Armed Forces (Pensions and Benefits)

Nick Harvey Excerpts

Tuesday 8th March 2011 Westminster Hall

[The Minister for the Armed Forces (Nick Harvey)]

I commend the hon. Member for Liverpool, Walton (Steve Rotheram) on initiating this debate on the effect on the armed forces of Government changes to pensions and benefits, and I acknowledge that the subject is profoundly important to many people.

Our armed forces are deployed to most demanding areas of conflict and we have a duty, not only as a Government but as a nation, to support and look after them, to care for the injured and the bereaved. That is common ground for all hon. Members. As the House knows, the priority for the Government is to bring the national finances under control by reducing the deficit, which inevitably means reducing public expenditure. That means that we have to take difficult and sometimes very unpalatable decisions in all areas of spending, including defence. Because of the priority we place on security, the defence budget is making a more modest contribution to deficit reduction relative to almost all other Departments.

However, in the comprehensive spending review and the strategic defence and security review, we have still had to take difficult decisions that have repercussions for some members of the armed forces and their families. I repeat that many of those decisions have been unpalatable. Nobody in the coalition came into politics to make cuts to the armed forces or to eliminate capabilities in our military power, but that is what we have had to do.

[Gemma Doyle]

Will the Minister confirm that the decisions he refers to are financial, not strategic?

[Nick Harvey]

I am coming to that. We have to acknowledge three things. First, the scale of the deficit is so enormous that £1 in every £4 of public expenditure is being borrowed, and the interest alone on the debt this year is greater than the entire defence budget, including the proportion being paid by the Treasury for operations in Afghanistan. That is how immense the overall deficit black hole is. That is compounded in the area of defence by the situation we inherited, where the defence budget was lagging behind the defence forward programme over the 10-year planning period by £38 billion. That is the gap between the programme that we inherited and the existing budget, set at a flat real basis, for the 10-year planning period. That is over and on top of the general deficit picture that we inherited. There is the general picture and the specific defence picture.

The third element, which I do not think was acknowledged adequately by the hon. Member for Liverpool, Walton, is that before there ever was an economic downturn, before the banking crisis hit, before the deficit became part of the political currency, there was already a problem with public service pensions, which the previous Government had acknowledged and was beginning to address, and which was going to require pretty drastic action sooner or later, irrespective of the nation’s finances plunging as they did. Before any of that started, there was already a serious problem with the affordability of public service pensions. We have to acknowledge all three factors as the backcloth to the decisions that have subsequently been taken.

[Gemma Doyle]

Will the Minister give an example of a time in the previous Parliament when either his or the Conservative party called for less defence spending?

[Nick Harvey]

Certainly not. We would have liked to have seen more defence spending. We would still like to see that now. The fact is that defence figures, for obvious security reasons, are not exposed to the same degree of parliamentary scrutiny as those of other Departments, and with the long lead time of many defence items, commitments stretch further into the future than they do in many other Departments. Although we were aware from Bernard Gray’s report on procurement that there were some pretty serious financial difficulties inside the Ministry of Defence, it was not until we got in and saw the full scale of it that we realised how drastic the defence budget’s problems were.

[Steve Rotheram]

I have listened carefully to the Minister, and I understand the argument that we had in the main Chamber about deficit reduction. It is not possible to throw the old line that we are deficit deniers—I am stating publicly that I understand the rationale—because if that were the case, a proposal that was time-bound until the deficit was pared down would have got some support across the Chamber. However, that is not what is being proposed. As I mentioned, it is necessary to take cognisance of the fact that, because our forces personnel and their widows draw pensions at a much earlier age, the proposed changes are compounding the problem. It is not comparing apples with apples; it is not even comparing Cox’s with Cox’s. A completely different set of comparators must be used, because armed forces pensions are drawn at such an early age.

[Nick Harvey]

The hon. Gentleman is making two different points, and I shall address each in turn. The question of the deficit must be boiled down into the structural deficit and the cyclical deficit. If all the measures that we are taking during this Parliament to eliminate the structural deficit are reversed at some point in the future, the country will simply return to square one. This Government are attempting to address the cyclical deficit through economic growth over a period, but we must eliminate the structural deficit. The structural deficit is not a temporary phenomenon. It existed before the banking crisis. It is perfectly true that the banking crisis blew the lid off it and put the entire global economy into turmoil, but the fact is that the UK was in a serious deficit situation before the banking crisis hit. That is why measures taken now to address the deficit cannot be viewed as temporary. If we start reversing prior decisions when the cycle improves and the cyclical deficit is also eliminated, we will simply return to square one.

