Govt to fix NHS inflation link and mandate pensions recycling

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".