New Pensions

[Jeep]

Anyone crunched the numbers for the new pension if you are on PAS? Will it be better to stay on the old pension or transfer to the new one in April.

Having read all the MOD website pdf I am none the wiser.

I particularly like the idea of 50% of your final salary on the new scheme which seems to indicate that PAS will be included but not additional pay. What is the real story and what is the catch?

[Melchett01]

Jeep

Chutley is correct - the new scheme 'rewards' or should that be compensates people for staying in to the bitter end, whilst the current scheme throws cash at you at your 16/38 point.

We had the Armed Forces Pension Society up at our gaff a while back, and the chairman - a retired army 2 /3* put it very bluntly in words of less than one syllable for all of us trying to get our heads round it, using examples at different ranks.

To cut a long story short - if you swap over you are taking a risk. Can you guarantee that you'll have a job till you're 55? Can you guarantee that you will want to stay to your 55 point? If you can't and you change schemes but then decide to bail the next year, then sorry, but you've just blown a serious amount of cash over the remainder of your life-time.

I will try and get hold of the examples he gave when I get back off leave, but I do remember it went something along the lines of: if you change over and stay till you're 55, then you could expect to be up by around 10% on your pension payments over the course of your life. However, if you change over and then decide to leave before 55, you could lose upto approx 20% of your pension over the course of your life.

And given the current rather precarious state of affairs ...... are you willing to chance it? The bottom line appears to be this: change over and make the right call - you make a bit; change over and make the wrong call, and you'll be crying in your coco when you're 80!

Will have a look for the examples he gave when I get back in to work.

[Impiger]

From the bumpf circulated in MOD today it seems that those entitled to transfer will personally be contacted between July and September next year. They will be given figure based on their personal circumstances and left to make their own minds up. They will then get 3 months to decide. No decision = stay on the old system.

Rewarding those who stay to 55 by reducing the benefit to those who leave earlier sounds like a sensible retention measure to me. Then I am in the L+ league!!

[Ginseng]

The answer to your question about PAS is that you still cannot know until the precise transfer terms are made explicit - assuming you are on the PAS now. The rest depends on a trade off between reduction of early-leavers' income (from pension to reduced "Early Departure Payments", and increased Death-in-Service benefit (if you die!) and increased widows'/widowers' benefit (if you die in retirement!). The balance will be different for each individual.

The Armed Forces (Pensions and Compensation) Act 2004 received the Royal Assent on 18 November and will be published on the HMSO website tomorrow, 23 November. It is enabling legislation, giving the SofS powers to introduce new pension and compensation schemes. The detail will be introduced in secondary legislation, by means of Statutory Instruments laid under the Act.

Incidentally, for those who had not realised, it is not all a matter of choice. The new compensation scheme, which will replace the current AFPS Attributable Pension, will apply to Everyone, including those who eventually remain on the current AFPS, for new arisings after 1 (or 6?) April 05.

Regards

Ginseng

[JessTheDog]

The EDPs are 50% of the value of the old IP when first paid, rising in increments until the full pension is paid at 65. For all of those in service, the preserved pension payment age will shift to the right to age 65, for all contributions paid after a certain date.

Rewarding those who stay to 55 by reducing the benefit to those who leave earlier sounds like a sensible retention measure to me. Good point, but not everybody has the chance to stay to 55, so a lot of people will lose out.

Cynic me - when has any change to terms and conditions been for the better - under this government anyway!

[Ginseng]

It is worse than that. The EDP payments will only rise in increments between the ages of 55 and 65. Prior to 55, their purchasing power will be withered each year by inflation (and I mean real inflation, not just RPI or (even worse) CPI).

Good point about the relatively few who have the chance to serve to 55. Across all 3 Services, I believe it is about 4% across all ranks (though I am currently one of the lucky ones). A good point was made in Parliamentary Committee about the number of 50+ Cols/Lt Cols in the Army who elected to retire to make room for up-and-coming youngsters. If they do this under the new scheme, they will be cutting their financial throats. One presumes they are more likely now to hang on, thus clogging up the system. And this is progress........

[sweep complete]

Facts, figures and information pamphlets aside, do we really belive the government will be replacing an existing pension scheme with one that is even better for us (ie costing them more)???

