The government has announced its intent to overhaul the way in which NHS Pension Scheme members pay contributions from April next year, following the implementation of the McCloud remedy.
In a consultation published on Friday, the Department of Health and Social Care proposed that members’ contribution rates change to be based on actual pensionable pay rather than the present notional whole-time equivalent pay model, while the existing tiered system will be reduced — or “flattened” — in a process that will take two years to implement.
The proposed reforms would see lower-paid scheme members contributing more than they do currently, while higher-paid members would contribute less.
At present, employers contribute 20.6 per cent of a member’s pensionable earnings. Members collectively are required to contribute 9.8 per cent across the whole scheme membership, a change introduced in the 2010 spending review, before which that rate was 6.6 per cent.
Rebalancing the rates will mean that lower earners will be asked to contribute more than they currently do. The department therefore proposes that adjustments to contribution tiers are done gradually to dampen the impact on take-home pay for staff and mitigate the risk of staff leaving the scheme on grounds of affordability
DHSC
While 9.8 per cent is the aggregate amount drawn from the entire scheme membership, individual members are divided into contribution tiers in a bid to limit financial barriers and encourage greater participation in the scheme.
The government argues that tiering has helped protect the lower-paid, reduce opt-outs, and ensure the scheme is sustainable.
There are seven tiers under the current system, each with different contribution rates.
Those in tier one earn up to £15,431, and pay a contribution rate of 5 per cent. Those in tier two earn between £15,432 and £21,477, and pay a contribution rate of 5.6 per cent.
This continues up until tier seven, in which those who earn above £111,377 pay a contribution rate of 14.5 per cent.
Eighty-nine per cent of NHS staff are enrolled in the scheme, including 90 per cent of nurses and 88 per cent of hospital doctors.
This is slightly lower than the overall participation rate in public sector schemes (93 per cent), but higher than that in the private sector (85 per cent).
The introduction of auto-enrolment further boosted the participation rate in the NHS scheme among lower-paid employees, though opt-outs do still occur and around a third of members who choose to opt out cite affordability as a key consideration, the government argued.
This system has not changed since the public sector pension reforms of 2015, but the DHSC has been working with the NHS Scheme Advisory Board, comprised of trades unions and employer representatives, to review the structure.
The review considered a number of aspects of scheme design, including the number of tiers and how the rate payable should be determined.
In 2018, the NHS SAB agreed that, though the principles underpinning the current system should be retained, changes should be made to further reduce the number of opt-outs, to change how contribution rates are determined, and to reduce the “cliff-edge” factor that comes into play when members move between tiers.
The proposals
The board determined that the number of tiers should be reduced, while the contribution tier boundaries should be increased. It also suggested a change from whole-time equivalent pay to actual pensionable pay to determine the contribution rate.
Trades union representatives did warn, however, about the potential pitfalls of changing the structure from April 2022, but employer representatives argued certain changes would need to be made by that date, and the government has found in their favour.
“While retaining tiering remains the department’s preferred approach, we accept there is a need to reduce the number and steepness of the tiers, moving over time towards more members paying closer to the 9.8 per cent yield,” DHSC explained.
“This is more appropriate in view of the career average revalued earnings scheme accrual method [introduced in 2015], and means that high earners would pay lower contribution rates.”
“Rebalancing the rates will mean that lower earners will be asked to contribute more than they currently do. The department therefore proposes that adjustments to contribution tiers are done gradually to dampen the impact on take-home pay for staff and mitigate the risk of staff leaving the scheme on grounds of affordability,” it said.
The proposals would reduce the number of tiers from seven to six. Under the revised system, staff earning up to £13,231 would be placed in tier one and pay 5.1 per cent from April 2022, rising to 5.2 per cent in 2023, up from 5 per cent at present.
Tier two encompasses those earning between £13,232 and £22,548, paying 6.5 per cent.
The highest tier, tier six, would encompass those earning upwards of £54,764, and members in this tier would pay a contribution rate of 12.5 per cent from 2023. At present, the highest-paid members of staff pay a contribution rate of 14.5 per cent.
A healthcare assistant working full-time earning £19,918 would pay an additional £15 a month after tax relief, but would still pay £46 a month less than if on the average 9.8 per cent contribution rate, the consultation explained.
A nurse working full-time earning £31,534, and therefore paying the average 9.8 per cent contribution, would pay an additional £19 a month after tax relief. The same nurse working 60 per cent of full-time hours would pay £32 a month less and £43 a month less than if on the 9.8 per cent rate, it added.
And a consultant earning £114,003 would pay £85 less a month, after tax relief, but would still be paying £160 a month more than on the average 9.8 per cent rate, it continued.
Part-time workers in particular would benefit from the change from whole-time equivalent pay to actual personable pay, “as the member contribution will be lower for many and better reflective of the amount of pension that they are building”, DHSC argued.
“Around 40 per cent of the NHS Pension Scheme membership work part-time, and it is estimated that 30 per cent of the whole scheme membership would pay less in contributions as a result of moving to actual annual rates of pay.”
It added that such a change would result in “very little change” for practitioner members such as GPs.
The proposals would be phased in over two years. In April 2022, all members would be moved into the 2015 career average revalued earnings scheme, at which point the change between whole-time equivalent pay to actual pensionable pay would be introduced.
“Phasing the new member contribution in slowly would protect scheme affordability for some scheme members and minimise the risks to take-home pay of large increases to member contribution rates,” the consultation stated.
Calls for NHS pension reform to tackle 'medical staffing crisis'
The British Medical Association has used a Public Accounts Committee report criticising the Treasury’s implementation of public sector pension reforms to call for further changes to the NHS Pension Scheme in order to tackle the medical staffing crisis.
“Therefore, it is proposed that the new member contribution structure be phased in over two scheme years — 2022 to 2023 and 2023 to 2024.”
“This phasing will help to minimise opt-outs and reduce the impact on take-home pay for members who will be paying higher contribution rates under the new structure, while ensuring that the new member contribution structure is implemented in a timely manner.”
The consultation will run until January 7 2022.
