The government is to amend regulations to the NHS Pension Scheme that has seen hundreds of employers, including GPs, hit with charges for staff members who are in the last three years prior to retirement, which could amount to hundreds of thousands of pounds.
The government opened a consultation in January on its proposals to amend final pay controls, which were designed to protect the NHS Pension Scheme from the costs of large increases in pensionable pay.
Under the existing regulations, introduced in 1995, pensionable salary increases in a qualifying member’s last three years before retirement cannot exceed an “allowable amount”, with any increase above the consumer price index plus 4.5 per cent being deemed “excessive”.
“Excessive” increases saw employers charged “excess employer contributions”, otherwise known as a final pay charge, to cover the cost of benefits above the allowable amount, thereby ensuring that the NHS scheme is not saddled with the additional burden.
Whether the change in the threshold where these controls apply from CPI plus 4.5 per cent to CPI plus 7 per cent is reasonable depends on our sense of perspective. In the current environment, CPI plus 4.5 per cent is probably already a level of pay-rise most workers can only dream of
Moira Warner, Royal London
Following the introduction of a final pay control policy in 2014, two qualifications were added that were intended to stop employers being hit with a hefty bill if a significant pay rise had been awarded for reasons outside their control, for instance national minimum wage increases, or the receipt of Clinical Excellence Awards.
However, the NHS Business Services Authority, which operates the final pay controls, raised concerns in 2018 that the regulations were still seeing final pay charges levelled in cases that were not intended by the policy, and a number of employers found they had been hit with the charges despite their pay increases stemming from promotions they felt should have been exempted.
The NHS Scheme Advisory Board reviewed the policy and concluded that, though the regulation performed a vital role and should be retained in some form, it should be reformed to fix the problems identified by employers and the NHSBSA.
The government picked up two of the four proposed reforms and put them to consultation. It proposed raising the allowable amount to CPI plus 7 per cent, and to include further exemptions in the final pay control regulations.
The consultation closed in April and the government published its response on Thursday, announcing its intention to press ahead with the proposals.
A welcome move
Graham Crossley, NHS specialist at Quilter, told Pensions Expert the move was reasonable, especially in light of the dramatic increase in the number of regulatory breaches over the past two years.
While only 60 breaches were recorded in 2017-18, that number jumped to 607 in 2018-19 and to 931 in 2019-20.
Many employers would have incurred charges because of circumstances that “did not really fall within the intention of the original policy”, he said.
“For example, I know of one case where a member of staff at a GP practice was promoted to a practice manager role because of their ability and took on significantly more responsibility, which led to higher pay,” he explained.
“This increase in pay caused a huge increase in their pension entitlement, which caused an annual allowance charge for the year. The member then opted out of the NHS pension for fear of further taxation. If they had stayed out of the scheme and retired, the GP practice would have had to pay a final pay control charge of over £300,000 — bearing in mind the GP practice only has a few doctors as the ‘business owners’ it would have seriously dented their individual finances.”
“Similarly, there are now a number of practice managers who are also partners in their GP practice,” he continued.
“This means their pensionable pay fluctuates each year, depending on the profitability of the GP practice — however, the majority still have final salary-linked pensions, so if the profits have a spike, then not only can the practice manager have an annual allowance charge, but it can trigger a final pay control charge if the pay forms part of their final pension award.”
The government’s response to the consultation specifies a number of additional exemptions to be included, clarifying, for instance, which pay increases are accepted to be outside an employer's control.
Increases approved by the secretary of state are to be spared, as well as those that come as part of “nationally agreed contracts and framework agreements”, those received as a result of a National Clinical Excellence Award, and those that come about following a promotion “on the basis of fair and open competition”, the response stated.
Rebecca Smith, managing director of NHS Employers, part of the NHS Confederation, told Pensions Expert that employers “agree that the changes, now confirmed in the outcome of the consultation, will help to make sure employers are only charged where they give a pay increase that is within the aim of the final pay control policy".
However, Moira Warner, senior intermediary development and technical manager at Royal London, said that, though the changes were “entirely reasonable”, it seemed "perverse that the NHS final pay controls have been reviewed by government due to concerns raised by the scheme administrator in 2018 that the volume of these charges was creating an 'administrative burden'. It’s a little like the tail wagging the policy dog”.
“Otherwise, whether the change in the threshold where these controls apply from CPI plus 4.5 per cent to CPI plus 7 per cent is reasonable depends on our sense of perspective. In the current environment, CPI plus 4.5 per cent is probably already a level of pay-rise most workers can only dream of, but would be much more normal in a higher interest rate environment,” she said.
“Scheme regulations are made for the longer term, not just the here and now. But whether the level is set at CPI plus 4.5 per cent or CPI plus 7 per cent, it’s important that there’s visibility of these employer final pay control charges to the taxpayers who ultimately underwrite them.”
Fixing discrimination
The government will also equalise survivor benefits and fix discrimination identified in the Goodwin judgment last year.
That ruling “considered the rules on survivor benefits in the Teachers' Pension Scheme and concluded that a female member in an opposite-sex marriage was treated less favourably than a female member in a same-sex marriage or civil partnership, and that treatment amounted to direct discrimination on the grounds of sexual orientation”, the government’s response explained.
“As a direct result of this discrimination, male survivors of female members were entitled to a lower rate of survivor benefit than a comparable same-sex survivor.”
The proposed rectification could mean “the value of survivor pensions payable to some male survivors of female members may increase". "Where this relates to a female member who died on or after December 5 2005 there may also be a payment of arrears due to the survivor,” the response added.
BMA calls for doctors to be exempt from pension age hike
On the go: The British Medical Association has called for NHS workers to be exempt from proposals to increase the minimum pension age to 57, saying the complex nature of pensions taxation means many need to retire before this age.
“Equality issues related to survivor benefits in public service pension schemes have been subject to repeated change and challenge in recent years,” Warner said.
She warned, however, that the equalisation of benefits in this manner “runs counter to the government principle of paying entitlements based on the rules in force at the time the member served".
“In an equal society it is right and proper that these anomalous provisions are rectified,” she said, but “while this battle may have been won, the war isn’t over yet".
"Anomalous provisions continue to exist — particularly in old-style final salary schemes and particularly in relation to cohabiting partners," she concluded.