They'll be giving us tax breaks next...... I think not :oh:

[Melchett01]

Something that I forgot to mention earlier. You may or may not be aware of this little known and certainly not advertised fact, but your non-contributary pension isn't quite as free as you might think.

From the head of the AFPS - your pay is amortised by 7% per year to take into account your 'free' pension. So bear that in mind when you are thinking about staying on the current scheme or switching.

Nothing is done for our solely benefit - even the so-called non-contributary scheme that we are in. We all end up paying at some point. So don't listen to the bollocks spouted by PMA, the pensions people, financial advisers. Instead, do your homework, play around with the numbers and make a hard-hearted, cold and calculating business decision ...... which option works to your financial advantage? Do that - and the MOD accountants will hate you for it, but at the end of the day, 'cost neutral'??? Yeah right for who?

Ginseng[QUOTE]The new compensation scheme, which will replace the current AFPS Attributable Pension, will apply to Everyone [QUOTE]

The only people that have absolutely no choice about this are those that join up after a certain date - off the top of my head, something like 1 Apr 05 / 06. Everyone else that is serving at that time must be given the option - they cannot be forced to go over to the new scheme.

However, why would I not be surprised if moving over to the new scheme didn't suddenly start to feature as part of new terms of service offered to those who get picked up?? Want your scraper? We'll swap you for your existing pension! You may laugh, deny it or even scoff that they would try something like that, but just wait and see how poor the uptake is and how desperate they get for people to move over and watch the underhand behaviour begin.

[Ginseng]

Sorry, Mate, but you are wrong.

The new Compensation scheme, which among other things replaces the attributable pension currently payable under the AFPS, applies to EVERYONE from its introduction in April 05 (for new conditions arising out of circumstances occuring on or after the date of introduction) INCLUDING all those currently serving, even if they should later elect to remain in the AFPS75 rather than transfer to AFPS05. Did someone forget to mention that? There is NO CHOICE about this element - ZILCH. Believe me, I have read every word of the parliamentary process, which takes some doing!

Also, for future compensation claims under the new system, the burden and standard of proof are effectively shifted to the claimant, to prove that their condition was "on the balance of probabilities" caused by their Service, rather than at present, where the SofS has to prove "beyond a reasonable doubt" that the condition was NOT caused by their Service. This is a hugely significant change.

For the new Pension scheme, the MoD communication released today states that the Offers to Transfer to AFPS05 will be sent out during Jul to Sep 05, and that we will have 3 months (to be extended for those OOA or on long-term leave) to reply with a decision. The effective date of transfer is likely to be 1 Apr 06. If you do not reply, you will, by default, remain on AFPS75.

[teeteringhead]

This is a hugely significant change Could not agree more. Put (over)simply:
Proving it wasn't "beyond reasonable doubt" = 95% chance of getting compo.
Proving it was on "balance of probabilities" = 49% chance........

[Vage Rot]

Might have missed it as I'm reading this in a rush but, On the new scheme I thought that the pension wasn't actually paid until age 65 - ie, you have 10 years with no pension??!!!

Also, call me a cynic but - if they can save loads of dosh by making you leave before 55, I wonder how many of us will be unfit medically or simply surplus to requirements before 55 - would save them a fortune. Nope, it's the old scheme for me - PAS pension is good enough thanks!!

[Biggus]

I thought that the new pension scheme was just that, new, and was designed and conceived for people joining today and in years to come. Therefore the rules for people who are already "in" switching over from the old to the new pension were a bit of a compromise!

I was under the impression that for people switching there was a magic date, say 1 Apr 07, with all pension rights earned before that date guarranteed, even if you retired before 55. It is only the portion of your pension earned after the magic date that comes under the new 'leave before your 55 and you don't get it straight away' type rules!!

Still, I could be wrong, it wouldn't be the first time!!!!!!

[Oggin Aviator]

Biggus I think you are right about preserved time served before that magical date.

