much point in pressing the new clause to a Division because I would not win the vote. We argued the case forcefully both on day one and today. The Minister will not fully convince us, or the beneficiaries of the scheme, that his proposal is the best way to deal with the problem. However, I recognise that the cost-neutrality corset into which all the aspects of the new scheme have to be fitted means that Ministers have to make difficult decisions. This is one of them. I suggest that we think again and perhaps consider whether the parliamentary scheme or one of the other schemes that I mentioned might provide a solution. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.