Moira Warner: NHS pensions overhaul requires strong foundations

    O, what a tangled web we weave, when first we practice to relieve! That shameless re-working of the famous observation made by Walter Scott has been running on a continual mental loop since I read the latest government proposals to resolve the doctors’ pension crisis, writes Moira Warner 

    In a fresh consultation published on 11 September, the Department of Health and Social Care set out a number of measures which it anticipates implementing for 2020/21.

    Most notably it intends that clinicians likely to be impacted by a tax charge will be able to self-determine their accrual rate at the start of each scheme year subject to a 10% of standard minimum contribution and at 10% increments thereafter.

    The government anticipates that members will then be able to adjust their chosen rate towards the end of the year when they have greater clarity on their expected earnings for the year.

    There are further proposals to allow employers to use the value of unused contributions to top up the member’s pay as a cash lump sum and to allow senior clinicians the option of phasing in the “pensionability” of large pay increases subject to certain de minimus criteria.

    Scheme pays methodology will also be overhauled to make the impact on benefits clearer.  The government also intend to commission a new modeller to help members assess the personal impact of all these options.

    To the extent that these proposals reflect calls from doctors’ groups for measures to help them proactively manage pensions tax liabilities, they are welcome. But increased options bring with them increased complexity and I can’t help doubting whether the modeller will be the cement which stops the whole house of cards shaking.

    Here’s why.

    Consider, if you will the proposal that clinicians opting for reduced accrual will be able to ‘fine tune’ their rate towards the end of the year.  In this situation it’s proposed that retrospective contributions at the adjusted rate for the whole year will be due. In turn this means that affected members will need to ensure their net pay after other adjustments (e.g. NICs) for the remainder of the year is sufficient to accommodate the ongoing contributions at the revised rate together with backdated contributions of the balancing amount. This may not always be possible.

    I’m also bothered by the proposed eligibility test for access to the new flexibilities. Aside from being employed in a role that requires registration with an appropriate healthcare regulatory body, the individual will need to “demonstrate a reasonable expectation that their prospective NHS commitments would result in pension growth exceeding their annual allowance”.

    This test appears to overlook that the income cutovers for the tapered annual allowance include all income, not just earnings from employment. It implies that individuals whose non-NHS income causes the tapered annual allowance to be exceeded won’t be eligible for the new flexibilities. It remains to be seen whether this would result in doctors reducing non-pensionable NHS overtime in order to retain eligibility. The test therefore has potential to defeat the object of the exercise.

    Another issue is that any new modeller will only be as robust as the information input into it.  NHS pension entitlement (and hence pension input and any applicable annual allowance charges) is not calculated using “earnings” but using much more complex pay factors in line with scheme regulations and pensions law. Firstly members will need to be clear on which elements of their pay are pensionable and which are not. Thereafter they will need to understand the “pay” that is used in the calculation of benefits. In the 2008 Section the definition is particularly complex where the average of the best consecutive three years pensionable pay out of the final 10 years inflation-adjusted pay prior to retirement is used.

    In short it’s unfathomable for most people and members’ will therefore need to rely on statements of benefits provided by NHS pensions when using the modeller. And here’s the rub. NHS employers are often extremely poor at providing timely employee pay data to NHS Pensions which in turn means that annual benefit statements – the likely source of all scheme data for input into the modeller – are frequently inaccurate.

    Even where the statements are correct, the NHS Scheme year (1 April to following 31 March) is five days adrift from the pension input period so benefit statement values will never produce a modeller result which is wholly accurate.

    The structural integrity of any building constructed on weak foundations is always questionable, and so it is with the pensions of our senior clinicians. There‘s limited merit in raising the flexibility flag on a rambling pensions edifice which is not underpinned by sound data. Even if the inhabitants can find their way around the building, the whole thing is at risk of collapse if missing data leads to incorrect decisions and poor outcomes.

    In the absence of any measures which will ensure NHS members are provided with relevant pay and benefit values as at 5 April each year (and on a timely basis), we can only hope that the promised review of the impacts of the tapered annual allowance on our public servants leads to a much simpler pensions tax architecture.

    Moira Warner is senior business development manager at Royal London