Big choices needed by all concerned. We cannot predict the future and dont know what professional or domestic situations will occur a few years down the road. Are you going to stay in that long? If front seat, will commercial aviation beckon at your option point? If backseat, same question, using gratuity to pay for ATPL etc? or other career? can you guarantee your respective Service will keep you in? Seems to me people serving now are caught in between a rock and a hard place over this issue, however to reform the system that will always be the case.

I guess we all just have to wait until the personal pension forecasts get sent out next year before deciding.

Oggin

[Nignog]

I have asked this before but does anyone out there have a definitive answer as to how Gordon Brown's plan to prevent anyone claiming a pension before the age of 55 will affect us? As I understand it this comes into effect on 1 apr 2010. On the new sceme, if you leave early its not called a pension but on the old scheme it is. So if on the old scheme and you leave after 1 apr 2010, but before age 55, will you get anything or will you have to wait till age 55? Its not just us this affects as sportsmen etc have the same problem.

[Green Bottle 2]

Biggus,

It's my understanding that if you transfer to the new pension scheme you transfer years earned and don't preserve any of the old pension terms. The only difference is for officers who served before age 21 - they can also count years served before 21 to their pension.

The bottom line as has already been alluded to if you are certain you will stay untill 55 you will be better off. If you don't stay untill 55 you'll be worse off.

In my situation if I were on the new scheme and left at 38 I would receive £6K pa not index linked. Under the current scheme I'd get £12K. Once I reached 55 the old scheme and new would become index linked but the new scheme would only gradually increase untill 65 when it would finally reach a similar amount. If I stayed to 55, the new scheme would probably see me better off but not by a large margin.

So that's the risk you take - if you stay in to 55 you'll be better off, if not you'll be worse off.

GB2

[Melchett01]

As promised, a few notes that I picked up from the Armed Forces Pension Society when they popped round our place for tea and cucumber sandwiches.

1. MoD Review of the Armed Forces Pension Scheme

This Society judges the MoD proposals under two basic criteria:
> How well does MoD meet its own policy (stated in AFOPS) of providing 'a pension scheme which reflects modern standards and is consistent with the legitimate expectations of service personnel'?
> To what extent are the anomalies and inequities of the past corrected and is recurrence prevented?
Summary of FPS Comments on the New Scheme
> The Forces Pension Society believes that the current AFPS was well overdue for modernisation. It has many anomalies and shortcomings, and no independence of governance. It also fails to reflect modern good practice standards in most key areas or the legitimate expectations of Service personnel and their dependants. Given the Unique nature of Service commitment this is indefensible.
> The Forces Pension Society welcomes the constructive manner in which MoD has handled the Consultation phase of the Review and has been encouraged that a number of our proposals have been incorporated in the New Scheme announced in the House on 15 September 2003. The MoD have moved some way towards meeting modern good practice standards.
> Major Advances are:
4 Improvements to Dependant's benefits which will come much closer to modern good practice.
+ Improvement of Death in Service Benefit from between 1 and 1.5 times salary to 4 times salary.
* The introduction of Unmarried Partner Benefits. > Remaining significant weaknesses are:
4 The failure to provide full career pensions at the Normal Retirement Age which meet Inland Revenue limits or reflect standards of modern good practice.
4 The rules governing the payment of pensions to existing non-attributable widows. Unlike non-attributable widows in the new scheme they will still have to surrender their pensions should they remarry or cohabit.
4 The fact that no attempt has been made to correct past injustices leaving many of today's pensioners severely disadvantaged.
> Unresolved Issues
* Transitional arrangements.
You can read our earlier comments on MoD's original proposals and our initial comments on the New Scheme on our web-site www.forpen.co.uk.

