How is the current NHS Pension Scheme structured?
The NHS Pension Scheme (NHSPS) operates in England and Wales. It is an unfunded, contributory public service occupational pension scheme, which means it has no assets and current pensioners are paid out of current resources on a year-by-year basis.
Now the largest single occupational pension scheme in Europe, the NHSPS has two sections. The 1995 Section is for those who joined before 1 April 2008 and the 2008 Section is for those who joined on or after 1 April 2008.
For both sections, the member's (employee) contribution rate depends on the individual's total annual NHS-pensionable earnings and ranges from 5-8.5%. The employer's contribution rate is 14% of total annual NHS-pensionable earnings.
For the 1995 Section, the retirement age is 60. The annual pension is 1.4% of total uprated NHS pensionable earnings plus a tax-free lump sum of normally three times annual pension. Pensions are uprated annually to keep in line with inflation.
What changed in the 2007 reforms?
In 2007 the NHSPS underwent a huge overhaul and the subsequent changes were implemented in 2008. The normal pension age for new staff was increased from 60 to 65.
For both the 1995 and the 2008 sections of the NHSPS, contributions from employers were capped and tiered member contributions were introduced, with the highest-paid NHS staff paying more. Doctors’ contributions increased substantially, from an average 6% of salary to an average 8.5% – a 30% rise in the cost.
For those in the 2008 section, the annual pension is 1.87% of total uprated NHS pensionable earnings minus the amount needed to pay for the minimum tax-free lump sum.
Anyone in the 1995 Section can opt to transfer to the 2008 Section and this could prove financially beneficial for some GPs, depending on when they plan to retire and other circumstances.
What other changes have there been?
Along with an increase in pension contributions, GPs have also faced changes to pension tax relief this year. From 6 April, the amount individuals can save each year in their pension with tax relief dropped from £255,000 to £50,000 – this includes contributions to the NHSPS and any other pension.
In addition, from April 2012, the lifetime allowance – the total amount of pension savings individuals can build up tax efficiently over their life – will reduce from £1.8m to £1.5m.
How else does the government plan to change public sector pensions?
In June 2010 Lord Hutton was appointed chairman of the Independent Public Service Pensions Commission. The commission undertook a fundamental structural review of public service pension provision and published its final report in March.
Recommendations included linking pensions to career average earnings rather than final salaries and aligning the normal retirement age to the state pension age, currently 65 but rising to 66 in 2020 and eventually to 68.
The government’s full response to the Hutton review is expected in October or November this year, after which it will hold a consultation. However, the government has already taken some action and changed the way the value of the pension tracks inflation – it has switched from using the Retail Prices Index (RPI) to the Consumer Prices Index (CPI).
In June this year, Danny Alexander, chief secretary to the Treasury, indicated that the government plans to implement Lord Hutton’s recommendations. He said the government wanted pension contributions to rise by an average of 3.2% over three years, phased in from April 2012, and the normal pension age for public sector workers to link to the state pension age. He also said that pensions should be based on career average earnings rather than final salaries, although any pension accrued under the current final salary scheme would be protected.
How will these changes affect GP pensions?
So far the only thing that has changed is the switch to using the CPI instead of the RPI to track inflation. The CPI is comparatively lower than the RPI because it does not include items such as council tax and mortgage payments. Now public sector pensions follow the CPI rather than the RPI, they will increase by less per year because of the way CPI is calculated.
The government is in discussion with all public sector unions about its plans to increase contributions, change the normal pension age and move to a career average scheme.
A switch to career average would not affect GPs. GP pensions are already based on a career average revalued earnings deal, which gives them benefits roughly equivalent to consultants on final salary schemes. However, according to Andy Blake, BMA head of pensions, the worst possible outcome of the Hutton review would be for the government to accept the report in its entirety.
GPs could then ‘look forward’ to contributing more (up to 15.5% of their income) to their pensions, working longer (until they are 68) and getting less out of their pensions, Mr Blake says.
There are also fears that accepting Hutton’s recommendations would be detrimental to the pensions of younger GPs. Recent BMA worst case scenario figures have shown that 30-year-old GPs who started contributing to the pension scheme aged 25 would be expected to work for an extra eight years under the reforms. This would see them paying up to £140,000 in additional pension contributions.
If the government does accept the Hutton review, 2015 is the ‘absolute earliest’ that reforms could be expected to be implemented, Mr Blake says.
Why are the BMA and other unions angry about the reforms?
It has been calculated that in the years up to 2015/16 the NHSPS will provide a surplus to the Treasury of £10.7bn.
In May this year the public accounts committee said that projections by the government actuary's department suggest the changes made in 2007/8 to the civil service, NHS and teachers' pension schemes ‘will bring substantial savings in taxpayer costs worth £67bn over 50 years and stabilise their costs at around 1% of GDP’.
The BMA has warned that an increase in normal pensionable age for current NHS staff would be ‘unacceptable’ and could lead to a wave of early retirements.
It has also been argued that a number of the reforms suggested by the Hutton review have already been implemented in the NHSPS under the 2007 reforms. The age of retirement was raised and employer contributions were capped.
Motions were raised at the LMCs conference and the BMA annual representatives' meeting calling for industrial action over pensions. However, Mr Blake says that any industrial action is still a long way off and it is down to the government to prevent it. ‘Industrial action would be a massive failure on the government’s part,’ Mr Blake says.
The BMA is asking the government for a ‘reasonable dialogue’. It has recommended that the government use the NHSPS as a blueprint for future public sector schemes, rather than using a ‘broad brush approach’ and viewing all schemes in the same light.
‘I hope the government will take a step back and think through the implications,’ Mr Blake says. ‘We want our members to be treated fairly.’
- For more on pensions visit GPonline.com’s Pensions Toolkit