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FUTURE ARMED FORCES PENSION SCHEME CONSULTATION This presentation should be viewed in conjunction with the script which is in MS Word Document format on the same page. Future Armed Forces Pension Scheme Team. PURPOSE.
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FUTURE ARMED FORCES PENSION SCHEMECONSULTATION This presentation should be viewed in conjunction with the script which is in MS Word Document format on the same page.
PURPOSE • MoD will introduce a new pension scheme from April 2015. The majority of Service personnel will be transferred to the new scheme • AIMS: • To reassure you about your rights to your existing Armed Forces Pension • To gather your views on the design of the Future Armed Forces Pension Scheme: • Focus Group • Questionnaire: online or Hard copy • Consultation Document
LUMP SUM Exit the Armed Forces FUTURE PENSION SCHEMEEARLY DEPARTURE PAYMENT (EDP) EDP MONTHLY INCOME Pensionable Service EDP POINT
Your views count • The new pension has to be acceptable to the wider UK Government. It has to be fair, both to you and to the taxpayer • The opinions of the Service population are important • Your views will be used as evidence to support a recommendation
PROGRAMME • Introduction • Existing Schemes: • Describe AFPS 75 and 05 • Confirm rights to pension earned under existing pension schemes (Accrued Rights) • New Scheme: • Drivers for change • What will change • Where your views are needed • What happens next
AFPS 05 Non contributory Final Salary (best 365 days in last 3 years) 2 yr Vesting Period Pensionable Service accrues from first day of paid service Early Departure Payment (EDP) made after 18 yrs svce and age 40 Preserved pension for those who do not reach EDP Lump Sum of 3 times annual pension Full pension from age 55 Existing Schemes AFPS 75 • Non contributory • Rep Pay Rate based on Final Rank • 2 yr Vesting Period • Pension accrues after: • Age 18 (Other Ranks) • Age 21 (Officers) • Immediate Pension (IP) paid after: • 22 yrs service (Other Ranks) • 16 yrs service (Officers) • Preserved pension for those who do not reach IP • Lump Sum of 3 times annual pension • Full pension from age 55
Average Length of Service is 9 yrs • 64% won’t serve to age 40 – Preserved Pensions • 34% will earn Early Departure Payment • Only 2% will serve to age 55 18% 64% 2% 16% • Armed Forces need a young workforce:
KEY POINTS • AFPS will change – not before 1 April 2015 • Your rights to pension already earned are protected • The new pension will remain amongst the best available in the public or private sector • This Consultation will allow you to share your views on the design of the new pension
ACCRUED RIGHTS Government has stated that: ‘Pension benefits already earned up to the implementation date of any new scheme will be protected. Individuals will be able to draw these benefits at the same age as now and they will be based on their final salary at the date of retirement.’
ACCRUED RIGHTS • Additional 10 year Protection • Regular Service personnel who were born on or before 1 Apr 1967 will see no change to the pension they earn or when they can draw it • Reserve personnel who were born on or before 1 Apr 1962 will see no change to the pension they earn or when they can draw it • Effectively, they can remain on their existing schemes • (DIN 2011 01-226 and DIN 2012 01-063)
Examples • Warning. The following examples only give an indication of the final entitlements. There are many variable factors between now and transition to the FAFPS which make an exact calculation impossible • What follows are two examples, more information to suit your individual circumstances is available at: • DIN 2012 01-063(26 examples) • Intranet
Lump sum of around £70,800 Promote to OF-4 Cumulative CPI since exit + CPI Promote to OF-3 Immediate Pension of around£23,600 pa Promote to OF-2 AFPS 75 Pension Accrual Exit the Armed Forces at 20 yrs Svce Age 55 IPP(16 Yrs) Example 1: OF-4 (Cdr, Lt Col, Wg Cdr) AFPS 75 Immediate Pension