2. KEY FEATURES OF THE NEW ARMED FORCES PENSION SCHEME (AFPS)

• A scheme providing defined benefits based on actual individual pensionable earnings (best of lasx three tax years with the earlier years brought up to current value by application of Retail Price Index increases rather than, as now, on a "representative" rate of pay for each rank based on final year's pay rates).
• Common treatment for Officers and Other Ranks - unlike the current AFPS. Pensions will start to accrue from first day of service. Officers and Other Ranks will serve the same number of years (35) for a full career pension at age 55 with an even accrual rate (1/70ths per year) (currently there is an accelerated rate of accrual for Officers in particular up to the early Immediate Pension (IP) point).
• A new system of Early Departure Payments (EDPs) for those serving 18 years (and having reached age 40) to replace the IP. The scheme will pay a lump sum on leaving of 3 times the accrued pension, plus an income stream of 50% of the accrued pension. This latter rate will be uplifted by 1.66% for each year of service exceeding 18 years and beyond age 40: at age 55 the rate will be uplifted to 75% of accrued pension and will be index linked. EDPs will be payable until the preserved pension and lump sum comes into payment at age 65.
• Value of pension. After 35 years, the pension income would be worth half of pensionable pay, with scope to accrue further pension for those serving longer. The lump sum will accrue in parallel with the pension and will be three times pension.
• Improved dependants' benefits. Widow's pensions will be increased by 25% compared with the current AFPS and will be awarded for life (already the case for attributable widows). Children's pensions will be awarded to children of post retirement marriages.
• Provision will be made for registered unmarried partners (including same sex).
• Death-in-Service benefits will be increased to 4 times pensionable pay (from a maximum of 1 Vz times at present).
• New three-tier non-attributable ill-health arrangements, with minimum guarantees for the more severely disabled. For the most severely disabled, this means a minimum pension guarantee of 20 years pensionable service on exit and, for the moderately disabled, an enhancement of one third of future service to age 55. Those with minor disablement will be awarded a gratuity.
• Preserved Pensions. In recognition of their special fitness requirements, it has been agreed that the Armed Services, Police and Fire Services will retain a full career pension age of 55. (This does not affect actual compulsory retirement ages which will continue to be tied to Service career structures.) However, to reflect the Government's plans to raise the normal public service pension age, preserved pension will be paid from age 65 (rather than age 60).
• The scheme will remain unfunded, in line with the majority of public service schemes, and non-contributory although it is expected that the pension value will continue to be taken into account (currently through a 7% abatement of comparator pay) when the Armed Forces Pay Review Body set Service pay levels.
• The proposals are designed to be cost-neutral. MoD did not consider that, in general, pensions were having a negative impact on recruitment and retention in the Armed Forces, and therefore it saw no justification for spending more on the scheme. MoD judges that the cost of the new scheme on recently updated mortality assumptions is the same as the


3. Some Myths Exploded - about the Armed Forces Pension Scheme (AFPS), both New and Old.

1. The AFPS is non-contributory.
It is formally non-contributory, but The Armed Forces Pay Review Body (AFPRB) take that fully into account when setting military salaries. They measure AFPS benefits compared to benefits in a range of comparators but then discount the latter to account for member contributions. Thus the net value of the AFPS is turned into an abatement of pay (currently 7%) which is a de facto contribution, and which causes pensions to be set on net salary after abatement rather than the more normal gross salary before contributions. This reduces the cost to the employer and the benefit to the pensioner.
2. Both the Old and New AFPS are one of the most expensive in the public sector.
On MoD's own figures it is clear that the cost to the MoD of 22% of pensionable salary lies at about the median of public sector schemes.
3. The AFPS is very generous.
The principal benefits of any good defined benefit scheme are full career pension, survivor benefits and death-in-service benefits. In the Old Scheme all three elements have fallen behind good practice in the public sector. Furthermore, the rate of abatement (see para 1 above) has fallen steadily from 11% in 1981 to 7% now: as there has been no significant change to the AFPS in that time it is clear that the comparators have improved, thus leaving AFPS behind modem good practice. In the New scheme full career benefits remain well behind the comparators.
4. The MoD's cost neutral approach was appropriate given that pensions are not an issue in recruitment or retention.
It might have been if the benefits compared well to modem good practice and indeed to Inland Revenue limits. When AFPS pension and terminal grant are aggregated the total is 62.5% of final salary which is well below comparators and IR limits of 66.67%. The level of knowledge amongst Service people about their conditions or how they compare is woeful. They also have no representation. Thus it would appear that MoD considers it is appropriate to provide pension conditions, which are less good than comparators despite the unique commitment which Service people make to their Country because they do not think they have a manning problem.
5. AFPS benefits are lower because of shorter full careers.
The age of full career retirement of 55 is not for the benefit of the employee but the MoD. And in any event policemen can earn full pensions after just 30 years and MPs after just 27.
6. Pension conditions are worsening across the private sector.
So they are for funded defined benefit schemes, but the factors of volatile stock markets, adverse taxation regimes and more onerous accounting standards have no impact on the AFPS and other similar unfunded schemes. Only increasing longevity is relevant as a factor.

