NHS Pension Changes

The NHS Pension is changing. Lengthy prose about the driving force behind these changes (the McCloud judgement & remedy) would be tangential. Instead of dredging the past, let’s look to the future. What’s happening to the 2015 NHS Pension scheme?

Change 1

“Members’ contribution rates would change to be based on actual pensionable pay instead of members’ notional whole-time equivalent pay”

I mentioned a peculiarity of the NHS Pension in my post on Less-Than-Full-Time (LTFT) Finances – those working LTFT pay NHS Pension scheme membership costs as though they were working full-time, but only accrue pension benefits at their LTFT percentage.

For example:
• Full-time basic pay for an FY1 is £29,384/yr. NHS Pension membership costs them the allotted membership rate (9.3%), and they accrue pension based on their (full-time i.e. 100%) pay.
• An 80% FY1 would earn £23,507/yr. They pay the same 9.3% rate as their full-time colleague, whereas they should pay 7.1% based on their actual income. Yet they only accrue pension benefits on their 80% pay.
• A 60% FY1 would earn £17,630/yr. They pay the same 9.3% rate, whereas they should pay 5.6% based on their actual income. Yet they only accrue pension benefits on their 60% pay.

This seems unfair when taken at face value. However, a doctor who worked 80% for their whole career would pay 80% of the pensions costs and accrue 80% of the pension of a full-time equivalent colleague. The cost to the individual of each £1 pension accrued (or conversely the pension generated for each £1 of membership fees) is the same for both full-time and LTFT individuals.

The pensions changes due to come into effect in October 2022 will alter this. (Unfortunately, there won’t be any refunds for those who’ve been affected by this to date: “the mechanism for determining the appropriate rates is prospective only“.)

A reasonable minority (17%) of those consulted opposed this change. One purported issue is that staff may reduce their working hours in order to reduce their pensionable pay to fall within a particular (lower) contribution tier. I think it’s unlikely to be a widespread issue. Maybe it would play a part, though I suspect those looking to work fewer hours have ulterior motives than pension costs.

Another argument against the new system is those working LTFT may earn more pension per pound contributed than a full-time colleague. For example:

Work patternPensions benefitsRelative costRelative cost for £1 of pension benefitsRelative pension benefits for each £1 membership cost
Full-time100%100%11
80% LTFT (current system)80%80%11
80% LTFT (with Change 1)80%76%0.951.06
 
This is based on my own spreadsheet modelling of the NHS Pension, and is merely demonstrative. It models a career spanning from FY1 through to retirement age.

The discrepancy is more apparent if the time period is shortened. For example, between FY1 and ST7, the relative cost of pensions benefits to an 80% LTFT trainee under the new system would be 65% of their full-time equivalent colleague’s.

Whether this is any more or less ‘fair’ is up for debate. There’s more to the story, however, on account of Change number 2…

Change 2

“The structure for member contributions would change”

At present, NHS Pension membership costs you a set percentage of your pensionable (~basic) pay. Said percentage is determined by your ‘contribution tier’, which is in turn dependent on how much you earn annually.

The current system has seven tiers, and the percentage ranges from 5% (for those earning ≤£15,431/yr) up to 14.5% (for those earning ≥£111,377/yr).

Over the next two years there will a phased transition to a new system, with the aim of ‘flattening’ the contribution tiers. From April 2023 there will only be six tiers, ranging from 5.2% (for those earning ≤£13,231/yr) to 12.5% (for those earning ≥£54,764/yr).

The planned changes to the membership cost of the NHS Pension.

The government’s consultation yielded majority (52%) disagreement with this proposed restructuring, though it’s happening anyway. There were various reasons for this disapproval, including concerns regarding:
• Higher earners benefitting more from the changes
• The affordability of the scheme for lower earners.
The BMA’s opinion was that the tier system should be scrapped, with all NHS Pension members paying a flat 9.8% fee.

LTFT

Change 2, when taken alongside Change 1, also impacts on the NHS Pension for the LTFT individual. In short, it make the NHS Pension even more economical:

Work patternPensions benefitsRelative costRatio of membership cost-to-£1 pension incomeRatio of pension income-to-£1 membership cost
Full-time100%100%11
80% LTFT (current system)80%80%11
80% LTFT (with Changes 1 & 2)80%71%0.891.12
 
This is based on my own spreadsheet modelling of the NHS Pension, and is merely demonstrative. It models a career spanning from FY1 through to retirement age.

