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Armed Forces: Pensions

Volume 700: debated on Monday 31 March 2008

asked Her Majesty’s Government:

How the net cash requirement for the Armed Forces pension scheme is calculated; and [HL2553]

What matters arose in the financial year 2007–08 which caused the cash shortfall of £150 million within the Armed Forces pension scheme; and [HL2554]

For what specific purposes the urgent expenditure within the Armed Forces pension scheme of £85 million is required; and [HL2555]

What steps they are taking to ensure that the necessary expenditure of the Armed Forces pension scheme is correctly budgeted for in future; and [HL2556]

Whether in future all the costs of the Armed Forces pension scheme will be brought within a single request for resources subject to an independent assessment before being brought before Parliament; and [HL2557]

On what date Ministers became aware of the £150 million cash shortfall within the Armed Forces pension scheme. [HL2558]

A financial plan for the Armed Forces pension scheme (AFPS) is produced six months ahead of each new financial year. The plan estimates the various costs of the scheme using historical cost data from the previous year and increased to take account of any rise in costs as detailed in Her Majesty Treasury indices, as well as factoring in the variable costs such as members joining and leaving the scheme. Once agreed, the plan becomes the main estimate for the net cash requirement for the AFPS for the following financial year. However, whenever any of the assumptions used in the main estimate are at variance with actual performance during the year, additional funds can be obtained during the course of the financial year via the winter and spring supplementary estimates process. This is an entirely normal process that is designed to allow for unpredictable variations in factors such as the inflow and outflow of scheme members.

The 2007-08 spring supplementary estimate for the AFPS sought an increase in the net cash requirement of £150 million for the 2007-08 financial year due in the main to higher actual total terminal pension payments than had been included at the main estimate. The Permanent Under-Secretary of State for Defence in his role of accounting officer was advised on 8 February 2008. As part of this request, an advance of up to £85 million was also sought from the contingencies fund to meet pension payment cash requirements predicted to arise before Royal Assent of the Armed Forces retired pay and pensions vote. The advance will be repaid following parliamentary approval to the spring supplementary estimate, expected on 20 March 2008.

In the light of this occurrence, the mechanisms for estimating the cash requirement for AFPS will be carefully examined and any improvements identified will be fed into the main estimate process. All AFPS expenditure is subject to detailed National Audit Office scrutiny.