The hon. Gentleman’s second point is a fair one. On average, people leave the military and begin drawing pensions from the age of about 40. I am sceptical about some of the figures that he and the hon. Member for West Dunbartonshire (Gemma Doyle) quoted, and I need to examine them in depth to see how on earth they were arrived at, but the general point that the pension is drawn from an earlier age is valid. However, in the vast majority of cases, people who draw a military pension from the age of about 40 do not then live on it exclusively for the rest of their days. My hon. Friend the Member for South West Wiltshire (Dr Murrison) acknowledged that he receives a service pension, but that has not prevented him from going on to do other things. Of course, some will not have further opportunities, but for the vast majority of people who leave the services at about 40, the service pension augments what they can earn in other walks of life for a long period. It is not really comparable with an old age pension in the sense that I think the hon. Gentleman meant.

[Steve Rotheram]

It is strange that the Minister mentions the difference between the structural and cyclical deficits. If the change is being made to address the structural deficit, that existed a long time before the banking crisis, as he rightly said, but I do not remember any dissident voices from the Tory and Liberal Democrat Benches at the time saying that we should reduce armed forces pensions. Why the change? If it was known well before the banking crisis, why was it not in either party’s manifesto?

[Nick Harvey]

The hon. Gentleman makes the point that we are having to take measures now to eliminate the deficit that we would not have taken or needed to take if the deficit had not grown over seven or eight years in the first place. Nobody in Government is saying that the precise measures that we are taking now are those that got the country into deficit, but the fact is that between 2001 and the banking crisis, we ran a budget deficit, some of it during a boom period in which traditional Keynesian economics should have dictated that we run a budget surplus.

The Government are now being forced to take drastic measures to address the structural deficit, not on the logic that these are the specific issues that built up the structural deficit, but because we must deal in the art of the possible. None of us came into politics to cut armed forces numbers or delete military capability, but we are driven to do so now by the scale of the budget deficit. It is simply not fair to say that nobody said anything. Throughout the period, my right hon. Friend the Member for Twickenham (Vince Cable) said that both personal debt and debt in the state’s coffers were mounting to the point of unsustainability and would sooner or later go pop. I do not claim to have been a soothsayer myself, but to say that nobody said it is simply inaccurate and untrue.

[Jim Shannon (Strangford) (DUP)]

I apologise for not being here earlier, Mr Streeter. I was at the Health and Social Care Bill Committee. I noticed in the paper that the Army Families Federation, which represents soldiers and their families,

“said that it had received 2,000 complaints in the past five days about the impact of cuts from people who feel that pensions and pay changes are a sign that the offer they laid down their lives for has been reneged on”.

I understand the Government’s position clearly in relation to the Budget, but in the middle of it all are the families and those serving on the front whose benefits and pensions are being reduced. That is the clear issue for many of us in this Chamber.

[Sandra Osborne in the Chair]

[Nick Harvey]

It is a serious issue—I do not deny that for one minute—but I think that what the hon. Gentleman refers to was an online survey run by the Army Families Federation that had 2,000 participants in its first five days. Of course there is a lot of concern and anxiety about the measures; I do not deny that for a minute. It is understandable. Some of the changes that we have had to make to the allowances package, which is what I think the survey was specifically about, are unpopular and will require lifestyle adjustments, but they are a necessary part of the Department’s contribution to the overall Government effort to reduce the deficit and bring the defence budget into some sort of balance.

The strategic defence and security review set out a requirement to reduce expenditure on service and civil service allowances, amounting to £300 million a year. Allowances are designed to support service personnel in particular circumstances, not to supplement income. It is entirely right that the package of allowances is reviewed from time to time to ensure that it fits the needs and circumstances of today’s armed forces fairly and affordably. There is no getting away from the fact that the measures will have an impact on individuals; I acknowledge that. However, to minimise the effects, we have concentrated on ensuring where we can that no group is disproportionately affected by changes. We have also sought to mitigate the effects by phasing in some of the changes over two years.

Operational allowances have not been affected by any of those changes. The House will be aware that we have doubled the operational allowance, backdated to 6 May last year. We have also changed the policy governing rest and recuperation for service personnel deployed on operations. Personnel deploying for six months will remain eligible for 14 days’ R and R, and personnel who lose out on that, whether as a result of operations or of disruptions to the air bridge, will be guaranteed additional post-operational leave in lieu as compensation. An appropriate set of allowances is a vital part of our support to personnel, and it will remain so. We believe that the changes announced in January by my right hon. Friend the Minister with responsibility for defence personnel, welfare and Veterans, struck the right balance between the need for savings and the need to get the package right.

