Your pension

Independent Public Service Pensions Commission review

On 10 March Lord Hutton and the Independent Public Service Pensions Commission published their nine month review of public service pension provision,1 which recommends replacing final salary pensions with career average schemes and linking the normal pension age in the public sector to the state pension age, currently 65 but set to increase to 68 over the next 35 years.

The report also suggests increasing employees’ contributions if the cost of providing public sector pensions exceeds an unspecified ceiling. However, the government will honour in full the pension benefits that have been accrued by scheme members to date, and the final salary link for past service will be maintained. All these changes are expected to come in by 2015.

Needless to say, the BMA is unhappy about these proposals,2 pointing out that doctors accepted considerable changes to their pensions back in 2008, when the normal pension age for new staff rose from 60 to 65 and contributions were increased from an average 6% of salary to an average 8.5%. It also mentions that the NHS pension scheme is in a very strong funding position at present and will provide a surplus to the Treasury of £10.7bn up to 2015-16.

“Basically the closer you are to retirement, the lower the impact would be,” says Andy Blake, head of pensions at the BMA. “On the other hand, if you’re a junior doctor you’re going to have the bulk of your retirement benefits based on a normal pension age of 65, so it would have a disproportionate effect the further you are away from retirement.”

Changes to university pensions

Medical academics who are members of the universities superannuation scheme are likewise facing considerable changes to their pension, including a rise in pension age to 65 in line with the state pension age and the end of their final salary scheme in favour of a career average scheme.3 The BMA suggests that medical academics who retire at senior lecturer level could receive £120 000 less during their retirement if these new proposals are implemented.4 College and university lecturers across the United Kingdom, including those at newer institutions who are part of the Teachers’ Pensions Scheme, are going as far as strike action to block these changes.5

Changes to pay

On top of these changes to pension schemes themselves, doctors’ salaries, the key determinant of their pensions, are also under fire. In the June 2010 Budget the government announced a two year pay freeze for all public sector employees earning more than £21 000,6 and NHS staff in England have also been threatened with a two year freeze in incremental pay progression,7 a possibility that seems to have been narrowly avoided thanks to robust rejection by the BMA.8

These pay freezes could well have a detrimental effect on pensions for doctors approaching retirement, in particular doctors in the 1995 section of the NHS pension scheme, whose pensions are based on the best of the past three years’ whole time equivalent pay. For example, a consultant with 30 years’ service who is a member of the 1995 version of the scheme could well be expecting a pay increase of £5000 in the year before retirement but would now not receive this increase, thanks to the pay freeze. As a result they would miss out on an extra £1875 in their pension and an additional £5625 on their lump sum.9

Review of Fair Deal regulations

If things are bad in the public sector, they’re worse in the private sector. Currently doctors who move from the NHS to a private healthcare firm largely have their pensions protected at public sector levels thanks to guidance known as Fair Deal, which requires the new employer to provide a broadly comparable pension scheme for the transferred staff. But in March the government announced a review of the Fair Deal guidance,10 which is widely expected to suggest abolishing the policy so that private sector employers no longer have to honour the pension benefits of NHS staff who move from the public sector.

Without Fair Deal, a doctor on £100 000 a year who has been a member of the 1995 version of the NHS pension scheme for 40 years could see their pension drop 77% to £11 403 a year if they moved to a standard private sector scheme.11 Salaried general practitioners, locum doctors, and medical academics in particular could suffer from any changes in the provisions. “Let’s be honest, they’re not consulting on [Fair Deal] because they want to make it better, so it will almost certainly have a negative impact,” says Andy Blake, head of the BMA’s pensions department.

Changes to tax rules

Last year the government also announced changes to the taxation of pension savings, which reduced the amount of pension benefits a person could save a year before they incurred tax.12 This value, called the annual allowance, was previously set at £255 000 a year, with a single valuation factor of 10, meaning that an individual could put up to £25 000 a year in his or her pension without paying a tax penalty.13 Anything beyond this threshold would incur 20-50% tax. The annual allowance has now been reduced to £50 000 a year, with a single valuation factor of 16, which means that any pension savings over £3125 would incur a tax penalty. Unused annual allowance from the previous three tax years can, however, be carried forward to the current tax year, potentially lessening the impact for a year or two.