4. Examples

Based on WO1 joining at 18 and a Lt Col joining at 21, both leaving the service on the same dated. Both assume 0% inflation, do not take tax into account for simplicity are based on representative rates of pay for pensionable purposes and assumes death at 75:

WO1 retiring at 40

Pensionable Salary: £35,872
Through life value of current scheme: £433,884
Through life value of new scheme: £349,489
% Difference on new scheme: -19.5%
Monetary difference on new scheme: -£84,395
WO1 retiring at 47

WO1 retiring at 47

Pensionable Salary: £35, 872
Through life value of current scheme: £440,448
Through life value of new scheme: £442, 556
% Difference on new scheme: -4%
Monetary difference on new scheme: -£ 17,892

WO1 retiring at 54

Pensionable Salary: £35, 872
Through life value of current scheme: £407,952
Through life value of new scheme: £447,050
% Difference on new scheme: 8.7%
Monetary difference on new scheme: +£ 39,098

Lt Col retiring at 40

Pensionable Salary: £62,254
Through life value of current scheme: £653,980
Through life value of new scheme: £523,839
% Difference on new scheme: -20%
Monetary difference on new scheme: -£ 130,141

Lt Col retiring at 47

Pensionable Salary: £62,254
Through life value of current scheme: £730,081
Through life value of new scheme: £658,008
% Difference on new scheme: -9.9%
Monetary difference on new scheme: -£ 72,073

Lt Col retiring at 54

Pensionable Salary: £62,254
Through life value of current scheme: £706,334
Through life value of new scheme: £711,202
% Difference on new scheme: +0.7%
Monetary difference on new scheme: +£ 4,858

Although these examples are for army ranks, they can be read across to equivalent ranks of all services. I have the detailed examples and graphs available and can email them to those that would like them.

Happy bean counting.

[Ginseng]

The previous few posts illustrate how much confusion and misunderstanding exists about both the current and future AFPS schemes, and how the new arrangements are related to the overall changes to national pension legislation coming in the next few years.

The current AFPS (AFPS75) provides immediate occupational pensions (IP) for those retiring with the minimum required “Reckonable Service”, which starts at age 18 for ORs and 21 for Officers. The minimum Reckonable Service for an immediate pension is 22 years for ORs and 16 years for Officers. The size of the pension at this point depends on the accrual rate to the retirement date and the “Representative Rate of Pay” for the rank and length of service at retirement. The current scheme for Officers offers a faster rate of accrual up to the Immediate Pension Point (IPP) than afterwards, thus boosting the proportionate value of the IPP at that point relative to the proportion of a “full career” served to that point. For ORs, the accrual rate is even throughout the career. The “full career” point is currently 34 years Reckonable Service for Officers and 37 years for ORs (effectively age 55, the normal compulsory maximum retirement age, if the Reckonable Service started at the earliest possible point and was unbroken to retirement). In addition to the pension income stream, a single tax-free lump sum of three times annual pension is paid on retirement. This sum accrues over the same career period, at three times the pension accrual rate. It is important to understand that the lump sum is effectively provided by a compulsory commutation of part of the pension, rather than as an option to commute; there is currently no option offered to reverse-commute all or part of this sum back to increase the pension, nor is that option likely now to be offered within the new scheme, so far as I know.

“Preserved” pensions are those pension rights earned up to retirement by those who do not complete enough years Reckonable Service to qualify for an IP, and leave their rights in the AFPS. They currently come into payment at age 60. This will be 65 for those in AFPS 05, and for AFPS75 age 65 will also apply from some future date, yet to be announced, for any "preserved" pension rights earned after that date, as a result of changes to national legislation. There will be no choice about this change.

