future armed forces pension scheme team

DCDS(Pers) Pensions, Compensation & Veterans

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.

DCDS(Pers) Pensions, Compensation & Veterans2

Future Armed Forces Pension Scheme Team


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


FUTURE PENSION SCHEMEEARLY DEPARTURE PAYMENT (EDP)

Exit the Armed Forces

EDP MONTHLY INCOME

Pensionable Service

LUMP SUM

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


Existing SchemesAFPS 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

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


• Armed Forces need a young workforce:

• Only 2% will serve to age 55

2%16%

• 34% will earn Early Departure Payment

18%

• 64% won’t serve to age 40 – Preserved Pensions

• Average Length of Service is 9 yrs

64%


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


Example 1: OF-4 (Cdr, Lt Col, Wg Cdr) AFPS 75 Immediate Pension

Exit the Armed Forces at 20

yrs Svce

Immediate Pension

of around£23,600

pa

Promote to OF-3

Promote to OF-2

AFPS 75 Pension Accrual

Promote to OF-4

Lump sum of around £70,800

IPP(16 Yrs)

Age 55

Cumulative CPI since

exit

+ CPI


Immediate Pension

of around£23,600

pa


Cumulative CPI since

exit

+ CPI

Immediate Pension

of around£12,600

pa


+ CPI

Example 1: OF-4 (Cdr, Lt Col, Wg Cdr) AFPS 75 Immediate Pension

Exit the Armed Forces at 20

yrs Svce

Promote to OF-3

Promote to OF-2


IPP(16 Yrs)

Age 55

Transition to Future AFPS

10 Yrs

Future AFPSPension Accrual

+ Future AFPSPension

10 Yrs


IPP

Example 2: OR-6 (PO, Sgt) AFPS 05 Early Departure Payment

Exit at 25 yrs svce


Promote to OR-6 (PO, Sgt)

Salary c£34K

EDP Point

(18/40)

+ CPI

+CPICumulative CPI since exit

Income of around

£7,500 pa

Age 55


Income of £9,200 pa

Age 65

Pension of

£12,300 pa



Example 2: OR-6 (PO, Sgt) AFPS 05 Early Departure Payment

Exit at 25 yrs svce


Promote to OR-5 (PO, Sgt)

Salary c£34K

EDP Point

(18/40)

+ CPI

+CPI

Income of around

£2,900 pa





Point of Transition

to Future AFPS

10 yrs

Age 55 Age 65

+ CPI

+CPICumulative CPI since exit

Income of around

£7,500 pa



Pension of

£12,300 pa


Future AFPS Accrual

15Years

of Future AFPS

FutureAFPS


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’


Increasing longevity (and failure to predict accurately)


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


• Armed Forces need a young workforce:

• Only 2% will serve to age 55

2%16%

• 34% will earn Early Departure Payment

18%

• 64% won’t serve to age 40 – Deferred Pensions

• Average Length of Service is 9 yrs

64%

DCDS(Pers) Pensions, Compensation & Veterans2516%

18%

64%

2%

34% of Service

population

66% of Service

population66% of Service

population

34% of Service

population

EDPs paid between exit and age 65

Pensions paid to former EDP recipients

Preserved Pensions

and Full

Career Pensions

33%of cost

33%of cost

33%of cost


Complexity

Accrual rate

Uplift Factor

CAREMoD Funding

Ancillary

Benefits

Actuarial Reductions

NPA + MPA

Employee

Contributions

Indexation

EDP


How does Career Average Work?

Pensionable Service

Sa

lary

(R

ank)

Current schemes

Pension = Rank(Salary) x Service



Pensionable Service

Sa

lary

(R

ank)

WO Brown



Pensionable Service

Sa

lary

(R

ank)

WO Brown

WO White


How does a Career Average scheme work?

£20,000

Year 1 Salary

£300

£314

£286

£21,000

Year 2 Salary

£286

Year 1 Indexation

£22,000

£300

Year 3 Salary

Year 1 Indexation

£286

Year 2 Indexation

1/70 of £20,000

MoD

1/70 of £21,000

MoD

MoD

1/70 of £22,000

£900

Cumulative Indexation

Year 3 Indexation

£300

Year 1 Indexation

£286

Year 2 Indexation

After 3 years pension is worth

(per year):



Pensionable Service

Sa

lary

(R

ank)

WO Brown

WO White



WO Brown

Accumulated Pension

WO White

Accumulated Pension


New Scheme Design

What is already fixed (recommendations of Hutton Report)

What is not fixed:

● Consulting the Service populationCertain 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


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 this timescale

Employee Contributions


New Scheme: What is not fixed

Accrual Rate

Indexation

MoD Funding Cap

Accrual rate

MoD Funding Cap

Indexation


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


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?

Early Departure Payment

35 36 37 38 39 40 41 42 43 44 45 46

AFPS 75 Offrs

AFPS 75 ORs

AFPS 05 All

18/40

New EDP?

20/42 23/45

22 Yrs Svce (from age 18)

16 Yrs Svce (from age 21)

18 Yrs Svce (and reaching age 40)

AFPS 75 Offrs

AFPS 75 ORs

AFPS 05 All Ranks


EDPEarly 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?


DEFENCE INTRANET


WWW - INTERNET

?Questions

Accrued Rights – DIN 2012DIN01-063

future armed forces pension scheme team

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