Treasury told to act quickly on pensions

In a critical report, MPs blasted the Treasury’s handling of reforms of public sector pensions in 2015, which aimed to reduce the overall cost to the taxpayer. The reforms included protection for scheme members nearing retirement age, but this was challenged on the grounds of age discrimination. In 2018, the Court of Appeal ruled the protections discriminated against younger scheme members.

As a result of this so-called McCloud judgement, NHS Pension Scheme members will be given a choice – usually at retirement – if they would like to receive benefits under the 1995/2008 or 2015 schemes for the period between 1 April 2015 and 31 March 2022.

The PAC said this remedy would likely cost £17bn across the four big schemes (health, education, armed forces and civil service). But it said the Treasury wanted pension scheme members to cover this cost despite it being ‘its own mistake – a mistake that could have been avoided by listening to advice and which will take many decades to resolve’.

The report added that it saw evidence of pension issues affecting delivery of frontline services, such as the fears over pension tax that saw a large number of doctors reducing their working hours, opting out of the pension scheme or retiring early. Though changes have been made to the scheme that aim to prevent this, a recent British Medical Association survey said 72% of respondents would retire early and 61% would reduce their hours because of tax rules. A previous BMA survey had shown that more than half of surgeons in Wales had been told by an accountant or financial advisor to work fewer hours in the NHS.

The committee recommended the Treasury should set out the impact of changes on employer contribution rates regularly, and before implementation. This should minimise the impact on frontline services, it added.

Overall, in the NHS Pension Scheme 10% of employees have opted out of their pension – the equivalent of around 180,000 employees, the Treasury told the committee. However, the committee said opt-outs of the NHS Pension Scheme was not restricted to senior staff. Younger staff were not enrolling in the scheme, and this raised questions over the long-term financial viability of the unfunded scheme.

An HFMA survey in 2019 highlighted that lower-paid staff were more likely to opt out due to concerns about affordability. Another association survey that year found that pension tax issues were the main reason for leaving the NHS Pension Scheme. However, it noted that for some staff the scheme is too expensive.

The PAC report said there were understandable reasons why people may choose to opt out of pension schemes, for example, due to short-term spending priorities. But it added that inadequate pensions are likely to cause issues in the future and push costs into other policy areas, for example if people are more likely to be reliant on benefits.

PAC chair Meg Hillier (pictured) said: ‘The Treasury’s £17bn mistake on pensions reform is a ripple compared to the tsunami of costs to the public purse if government fails to address the growing number of young people unable to afford to plan for a proper pension.

‘Its lack of curiosity about why nearly a quarter of a million workers are not joining these pension schemes is a concern. Pension planning must be long term; mistakes and poor planning have an impact for decades. Short-term cost savings can become long- term costs to individuals with lower retirement incomes and the taxpayer who may end up supporting them.’

BMA pension committee chair Vishal Sharma said: 'It is completely unacceptable if members of the pension scheme are left to foot the bill for these changes. This was a problem entirely of the government’s making and it is their mistake to fix.'

NHS Employers has produced a summary of the McCloud judgement and remedy. Click here for more