Consultation on draft Regulations - NHS Pension Scheme (Amendment) Regulations 2014
Response from the British Medical Association
About the British Medical Association (BMA)
The BMA is the doctors’ professional organisation established to look after the professional and personal needs of our members. The BMA represents doctors in all branches of medicine all over the UK. We are a voluntary association with over two-thirds of practicing UK doctors in membership and an independent trade union dedicated to protecting individual members and the collective interests of doctors.
Member contribution rates
The BMA is disappointed that the Government has gone back on the 2008 negotiated reforms to the NHS Pension Scheme that were already yielding large savings for taxpayers and were estimated to reduce the future costs over the period to 2060 by £67 billion.
The decision in June 2010 to switch the indexation of public sector pensions from the RPI to the CPI further lowered the value of public sector pensions, resulting in an estimated cumulative saving to HM Treasury of £250 billion by 2060. The scale of these savings makes further radical reform unnecessary.
The current ‘blanket’ approach to change ignores the varying stages of reform and different funding profiles of the public sector pension schemes, and particularly the NHS Pension Scheme. Requiring each individual scheme to deliver an average 3.2 percentage point increase in contributions, to be phased in over three years from April 2012, disregards their differing histories of contribution increases and is inevitably unfair to some schemes.
There are big disparities in the proportion of the overall scheme benefits that members fund in the different public service pension schemes. For example, after April 2015, NHS staff will overall fund almost double the proportion of their scheme’s future benefits compared with civil servants. Contribution rate tiers are higher and steeper for NHS Pension Scheme members. Under current plans, by April 2015, the NHS scheme will have seven tiers of contributions with a top rate of 14.5%, while the indicative contribution rates for the Principal Civil Service Scheme have four tiers with a top rate of 9%.
The BMA urges the UK Government to tackle unfairness in public sector pensions, particularly towards the NHS Pension Scheme, now and for the longer term. This can be done by reducing the disproportionate impact of the 2012-13 to 2014-15 increases on the upper tiers of employee contributions in the NHS Pension Scheme, by freezing contributions from April 2014.
There will be an increase in average member contributions from 6.6% to 9.8% of total pensionable pay in the NHS Pension Scheme over the three years to 2014-15. However, the impact on higher paid staff will be much greater. Indicative contributions rates published in the Proposed Final Agreement show that members with pensionable pay of £49,000 and over (around 150,000 scheme members) will see a 6.0 percentage point increase in their gross contribution rates, with the highest earners paying 14.5% of gross earnings from 2014-15.
This means that between 2007-08 and 2014-15 doctors will see a rise in their contribution rates of 108% (for someone earning around £49,000), 125% (for someone earning around £70,000) and 142% (for those earning above £110,000). At the same time, the scheme value has dropped for many.
Given the fixed requirement of a 3.2 percentage point increase in scheme average contributions by 2014-15, any moves to address the disparity in the return on pension contributions would mean flattening the contributions tiers. This would be more appropriate for a career average revalued earnings (CARE) scheme.
There is very limited justification for any tiering in a CARE scheme, since contributions in reflect pension out without any reference to final salary. Lord Hutton’s Final Report acknowledged that, once a scheme design changes from final salary to CARE, the original justification for tiered contributions becomes less valid. This is because the removal of the final salary link ends the discrepancy between the benefits for higher and lower earners.
Although the Hutton report suggested tiered contributions remained appropriate because “In general higher earners have a higher life expectancy and so may receive a pension for a longer time than those with lower earnings,” the data put forward as evidence on mortality and pension benefits did not cover public sector (or NHS) pensions. In addition, the highest pension benefit band considered in the analysis had a lower threshold of £13,000 a year for men and considerably lower for women.
Separately, evidence was cited to illustrate a higher opt-out rate at the lowest salaries and increasing participation in pension saving with increasing salary, but this effect flattened out above around £30,000.
The BMA accepts the general principle that the lowest paid NHS staff should be encouraged by scheme design to join the pension scheme. It also accepts that tiering is appropriate within a CARE system at the gross level to recognise higher rate tax relief. However, the steep tiering that is being phased into the new CARE scheme is completely unjustified.
Steep tiers in contributions in a CARE scheme discriminate against part-time employed staff, as the contribution rate relates to the equivalent full-time salary rather than actual salary. This means a member of staff on a higher salary band working three days a week would pay significantly more for the same pension as a member of staff on a lower salary band working full time.
The funding restrictions set by the Government for the future funding of public sector pensions are largely arbitrary, and the latest reforms pay little regard to the actual funding position of the NHS Pension Scheme or the 2008 changes to the scheme. This is creating and embedding big disparities for and within the public sector, especially in relation to the NHS Pension Scheme.
This is particularly significant given the publication in September 2012 of the Public Service Pensions Bill (now Act), which provides a common legislative framework for all public sector pension schemes.
This is the ideal opportunity to create a fairer approach across public sector pensions, rather than entrench the disparities. It is important for the future sustainability of public sector schemes, that they remain sufficiently attractive to both lower and higher earners.
Meanwhile, the huge savings the Government has achieved by switching the indexation of public sector pensions from the Retail Price Index (RPI) to the Consumer Price Index (CPI), on top of savings already being realised by the 2007-08 pension reforms, could provide some flexibility with how the latest reforms are now taken.
Post 2015 contributions
From 2015, there will be an even greater variation in the proportionate cost of accruing benefits between NHS staff on different salaries. Taking tax relief into account, from 2015, the proportion of top earners ‘ salaries paid into the NHS Pension Scheme will be 2.2 times that of the lowest earners; before the latest reforms, the contribution rate (post tax relief) for the highest earners was 1.3 times that of the lowest.
In April 2015, 75 per cent of members of the NHS Pension Scheme will be accruing benefits in a Career Average Revalued Earnings (CARE) scheme.
The Proposed Final Agreement was clear that in setting post 2015 contribution rates, the differences in design between the pre 2015 and post 2015 schemes would be an important factor. Although tiering contributions in a CARE scheme is hard to justify, the BMA does accept the need for a progressive contribution structure that protects the lower paid, encourages scheme membership and, crucially, is fair to all parties.
It is clear from the actuarial advice that we have received and shared with the NHS Pension Scheme Governance Group, that the current seven tier structure is not a fair and equitable model post 2015. For example, the fact that higher earners often have better promotional experience is not relevant in a CARE scheme, because members build up pension on their salary in each year, rather than their entire pension being calculated on their final salary at retirement.
Whilst there is some evidence that higher earners experience a greater life expectancy and therefore the cost of their benefits can be higher, this can be taken in to account through having a lower band for those earning under £15,000.
The BMA proposes the model set out below, which yields the required average contribution of 9.8%, is based on actuarial advice and is fair and reasonable to all staff.
FTE pensionable pay / Contribution (gross) / Contribution (net)up to £15,000 / 5.00% / 4.00%
£15,001 to £21,175 / 6.50% / 5.20%
£21,176 to £48,982 / 9.30% / 7.44%
£48,983 + / 12.50% / 7.50%
Contact
Andy Blake, BMA Pensions Department
BMA House
Tavistock Square
London, WC1H 9JP
Tel. 020 7383 6419