Long ReadJun 30 2022

Public sector pensions are in need of a health check

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Public sector pensions are in need of a health check
Photo by Christopher Furlong/Getty Images

I am of course talking about the latest salvo in the ongoing battle between government and NHS clinicians over the application of pension tax charges.

It seems that in April this year there was a 28 per cent year-on-year increase in the number of NHS staff claiming benefits, which, it is argued, points to an increase in retirements resulting, at least in part, from the pension tax system.

I have no doubt that real or perceived ’unfairness’ of the pension tax system has driven some to retire. And I have no doubt that these complaints have been exacerbated by the demands put on our NHS staff as they struggle to cope with the pandemic and its fallout.

But our great NHS army consists of more than just its clinicians and senior staff. It also consists of nurses, pharmacists, physiotherapists and countless others who are unlikely to be troubled by pension tax charges other than in the most exceptional circumstances.

And it seems unlikely that a 28 per cent year-on-year uptick in benefit claims will stem from clinicians alone. So what other factors are at play here?

The McCloud remedy

I for one do not believe it is pure chance that this apparent increase in retirements has coincided with implementation of the first phase of the McCloud remedy.  

Under this remedy, to end the unlawful age discrimination that occurred at the time of public sector pension reform in 2015, all ‘protected’ individuals who would previously have been allowed to stay in their legacy final salary scheme indefinitely, were instead moved across to their scheme’s reformed career average alternative effective April 1 2022.

Since that date, this group of older members has not been building up benefits on the basis they were previously expecting. And there is a good deal of anecdotal evidence to suggest many of them have retired or are considering retirement in order to avoid joining the reformed scheme altogether, or at the very least to minimise membership of it.

And for some, that stems from confusion around how their different portions of benefits work in combination and what it all means for their retirement plans.  

And this problem is not limited to the NHS. Many of the same issues and outcomes exist in other public service pension schemes too. One adviser I spoke to recently reported that his client, a teacher, was convinced that if she joined the reformed teachers’ Care scheme in April this year, she would no longer be able to retire at age 60, and intended taking early retirement as a result.

In another case, a police officer was considering exiting his scheme and investing in crypto currency rather than enter the reformed Care scheme, so poor did he believe benefits under the latter to be.  

Hard realities

The disappointing truth is that although common misconceptions may be driving some early exits, hard realities about the operation of these schemes are driving others.

First, across the board, the interaction between the different normal pension ages under legacy and reformed schemes does not work well for members. 

There is no actuarial enhancement to the legacy benefits of members retiring late from certain schemes even though net pay arrangements in the reformed Care scheme may be much later.

Many police officers fare particularly badly under these arrangements. So there is a heady mix of factors that appear to speak in favour of retirement no matter the recruitment and retention imperatives. And they do not apply solely to our NHS clinicians.

Arguably we have a greater emotional response to disaffection in our beloved NHS than we do in our police forces, but it would be concerning if that emotional response became the catalyst for resolution in the NHS alone. Yes, there are some elements of the NHS pension scheme design that are unique to it and they require a unique solution.

But more broadly there are issues common to many public service schemes that could be addressed in a bid to ease the emerging recruitment and retention crises.  

Lord Hutton's recommendations

In his final report setting out his blueprint for the future of public sector pension provision, Lord Hutton recommended that public service pensions, inter alia, should be ‘supporting productivity’ and be ‘transparent and simple’. All his recommendations were accepted by the government.

But the proof of the pudding is in the eating. We are failing in the first of those objectives because we are failing in the second. And we are failing in the second because we have clung onto historic elements of legacy scheme design that conflict with key elements of reformed scheme design and that combine together to confound and confuse members’ retirement plans.

It is these transitional arrangements that are sometimes unfair, but much more often completely unfathomable to all but the most dogged pensions professionals.  

There are no easy fixes, and I fully accept that there will always be a small number of individuals for whom pension tax is the overriding concern. But if we are to get back to a place where our public servants unequivocally look forward to receiving the undeniably generous pension they have built up as a reward for a life of public service, then we do need to work towards removing some of the blockages I have mentioned here.

And we need to do better at ensuring that members are given clear and simple information so their decisions are based on fact rather than hearsay or misconceptions. And this needs to apply across the public sector, not just in the NHS. No matter how much we treasure that great army of health warriors. 

Moira Warner is senior pension development and technical manager at Royal London