Lump sum of around £70,800 10 Yrs + Future AFPSPension 10 Yrs Cumulative CPI since exit Lump sum of around £37,800 + CPI Immediate Pension of around£23,600 pa Future AFPSPension Accrual + CPI Immediate Pension of around£12,600pa Transition to Future AFPS Example 1: OF-4 (Cdr, Lt Col, Wg Cdr) AFPS 75 Immediate Pension Promote to OF-3 Promote to OF-2 AFPS 75 Pension Accrual Exit the Armed Forces at 20 yrs Svce IPP(16 Yrs) Age 55
Lump sum of around £36,900 Salary c£34K Lump sum of around £36,900 Promote to OR-6 (PO, Sgt) + CPI Pension of £12,300 pa Cumulative CPI since exit +CPI AFPS 05 Pension Accrual Income of £9,200 pa Income of around£7,500 pa Age 55 Age 65 Exit at 25 yrs svce EDP Point (18/40) Example 2: OR-6 (PO, Sgt) AFPS 05 Early Departure Payment IPP
Lump sum of around £36,900 Salary c£34K Lump sum of around £14,400 10 yrs Lump sum of around £36,900 15Yearsof Future AFPS Lump sum of around £14,400 Promote to OR-5 (PO, Sgt) + CPI FutureAFPS + CPI Pension of £12,300 pa Income of £4,800 pa Cumulative CPI since exit Future AFPS Accrual +CPI AFPS 05 Pension Accrual +CPI Income of £9,200 pa Income of £3,600 pa Income of around£7,500 pa Income of around£2,900 pa Example 2: OR-6 (PO, Sgt) AFPS 05 Early Departure Payment Age 55 Age 65 Exit at 25 yrs svce EDP Point (18/40) Point of Transition to Future AFPS
Accrued Rights Summary • Rights earned to the Point of Transition are protected • Rights will be based on final salary, not salary at Point of Transition • Rights include no change whatsoever to when the pension benefits can be drawn • Further information: • DIN 2012 01-063 • Intranet
NEW SCHEME:Need for change • Increased longevity (and consistent failure to forecast this) • UK PLC - Pensions ‘Black-Hole’
NEW SCHEME:Need for change • Increased longevity (and consistent failure to forecast this) • UK PLC - Pensions ‘Black-Hole’ • Government debt 2011 - £883 Bn Jan 2012 - £1.000 Trn • MOD pays £1.9 Bn pa into Armed Forces Pensions: • 34% of total pay bill, rising to 42% • Cost of public service pensions paid out has risen by over a third over the last ten years to £32 billion in 2008/2009 That is more than is spent on police, prisons and courts combined
HUTTON REPORT • All Public Service pension schemes Principles: - Affordable and sustainable. - Adequate and fair. - Support productivity. - Transparent and simple. 27 Recommendations
Hutton Key Recommendations(Those most relevant to Armed Forces) • Normal Pension Age linked to State Pension Age and should track planned changes but: ‘…for the uniformed Services…a pension age of 60 is appropriate.’ • Pension Schemes should be CARE (Career Average Revalued Earnings) • Lump sums should be made available • Preserved Pension Age linked to State Pension Age (currently 65 and rising) (Note this is already the case for AFPS 05 and AFPS 75 for service beyond 2006) • Annual Statements on Pension Benefits earned to date • Workers to have representation in pension management
Average Length of Service is 9 yrs • 64% won’t serve to age 40 – Deferred Pensions • Only 2% will serve to age 55 64% 2% • Armed Forces need a young workforce: • 34% will earn Early Departure Payment 18% 16%
66% of Service population Preserved Pensions and Full Career Pensions EDPs paid between exit and age 65 33%of cost 33%of cost 34% of Service population 33%of cost Pensions paid to former EDP recipients 66% of Service population 34% of Service population 18% 64% 2% 16%
Complexity Accrual rate AncillaryBenefits NPA + MPA Uplift Factor Employee Contributions CARE Indexation MoD Funding Actuarial Reductions EDP
How does Career Average Work? Current schemes Pension = Rank(Salary) x Service Salary (Rank) Pensionable Service
WO Brown How does Career Average Work? Salary (Rank) Pensionable Service
WO White How does Career Average Work? WO Brown Salary (Rank) Pensionable Service
