PensionsSep 22 2022

Govt to fix NHS inflation link and mandate pensions recycling

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Govt to fix NHS inflation link and mandate pensions recycling

The government will be correcting pension rules regarding inflation and will mandate NHS trusts to offer pension recycling by 2023, as part of its bid to prevent punitive pensions rules from encouraging workers to leave the National Health Service.

Health Secretary Thérèse Coffey set a range of measures that the government hopes will address key NHS challenges including patient backlogs. 

The waiting list for planned care currently stands at 7mn patients, a figure that Coffey claimed had been exacerbated by the coronavirus pandemic.

The government is proposing changes to the NHS pension scheme in order to boost the health service’s capacity. “We know that people are leaving the workforce for a variety of reasons,” she said.

“For instance, currently pension rules can be a disincentive for clinicians who want to stay in the profession” she admitted, “or to return from retirement and help our national endeavour.”

“We will correct those pension rules relating to inflation,” Coffey continued. “We will expect NHS trusts to offer pension recycling, and we will extend, until 2024, measures that will allow people to stay or to return to the NHS.”

Former health secretary and current health and social care select committee chair Jeremy Hunt welcomed the government's planned pension rule changes from the backbenches. 

In August, Hunt called for “an immediate exemption for doctors to public sector pension rules which are currently forcing them to retire in their fifties in alarming numbers”.

Correcting inflation woes

The standard pensions annual allowance is £40,000. However, a taper lowers the annual tax-free allowance for pension contributions from £40,000 to as low as £4,000 for those NHS Pension Scheme members earning an “adjusted” income of more than £240,000 and a “threshold” income of more than £200,000. 

Those that surpass the limit, however, are slapped with tax bills, while members also face a lifetime allowance of £1mn.

The NHS Business Services Authority has struggled to cope with a surge in retirements, which in the three months to April 2022 were 50 per cent higher than in the same period over the previous five years, according to the Health Service Journal. 

NHS Digital statistics showed that there were 9,737 retirements in the three months to April 2022. The spike in retirements has caused a delay in pension payments.

In a statement, the Department for Health and Social Care announced the introduction of new retirement flexibilities which “will include a partial retirement option for staff to draw on their pension and continue building it while working more flexibly, allowing retired staff to build more pension if returning to service”.

The government also committed to “fix the unintended impacts of inflation, so senior clinicians aren’t taxed more than is necessary”.  

To achieve this, it will amend the revaluation date in the NHS Pension Scheme “to reduce the risk that NHS staff face annual allowance tax charges as a result of high inflation”.

In August, the Policy Exchange think tank called for a reassessment of the link between consumer price inflation and the annual allowance for public sector pensions.

Previously, legislation ensured that only pensions growth above inflation was assessed, as the rate of CPI used to revalue benefits in the career average revalued earnings section of the NHS Pension Scheme was the same rate of CPI applied to uplift annual allowance calculations. 

This changed in April 2016, however, when pension input periods were changed to align annually from April 6 to April 5. These are the periods over which the amount of pension saving under an arrangement is measured. 

The Policy Exchange report argued that “the design of the legislation has created two unintended consequences”. It noted that when CPI rises, members are now assessed for their growth in benefits including inflation. When CPI falls, the annual allowance growth may be negative.

“Negative growth is zeroed and cannot be carried across to other pension schemes within the same tax year or carried back to previous tax years to offset historic tax charges,” the report stated.

Pensions recycling carries legal risks

In June, members of the British Medical Association demanded support for employers to offer the recycling of pension contributions. Pension recycling in this setting entails the passing on of unused employers' pension contributions to an opted-out member of the pension scheme as part of their total reward.

The government has now responded to this request, announcing that by 2023 all trusts “will be required to offer pensions recycling, meaning employer pension contributions can be offered in cash instead of as an addition to pension funds, helping retain senior staff who have reached the lifetime allowance for tax-free pension saving”.

The NHS Employers website guided in March that pensions recycling “may be considered necessary to recognise the fact that staff who have opted out of the scheme due to pension tax issues will not get the full value of benefits from their employer’s pension contribution in comparison to other colleagues”.

It warned, however, of legal risks associated with recycling. Employers should weigh up the impact of recycling on pay equality and the gender pay gap, it warned, especially where recycling is offered to one group of staff and not others. 

Employers could also be accused of using recycling as an incentive for employees to leave the NHS Pension Scheme, the guidance added. 

“Under the automatic enrolment regulations,” NHS Employers cautioned, “employers should not take ‘any action for the sole or main purpose of inducing a worker to give up membership of a relevant scheme without becoming an active member of another relevant scheme’.”

The Department for Health and Social Care policy paper on NHS also revealed the government will be "implementing permanent retirement flexibilities and extending existing temporary measures to allow our most experienced staff to return to service or stay in service longer".

In August, the government announced new proposals in a consultation which extended an existing suspension on the application of rules around “retire and return”. 

The rules, which ordinarily require suspension and abatement of pensions for returning workers who exceed certain thresholds, were originally suspended in March 2020 in a bid to make up a potential staff shortage resulting from the Covid-19 pandemic.

The suspension was due to be lifted in October this year, but the government has now proposed an extension, meaning the rules would not be reapplied until March 2023. 

In reaction to the government's announcement, Hymans Robertson partner Chris Noon said: "Interventions like this continue to highlight the inappropriateness of the pension taxation system."

"The complications of the annual and lifetime allowances make it difficult for many individuals to save for retirement and ultimately have political consequences like we have seen with NHS staff in recent years," he noted, adding that Treasury should "dust off the review of pension taxation" that it came close to implementing in 2016.

Alex Janiaud is deputy editor at FTAdviser's sister publication Pensions Expert