This huge drop in annual allowance could mean a big tax bill for senior doctors—in particular, high earners, people with considerable promotional or pay rises, and doctors who have been members of the NHS pension scheme for a long time.

“The original legislation really did apply to the highest earners,” says Mr Blake. “If we’re calling doctors—who earn £100 000—the highest earners in society, there’s been a slight ideological shift in the focus of this. It’s nakedly to raise more money.”

Changes to indexation

It’s not just the accrual of benefits that has taken a hit lately—pension payouts have also been changed. Previously, the increase each year in the amount of pension payments that a retired person made was linked to a “cost of living” index of inflation called the retail prices index (RPI), which measures the percentage change in the cost of retail goods and services over the past 12 months.

In June 2010 the government announced that increases in pension benefits would be linked to a different measure known as the consumer prices index (CPI), which does not include any housing costs such as mortgage rates or council tax.14 The CPI is typically 0.5% to 1% lower than the RPI; over the past 20 years it has been higher than the RPI only three times. All this means that a person’s pension payments between when he or she retires until his or her death could be something like 15-20% less when linked to CPI rather than RPI.

The effects of the health bill

General practitioners reading about the government’s Health and Social Care Bill may well focus on the extra work they’ll be landed with when general practice commissioning is implemented, but the proposals to cut out primary care trusts and other tiers of middle management could well leave their pensions in limbo.

“When primary care trusts are removed from the picture there will be a big black hole in the administration of pensions,” says Mr Blake. “I’ve asked the Department of Health what they’re going to do, and they don’t know as yet.” One possibility is that staff in the existing primary care trusts might put together organisations that can deal with pension administration.

“Of course the other possibility, and the most likely situation I think, is that it will just open the door for private sector providers to come in,” suggests Mr Blake. “There are a large number of private sector consultants who are very aggressive in the public sector and who will just come in and offer to run those contracts..”

Implications

So what do all these changes stacking up mean for doctors’ pensions? Quite simply, doctors are going to need to work for longer and pay more into their pension for reduced benefits when they retire, while at the same time carrying the major burden of the current NHS reforms. “Doctors are being asked to do more for no more money and at the same time accept an attack on their terms and conditions,” says Mr Blake.

An increase in the normal pensionable age for existing NHS staff could risk triggering an exodus of older, more senior doctors, as doctors in their 50s could opt for voluntary early retirement en masse to dodge the proposed changes. General practitioners in particular may be tempted to take “24 hour retirement,” where they “retire” on a Friday, draw their pension as a lump sum, return to work on Monday, and, providing that they do fewer than 16 hours a week for the first month, continue to earn a salary and pay into their pension.

It’s also possible that doctors might withdraw from the pension scheme altogether. Many doctors are contributing 8.5% of their pay into the NHS pension scheme, effectively subsidising low earners who put only 5% into the scheme. Should doctors choose to opt out, they could destabilise the whole scheme.

Doctors might not just leave the pension scheme—they could consider leaving the profession altogether. “If you look at GPs, at a time when the government is looking at GPs to really carry the changes they’re looking to make, if they are faced with an increase in pension age, an increase in employee and also possibly employer contributions, as well as a reduction in the overall value of their benefits, they’re quite likely to leave,” says Mr Blake. Junior doctors in particular stomach poor conditions early in their careers in the expectation of a good salary in middle age and a final salary pension at retirement—many could decide to take their skills elsewhere if these incentives are removed.

Another knock-on effect could be that A level students might start viewing medicine as a less favourable career given the erosion of doctors’ benefits. “I think that, if you look at everything, starting with students who already face massive debts coming out of university, going in to an NHS where pay is frozen, where pension benefits are devalued, where if they are successful in their work their pay rises might not be as much as in past generations, and when they finally come to retire their pension will be revalued against much less beneficial indexation, the changes could all well put people off studying medicine,” says Mr Blake.

“Ultimately you’ve got to ask what do we want with pensions: do we want to attract the best people to medicine, or do we want a second rate health service?”