Changes to national pension legislation will see the normal retirement and pension age standardized at 65, but it is recognised that some for professions, including HM Armed Forces, this would not be reasonable because of the fitness requirements for service. Hence the minimum age at which an occupational pension can be paid in future will be 55, at least for those approved schemes. There will be no “10 years without a pension” for those retiring at 55. However, it will not be possible for AFPS05 to pay an occupational retirement pension before the age of 55.

Hence, the current early IP in the AFPS75 cannot be replicated in AFPS05. It will be replaced by “Early Departure Payments” (EDPs), which are not pensions, will be paid from a separate stream of funding outside the AFPS, and will be considerably reduced in value by application of the new scheme rules, when compared with the current early pensions. It is mostly from this area that considerable savings will be made to fund the improved benefits elsewhere in AFPS05 (increases to some full career pensions (due to the change to “final salary” basis), increased Death-in-Service benefit from 1 or 1.5 times salary to 4 times salary, increased value of widows’/widowers’ pensions, “widows” pensions for unmarried partners in significant qualifying relationships (including same-sex, because HMG is bound under EU Law not to exclude same-sex relationships from equal treatment to heterosexual relationships!)). Most of the changes are to survivor benefits, at the expense of early pensions.

AFPS75 also provides some elements of Compensation, in the form of “Attributable” invaliding pensions to those who are forced to retire early (i.e., are “invalided out” or “medically discharged” as unfit for further Service due to injury or illness caused by that service). This element will not be part of AFPS05, nor any longer part of AFPS75, but will be dealt with under the separate new Compensation Scheme that will apply to all serving personnel from 1 Apr 05.

The Armed Forces (Pensions and Compensation) Act 2004 gives the SofS enabling powers to introduce, and amend, the 2 new schemes (AFPS05 and the Compensation Scheme, AFCS) by use of secondary legislation in the form of Statutory Instruments under the Act. The scheme details are not in the Act itself.

Whether it is in the interest of any individual member of AFPS75 to transfer to AFPS05 will depend heavily on the stage of career, individual attitude to various risks, and the precise details of the Offer-to-Transfer. The MoD will no doubt be very keen that as many people as possible should be persuaded to transfer. Remember that the MoD and HM Treasury are interested parties. Don’t be suckered by headline figures in glossy brochures. Read all the small print very carefully, and take independent advice if you are unsure of anything.

[BEagle]

Being a simple Hector and not that good at wading through Blunt-speak, it would seem to me that, unless you are confident that you would be content to soldier on until your mid-50s beyond any doubt whatsoever, you should stay with the old system?

Will anyone stay beyond ORD on the new scheme? I b£oody wouldn't - far, far too much at stake.

But maybe that's the plan........

[Ginseng]

A couple of further points occur to me that are worthy of comment:

It had previously been stated that the terms of transfer to AFPS05 would NOT include the automatic gaining of extra Reckonable Service, for previous service given prior to the age of 18 (ORs) or 21 (Officers) in AFPS75. The latest information bulletin from MoD seems to suggest that this has changed. Certainly, it can be read that way. However, it is not at all clear to me that this is what MoD intended the words to mean. I suppose we will have to wait for the final version of the transfer terms to be sure (not that it affects me – I joined after 21).

Similarly, it remains unclear exactly how PAS aircrew pensions will be calculated within AFPS05 for those who choose to transfer. The optimistic view is that “final salary” means exactly that – all of final salary. However, the current limited enhancements to pensions for PAS under AFPS75 were intended to effectively pension only that part of your previous flying pay earned after the date of first becoming PAS. Since the official advice, given in writing, to those who were offered PAS from 1 Apr 03 was NOT to second-guess what the new pension scheme arrangements would be, it would be wholly inappropriate now to give PAS the opportunity to transfer to AFPS05 and have ALL of their previous flying pay fully pensioned, without offering some redress to those who may have chosen not to become PAS (who would therefore have placed themselves at significant financial disadvantage as a result of taking advice published by the Services). I have no idea how the MoD would plan to deal with this issue, but it will be interesting to see. It is possible, of course, that the full expectations of current PAS, that AFPS 05 will fully pension the WHOLE of their final PAS salary, will prove to have been wishful thinking.

Happy reading

Ginseng