This tactic was used with the police last year. The government took some flack for this slight of hand and yes, it did mean that part of the pay increase was non-pensionable. This has a deleterious effect on the newer public sector career average pensions scheme and it also impacts death-in-service payments, ill-health and widows pensions. The pay award for the following year excludes this %, so if the armed forces received a 1% pay rise next year the actual increase in gross pay would be just 0.1%.
It is another thin-edge-of-the-wedge moment following AFPS15 as the armed forces now have a mixed pensionable/non-pensionable basic salary. I wonder what the AFPRB will do now. Their report weighed-up the argument for an inflation+ pay rise but on grounds of government affordability they settled on 2.9%. Now that we are not quite getting that will they look for a compensatory pay rise next year to fill the gap, or just give-up and rubber stamp their master's bidding, or honourably resign from the AFPRB?
For me this battle is over as I drew stumps in April, so this pay award finally tells me what my pension should have been on leaving.