What does this mean for me?

It won’t influence the pension benefits you receive in retirement.
It will affect how much your pension scheme membership costs you.

Unfortunately, the cost of the pension scheme will rise for FY1, FY2 and CT1/2 doctors. The cost will transition from 9.3% of pensionable pay to 9.8%.

For those ST6-8, the cost of the pension scheme will remain 12.5%.

The cost of the pension scheme will fall for:
• ST3-5’s, from 12.5% to 10.7%.
• Consultants, from 13.5 or 14.5% down to 12.5%

It may feel unfair on those at the bottom of the pay scale, though in my mind it represents a good deal. Sure, your pension will cost an extra £12 (FY1), £15 (FY2) or £17 (CT1/2) each month for four years. You’ll then save at least £75/month as an ST3-5, and the same or more as Consultant for the remainder of your working life.

I estimate Change 2 means my NHS Pension will cost me in the region of 5% less over the duration of my career.

Change 3

“The thresholds for the member contribution tiers would be increased in line with annual AfC pay awards”

The different tiers of pensions cost haven’t been adjusted since their advent in 2015. This has had punitive consequences:

An FY1 starting in 2016 would have earned £23,650/yr basic salary. This put them in the 7.1% contribution tier. Conversely, an FY1 starting in August 2022 can expect to earn £29,384/yr basic salary, putting them in the 9.3% tier.
Over the six years, basic pay went up cumulatively 24%, but annual pensions cost went up 63% (from £1,680/yr to £2,730/yr).

A similar phenomenon has occurred for those ST3-8, who have risen from the 9.3% tier to the 12.5% tier over time. Their cumulative 28% basic pay rise carried with it a 72% pensions cost increase. Staggering!

This, alongside below-inflation pay rises, has taken huge chunks out of take-home pay without any better pension income accrual.

To combat this, from October 2022 the contribution tiers will rise at the same rate as the Agenda for Change (AfC) pay scales. That is, if AfC invokes a 2% pay rise, then the contribution tiers will also all shift up 2%, meaning that everyone should still be in the same tier. AfC is the framework by which the bulk of NHS staff are paid, which is the rationale for choosing it for this particular purpose.

Two-thirds of those consulted agreed with the proposed revamp. There was some disagreement relating to the use of AfC as the basis of the contribution tier increases as it’s not representative of how all NHS staff are paid, including doctors.

In theory, if AfC pay increases are less than those of doctors’ pay it could mean that the same effect occurs as described above. The converse is also true, however. On balance I think it’s a reasonable compromise to use AfC pay scales.

Change 4

“The proposed member contribution structure would be phased over 2 years”

Change 4 is perhaps the least juicy of the tetralogy. In short, the final re-structuring won’t be fully implemented until April 2023.

This change split the surveyed crowd. Approximately half of respondents agreeing with Change 4. The 43% who disagreed were themselves divided into those who wanted faster change and those who wanted things to happen more slowly.

The phased introduction will mostly impact individuals who’ll see their pension contribution tier rise or fall.

Those CT2 and below will see their pensions cost rise and, I’m sure, would prefer a slower introduction of the changes so they can climb the pay ladder first. Conversely, ST3-5’s and Consultants will see their contributions fall and are presumably keen for the changes to be enacted sooner.

In summary
Change 1 will make the NHS Pension 2015 Scheme cheaper for LTFT Trainees.
Change 2 will make the NHS Pension cheaper (ST3-5, Consultants), dearer (FY1 – CT2) or have no effect (ST5-8).
Change 3 should prevent the cost of the NHS Pension rising disproportionately to increases in pay.
Change 4 means these effects won’t be fully in place until April 2023.

Inevitable

I’ve long opined that changes to the NHS Pension 2015 Scheme are a guarantee. Here, perhaps earlier than expected, are the first wave of alterations.

“We fear change”

Garth Elgar

I honestly would have predicted a more fear-inducing and financially detrimental round of revisions. Indeed, the changes feel as though they’ll impact on my pension in a positive way.

I remain wary of future reworkings, however. Are we being given a penny before a pound is taken from us? If nothing else, this demonstrates that changes to the NHS Pension can, and will, happen.

The prudent individual will, in my opinion, be anticipating such future alterations and planning their retirement finances accordingly.

TTFN,

Mr. MedFI

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