In a debate on Pensions Tax Relief: Employment and Retention held this week (November 1), Lord Davies of Brixton asked what assessment has been made on the impact of the annual allowance on both employment and the retention of members of public service pension schemes.
In response to his concerns, Leckie said the government “greatly values” the work of all public sector staff, be they NHS workers, teachers or police officers.
“Public sector pension schemes are mainly defined benefit schemes and are among the most generous available,” he said.
“The annual allowance affects only the highest-earning pension savers, and the government estimates that 99 per cent of pension savers make annual contributions below £40,000—the level of the standard annual allowance.”
Discussing the relaxation of the rules, Davies said recent prime ministers promised to stem the exodus of doctors from the NHS.
Although the annual allowance is a general problem that can affect people across all DB pension schemes, he said it is concerning that the 10 per cent increase in the CPI this September and given the rules of the NHS scheme, some GPs will be faced with additional tax bills into six figures this coming year.
Davies said “tinkering with the rules” will not be enough and urged that radical action is required.
Likewise, Baroness Ros Altman also urged Leckie to go back to the department and look again at the tinkering that has happened to the NHS pension scheme, stating “this will not sort out the problem”.
“The fundamental issue is the way that the annual and lifetime allowances deter extra work and drive early retirement,” she said.
“Although the government has made commendable efforts to make some adjustments, those underlying problems persist.”
She added: “My noble friend said that this affects only the highest earners, but of course, within the NHS, these are often the most valuable members of staff, whom we need to keep.”
However, in the debate, Leckie acknowledged that it was important to look after those at the senior end of the NHS but explained that tax relief offered on pension contributions is expensive, costing the exchequer £67.3bn in 2020-21, with around 58 per cent relieved at the higher and additional rates.
“As I mentioned earlier, there are a number of other aspects on which we have taken action, and perhaps there is more to do to be sure that we can retain our very best doctors and senior clinicians,” he said.
Leckie said he will take the message to the government to consider higher rate tax relief and the amount of money that has been lost in that.
“As the house is aware, we have the Autumn Statement coming up on November 17,” he added.
“Although I am the first not to second-guess what might be in that, I am certain that the chancellor and the prime minister will be looking at all aspects, and particularly in this respect.”
NHS changes
Last month, the government said it would extend amendments to the NHS Pension Scheme designed at boosting health worker numbers, prolonging measures that were introduced in response to the coronavirus pandemic.
The measures were brought in in recognition of three scheme rules that limit the ability of some retired NHS staff to work.
The amendments suspend a 16-hour weekly limit on working hours for members of the scheme’s 1995 section, along with barriers for some staff aged 55 to 60, who have claimed their pension benefits, from returning to work without having their pension benefits suspended.
The Department of Health and Social Care ran a brief consultation between August 28 and September 12 to consider extending these amendments beyond their scheduled expiry on October 31 2022.
Leckie explained that the government also announced changes to the NHS pension scheme to recognise these aspects including changing the pension rules regarding inflation, encouraging NHS trusts to offer “so-called pension recycling”, and implementing permanent retirement flexibilities to allow experienced staff to return to service or stay in service longer.
“I note what the noble Baroness has said, but, on her point about flexibility, one of the actions that we have taken is extending partial retirement; for example, by allowing more NHS staff to take part of their pension while continuing to work and build further pension rights,” he said.
“We have also extended flexibilities enacted in response to the pandemic by suspending the 16-hour rule, which requires some pension scheme members to work no more than 16 hours per week if they return to NHS employment.
“So I reassure the noble Baroness that we have taken action, and I am sure that there is more that we can do.”
In September, the Department of Health and Social Care expanded on its plans to change the way member contribution rates are calculated and decided in the NHS Pension Scheme, launching a new consultation laying out its proposed uplifts to contribution tier thresholds.
The decision to overhaul the way in which members pay contributions was announced in a consultation in October last year. Some of the changes mentioned were due to come into force from April, but were delayed until October 2022 following feedback from the consultation, to which the government responded in February.
Part of the proposed package of reforms would see contribution rates based on actual pensionable pay rather than the notional whole-time equivalent pay model that was used hitherto, while the total number of contribution tiers would be reduced, or “flattened”, over the course of two years.
The overall effect of the proposals would see certain poorer members contributing more, and some of the highest earners contributing less than under the existing system.
sonia.rach@ft.com