The emergency Budget in June announced that from this April, the indexation of benefits, tax credits and the state second pension will be based on CPI rather than RPI. The change looks forward to the future. Future increases in the value of deferred pensions—all pensions in payment—will be based on CPI. Public service pensions will continue to be index-linked, which will continue to protect individual pensions against increases in the cost of living. The change is not a reduction of accrued rights, but we accept that, in the long term, CPI tends to increase at a lower rate than RPI. That is not always true—a year ago, RPI was negative and CPI positive—but I think that everybody accepts that, over the long term, CPI increases more slowly.

We have to link pensions to the appropriate target measure. CPI is the target measure used by the Bank of England, the headline measure of inflation in the UK, and the international standard measure. It uses a methodology that takes better account of consumer behaviour in response to price increases. The Government believe that it is the right index to use for uprating additional state pensions, public and private pensions and social security benefits, and that it is a more appropriate measure.

It is in the nature of public sector pension schemes that individual schemes cannot be seen in isolation. Much as I would wish, as the Armed Forces Minister, to see the armed forces pension schemes as utterly individual, the fact of the matter is that other workers in other areas of public service could not and should not be expected to see that. We cannot change one scheme without it at the very least having implications for others, and we cannot treat armed forces pension schemes inconsistently. The armed forces are part of the society they serve. Service pensioners do not live in a different world where prices move in different ways and the economy operates in a different fashion.

[Steve Rotheram]

Can the Minister inform me of what the envisaged savings will be—specifically for armed forces benefits and pensions—over the next few years as a result of the change from RPI to CPI?

[Nick Harvey]

No, we cannot forecast that at this stage. The Treasury has taken the decision across the public service, and it remains to be seen exactly what that will realise over time. It has based its policy on actuarial assessments that conclude that, over a longer period, there will be a significant saving to the public purse.

The hon. Gentleman will be aware that Lord Hutton is in the final stages of a structural review of public service pension provision and will publish his findings this week. In his interim report, Lord Hutton noted that the most effective way to make short-term savings was to increase member contributions, but he did not recommend that in the case of the armed forces.

We recognise that there can be anomalies and do what we can to iron them out. It was unfair that, under the 1975 armed forces pension scheme, a service person who held acting rank and exercised the responsibilities of that rank, but who died as a result of service before a certain period had elapsed, did not have that higher rank reflected in his pension. We have, therefore, changed the rules. Every soldier, sailor or airman can be assured that, if they die for reasons related to service while holding acting rank, their dependants will receive payments that reflect that rank.

[Steve Rotheram]

I have reflected upon the Minister’s answer, and it seems that the Government do not know what the total savings of this policy will be. Surely there is a ballpark figure somewhere that can be used to say that the policy will address some of the structural deficit that he identified earlier.

[Nick Harvey]

The hon. Gentleman is right—there are such figures, but they are held by the Treasury and have been determined by the Treasury actuaries. They have not been worked out by each Department for itself. The Treasury’s policy is to address the entire situation of public service pensions, which—I will say it again—were a serious problem in terms of their affordability long before the financial crisis or the downturn occurred. The hon. Gentleman will remember that, during the previous Parliament, the previous Government ran themselves into hot water with some of the public service unions due to the reforms they began to make to public service pensions.

Moving indexation from RPI to CPI is one of the ways that this current Government have identified of reducing the scale of the measures that Lord Hutton will have to recommend in terms of varying either contributions or benefits for public service pensions. I have no idea what Lord Hutton will recommend later this week, but I am certain that, on top of that, some reforms will be proposed that will be unpopular and unpleasant. However, they will be less severe than they would have had to be, because of the Treasury’s switch from RPI to CPI. To answer the hon. Gentleman’s question, I am sure that there are such figures, but they are not held at an individual departmental level. He might want to address his question to the Chancellor.

Let me be clear about the challenges we face and why we are considering the issues under discussion. The fact of the matter is that we inherited a record national debt and a huge black hole in the defence budget. We cannot run away from those harsh realities. Tough decisions have to be made, and we are facing up to that challenge. We accept that some of the changes will be difficult and that support for the armed forces remains very high throughout the country. We ask them to do things to keep us safe, and deny them the right to choose what assignments we set them. We will do all we can to support them, properly equip them, compensate them when they are injured and honour them when they die. We owe them nothing less.