Pension equity

Restricting new flexibilities within the NHS Pension Scheme to clinicians seems wrong in principle and there is a good argument for it being available to all scheme members.

The Department of Health and Social Care issued a consultation on a second set of proposals in September amid concerns that potential tax demands related to pension allowances were starting to have an impact on the delivery of patient care.

The issue has arisen because of dramatic reductions in an annual allowance – limiting the amount of tax-relieved savings that can be made to a pension – and the introduction of a taper that lowers this allowance from £40,000 to £10,000 for the highest earners.

Although the arrangements have been in place for a number of years, the ability to carry forward unused allowance from previous years has meant the full impact has only started to be felt over the last 12 months.

The focus has been on clinicians – and understandably so. In the face of significant workforce challenges, the NHS relies on its clinical workforce to take on additional sessions on a regular basis. However, clinicians have been refusing additional programmed activities and waiting list initiative work, as well as promotions and further responsibilities, because the tax penalty can be higher than the pay for the additional work. Even uncertainty over the impact of the tax rules can be a deterrent.

In more extreme cases, clinicians have been retiring or withdrawing from the pension scheme.

But while it is understandable that the government’s knee-jerk response is to simply fix this issue for clinicians, that doesn’t make it right. Clinicians are vital to the NHS – in the front line of patient care, they are clearly the most visible members of the healthcare team. But ‘team’ is the key word here. In a care system that is increasingly talking about the importance of multidisciplinary working, it seems odd to be making a special case for just some of the team members.

Managers may not take on extra paid shifts – although clearly many are working far in excess of their contracted hours – but they are in their own way fundamental to the delivery of effective and efficient care.

We don’t know how many non-clinicians are disadvantaged by the annual allowance rules. But we are not talking about isolated cases. It is becoming clear that managers are responding in much the same way as clinicians to the pension tax issue – not applying for promotions, not taking pay rises, reducing working hours and leaving the NHS pension scheme (at least temporarily).

A clinical example in a research report for NHS Employers, published in June, highlights the specific dangers of pay rises and cliff edges. It shows how a consultant on £90,000 with £20,000 of private clinic income on top and taking on a managerial role with a pay rise of £14,000 would face an annual allowance tax charge of about £18,000. But increase the pay rise by just £1,000 to £15,000, and the tax charge jumps to £32,000.

In recent years, there have been efforts to support senior finance managers to make the step up to the most senior roles. It would be a shame if the impact of pension tax rules were inhibiting this progress.

Attention is clearly focused on the very high earners and primarily those with legacy pensions in the older final salary-related schemes. But the way the system works means more modest earners can also be hit as they receive a pay rise related to a promotion.

The Department has asked as part of its consultation whether its proposals should be made available to other staff or all staff in the NHS. It would seem equitable to suggest that any flexibilities should be open to all staff. Perhaps more junior staff would welcome the chance to reduce contributions to make them more affordable, even though existing variable rates allow for this to an extent.

The HFMA is keen to understand how the tax rules are affecting finance staff in practice. Are finance managers thinking twice about applying for promotions or turning down pay rises or even thinking about responses that would reduce the financial skills available to the service? Would staff who are unlikely ever to be affected by the annual allowance taxation issue welcome a more flexible pension scheme? You can find a survey link here and the survey will be open until Monday 7 October.