In a consultation published last week (October 15) , the Department of Health and Social Care proposed that members’ contribution rates change to be based on actual pensionable pay, ie, hours worked, rather than the present notional whole-time equivalent pay model, ie, salary.
In addition, 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 as the number of tiers is reduced from seven to six.
Rachael Hall, independent financial adviser & NHS pension specialist at Sandringham Medical, said this could lead to more people opting out of the scheme.
Hall said: "Increasing pension contributions for low earners is unlikely to be a welcome move, whilst decreasing tax relievable pension contributions for those on the highest levels of income, can push them into tapering thresholds.
"The future scheme design is based on a 'career average' so I think the argument linking pension contributions to actual pay, rather than a whole time equivalent, is less relevant as no future service (except for added years contracts) can build up within the legacy schemes post remedy period. It has been long argued that CARE schemes should operate with flat contribution rates.
"Advisers need to remain focused on the clients overall retirement objectives and not lose sight of how valuable these benefits are."
Current contributions
At present, employers contribute 20.6 per cent of a member’s pensionable earnings and members are required to contribute 9.8 per cent across the whole 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 argued 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.
Proposals
Under the proposals 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 see their contributions rates cut by 2 percentage points, from 14.5 per cent to 12.5 per cent from 2023.
For example, 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.
The government said it would phase in these changes over two years to minimise opt-outs and reduce the impact on take-home pay.
benjamin.mercer@ft.com, additional reporting by amy.austin@ft.com
