Armed Forces Pension Scheme

Tuesday 16th October 2012 Written Statements

[The Secretary of State for Defence (Mr Philip Hammond)]

On 31 July 2012, I published the outline scheme design of the new armed forces pension scheme and invited comments from service personnel and interested external organisations by 7 September. This followed an initial consultation exercise between March and May. Over 25,000 members of the armed forces have participated overall in the consultation process, which included presentations, focus groups and questionnaires.

Having considered the response to both periods of consultation, I am announcing today the final agreement on the new armed forces pension scheme. This sets out the Government’s final position, which will form the basis for detailed implementation. The new pension scheme will remain among the very best available in either public or private sectors.

The main parameters of the new scheme design are set out below:

a. Members will continue making no contributions;

b. A pension calculated on career average revalued earnings (CARE);

c. An early departure payment (EDP) scheme, available to members who leave before normal pension age (NPA), on completion of 20 years service having reached a minimum age of 40 years, comprising an annual income of at least 34% of the value of the deferred pension and a tax-free lump sum of 2.25 times the value of the deferred pension service personnel will also have the option to convert their total EDP lump sum into additional monthly income payments.

d. A NPA of 60 and a deferred pension age (DPA) linked to the state pension age (SPA);

e. A pension accrual rate of 1/47th of pensionable earnings each year;

f. Revaluation of active members’ benefits will be in line with average earnings;

g. Pensions in payment and deferred benefits to increase by CPI;

h. The option to convert pension income into a tax-free lump sum at transfer rate of £12 lump sum for £1 per annum pension income up to HM Revenue and Customs limits;

i. The option for scheme members to pay additional voluntary contributions calculated on an actuarially fair basis;

j. Abatement will not apply to service in the new scheme. Abatement rules for the current scheme will remain unchanged;

k. No maximum service and no upper age limit for the earning of benefits;

l. Members transferring between public service schemes to be treated as having continuous service;

m. Members rejoining after a period of deferment of less than five years can link new service with previous service;

n. Early retirements from age 55, with benefits to be actuarially reduced;

o. EDP monthly income ceases at the deferred pension age, when it will be replaced by the deferred pension in full;

p. Ill-health, death and survivors’ benefits (ancillary benefits) based on those currently provided in AFPS 05;

q. No additional transitional arrangements beyond the Government’s 10-year promise; and

r. An employer cost cap to provide backstop protection to the taxpayer against unforeseen costs and risks.

There will be full protection for accrued rights for all members as follows:

a. All benefits accrued under final salary arrangements will be linked to the member’s final salary when they exit service, in accordance with the rules of the members’ current schemes as follows:

The armed forces pension scheme 2005:

The armed forces pension scheme 1975;

The reserve forces pension scheme;

The full-time reserve service pension scheme 1997 (Full commitment and limited or home commitment);

The non-regular permanent staff pension scheme.

b. Members will be able to access their benefits from these schemes when they expected to do so based on current rules.

There will also be statutory-based transitional protection for those closest to retirement in these schemes:

a. All active scheme members who, as at 1 April 2012, had 10 years or less to their current normal pension age, will see no change in when they can retire, nor any decrease in the amount of pension they receive at their current normal pension age. This protection will be achieved by the member remaining in their current scheme until they retire or leave the armed forces.

There is a requirement for further work on accrued rights and transitional arrangements for the Gurkha pension scheme and Gibraltar regiment pension scheme.

The design of the new scheme has been the subject of an equalities impact analysis and equality issues will continue to be considered as the implementation details are progressed.

I believe this final agreement represents a generous outcome for service personnel and a fair solution for the taxpayer and meets the operational requirements of the armed forces. In particular, the EDP will continue to meet the need for a predominantly young work force. The new scheme will remain among the very best available in the public or private sector in recognition of the unique commitment which the armed forces make to the defence of the nation.

Copies of the final agreement, the scheme costing and the equalities impact analysis have been deposited in the Library of the House.