News / Pension charge plans unveiled

NHS employers could face major charges if they award big pay increases to staff within the final three years before they retire, under proposed new pension rules.

The rules, under consultation as part of draft NHS pension scheme regulations due to start from April, aim to protect against employers awarding big pay rises ahead of retirement to boost an employee’s pension. Although included in measures to open the scheme to independent providers, the charges would apply to all members of the 1995 final salary scheme.

A virtual cap on earnings is being proposed by NHS Pensions for each of the last three years, set at the consumer price index (CPI) plus 4.5%. Although employees can still receive pay rises above this, and their pension still calculated based on their final salary, the capped earning figures would be used to calculate a virtual pension.

A charge would then be levied on the employer based on the difference between the actual and virtual pension, including both the annual pension and the lump sum.

A worked example in the consultation document is based on an employee earning £30,000 as they enter their final three years and receiving increases of 10% a year compared with an assumed capped level of 8%. In this case, and based on the employee having 30 years’ service, the employer could face a charge of £19,000.

However, estimates at one trust contacted by Healthcare Finance suggest that staff gaining their first executive position, or consultants being appointed as medical directors, in their final years before retirement could trigger six-figure charges. Managers said these levels of charges would be disproportionate in these circumstances as well as being difficult to plan for.

Finance managers also raised concerns about the impact on salary sacrifice schemes as the unwinding of these arrangements before retirement could trigger the capping and charges. The charges could outweigh the benefits of running such schemes. Managers were concerned about the limited awareness of the changes and said greater detail was needed.

The consultation on this ends on 10 February.