1/70 of £22,000 1/70 of £21,000 1/70 of £20,000 MoD MoD MoD £21,000 £22,000 £20,000 £314 £300 Year 2 Indexation Year 2 Indexation Year 1 Indexation £300 £300 £286 Year 1 Indexation Year 1 Indexation £286 £286 £286 Year 1 Salary Year 2 Salary Year 3 Salary How does a Career Average scheme work? After 3 years pension is worth(per year): Year 3 Indexation Cumulative Indexation £900
WO White How does Career Average Work? WO Brown Salary (Rank) Pensionable Service
How does Career Average Work? WO Brown WO White Accumulated Pension Accumulated Pension
New Scheme Design • What is already fixed (recommendations of Hutton Report) • What is not fixed: • Consulting the Service population • Certain specific elements • Subject to discussion with Government
New Scheme: What is fixed • CARE (Career Average Revalued Earnings) • Normal Pension Age increased to 60 • Deferred Pension Age link to State Pension Age • NPA Lump Sums not automatic with pension, but still available • Annual Statements on Pension Benefits earned to date • Service personnel to have a voice in new scheme • No plans to alter Ancillary Benefits (incl Death in Service) • No employee contributions
Employee Contributions Contributions • Service personnel do not make any compulsory personal contributions to the AFPS • You will not be asked to pay a direct contribution to your pension when the new scheme is introduced • Govt will cap employer’s contribution to constrain costs which arise from unforeseen pressures (such as further increases in longevity). If costs rise above the cap in the future, the Govt will consider the best approach to managing the increasing costs. Service personnel will be fully consulted on any changes. • Govt consider that the cost cap will not be exceeded in the next 25 years, and has said that there should be no future public service pension reform in thistimescale
New Scheme: What is not fixed • Accrual Rate • Indexation • MoD Funding Cap Accrual rate MoD Funding Cap Indexation
EDP New Scheme: What is not fixed(and is the main focus of this Consultation) • Early Departure Payment (EDP)– when? • EDP Lump Sum? • EDP Monthly income?
EDP Early Departure Payment • Under AFPS 05 paid after 18 years Service and reaching age 40, whichever is later • Likely to move to slightly later, in line with move of Normal Pension age. But by how much? • No other public service pension has a similar EDP • 1/3 of pension costs is made up of EDPs in payment
New EDP? 35 36 37 38 39 40 41 42 43 44 45 46 Early Departure Payment AFPS 05 All18/40 AFPS 75 Offrs AFPS 75 ORs 20/42 23/45 16 Yrs Svce (from age 21) AFPS 75 Offrs 22 Yrs Svce (from age 18) AFPS 75 ORs 18 Yrs Svce (and reaching age 40) AFPS 05 All Ranks New EDP?
EDP Early Departure Payment • Paid as a Lump Sum and Monthly Income: • EDP Lump Sum? • Justified for Resettlement and Compensation for loss of full career • EDP Monthly income? • Justified for Resettlement and Compensation for loss of full career • Vast majority of Service personnel will be in employment within 6 months of leaving the Services • New pension scheme could maximise either of these, but we cannot afford to maximise everything
SUMMARY • AFPS will change – not before 1 April 2015 • Your rights to pension already earned are protected • The new pension will remain among the best available in the public or private sector • This Consultation will allow you to share your views on the design of the new pension
MoD Intent • The Government has confirmed that public service pensions will remain among the best available • The MOD has made its position clear – that a new pension scheme must continue to be: • highly competitive in relation to other schemes in recognition of the Armed Forces’ unique commitment; • retention positive in pulling personnel through to key career points and • aligned with the development of the New Employment Model (DIB 2011 – 38)
WHAT HAPPENS NEXT? • Today: Focus Groups • Online Survey • Questions: • How long do you intend to serve? • Importance of EDP Lump Sum? • Importance of EDP Monthly Income? • Timing of EDP qualification (18/40 point)? • Who should represent the views of Service personnel in the new scheme?
