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.
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, said 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, said 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.”
Benjamin Mercer is a reporter at FTAdviser's sister publication Pensions Expert
