Defence IssuesNew AFPS & Compensation Schemes
ARMED FORCES (PENSIONS AND COMPENSATION) BILL
CLARIFICATION OF SOME POINTS RAISED IN THE 2ND READING DEBATE - 04 JAN 22
Following the 2nd Reading on 22 Jan 04, concern has been expressed on some issues raised in debate. A number of MPs unfamiliar with the schemes’ design, and in a number of cases, not having read the framework documents provided for the House, failed to understand a number of its provisions. The Minister was unable to correct all the errors made during the debate as time was limited – so a number of points are clarified below:
"Will the Secretary of State confirm that although the critical age of 55 that he has mentioned is indeed the critical age for the police and the fire brigade, but that under his new scheme—in contrast to the early departure payment scheme—most retiring armed forces members will not receive the pension until they are 65?"
Those who serve a full career to age 55 will receive a pension from age 55. Personnel who leave after the age of 40 and after doing 18 years service will receive a compensatory income under the Early Departure Payments (EDP) Scheme and a tax-free lump sum until age 65 when the preserved pension will be payable along with the pension tax-free lump sum. Personnel who leave before the EDP point will be entitled to a preserved pension which will be payable at age 65.
What has changed, and has been covered in our IC messages, is that the new pension scheme will pay preserved pensions at age 65 instead of 60. In addition, the current scheme will be altered to reflect the change from a date to be announced - preserved pension earned to that date will be paid at age 60 and pension earned after that date will be paid at 65 - this has also been covered in IC messages. For the current scheme this will only affect those leaving before the Immediate Pension.
"During interminable debate on this issue, the Ministry of Defence has effectively moved the goalposts by changing the actuarial assumptions on which everything is based. As the Defence Committee reported, the expected cost of the existing scheme to the Ministry in 30 to 40 years' time has been recalculated from 22 per cent. to 24.5 per cent. of pensionable salary. The new scheme will reduce the estimated cost to 22 per cent. However, if the original actuarial assumptions were applied to the new scheme, it would cost 20.3 per cent. of pensionable salary, so the total value of the new scheme is 1.7 per cent. less than the value of the current scheme, which flatly contradicts the Government's claim that any savings in one area would be used to enhance benefits elsewhere."
The new scheme will cost the same as the current scheme currently costs - 22% of the service pay bill. However, the current scheme will shortly cost more than this due to the increasing costs associated with people living longer - the actual increase in costs has not yet been agreed with the Treasury. Given that current scheme members may not fully benefit from the predicted longer life expectancy - it will be new entrants to the new scheme who will be the main beneficiaries - the increase in the cost may not be as high as 1.7% - this is the worst case. Other pension schemes would expect their scheme members to pay for the costs of increasing longevity via an increase in contributions) or to reduce their benefits. It is considered reasonable that for Service personnel those joining the new scheme should bear the cost of these longevity costs as, being on average younger, it is they who can be expected to derive the most benefit from longer retirement.
"The Government assert that under the new scheme service personnel will be able to earn a full career pension, within Inland Revenue limits, of 66.7 per cent. However, the Forces Pension Society, to which the House is indebted, has calculated that the vast majority of people will be able to accumulate a maximum of 62.5 per cent. at age 55."
The current AFPS is worth 62.5% of pay - based on an actuarial calculation which converts the lump sum. It used to be quoted as being worth 66.67% but this changed when the formula for deciding the value of the lump sum changed (in simple terms the value of the lump sum was spread over a longer expected period of retirement, reducing its annualised value), but more importantly, the actual benefits have not been changed.
The new scheme is worth 62.5% after 35 years service - same for officers and other ranks - based on the same actuarial calculation. But, unlike now, members will be able to continue to accrue further benefits if they serve longer - up to 40 years. This may not benefit many at the moment, but may be very valuable in the future - particularly as we have an attractive accrual rate that delivers 50% pension and three times lump sum after only 35 years - whereas a civil servant would have to serve another 5 years to get the same on the classic scheme (which is the majority).
Other related documents to read providing further information, which are available on the internet are:
Last Updated: 20 Apr 04