The DHSC has responded to continuing concerns about how the operation of the tapered annual allowance is affecting the delivery of NHS services, by launching a new consultation (dated 11th September 2019).
The consultation proposes that GPs, senior doctors and nurses be allowed the flexibility to set their own level of pension contributions at the start of each tax year and pay lower contributions to reduce the likelihood of the annual allowance/lifetime allowance impacting on them (with contributions being a percentage of the normal scheme contribution in 10 per cent increments of the full accrual level). Other proposals include an option to change their pension contributions towards the end of the tax year when the individual has a clearer idea of their tax situation; and individuals who receive a large pensionable pay rise being able to incrementally phase, over several years, the extent to which their new pay is treated as pensionable. DHSC is also developing a tool to help clinicians tailor the new flexibilities to support their own individual circumstances.
Subject to the consultation outcome, the government will work to implement the changes in time for the beginning of the 2020/2021 tax year.
According to DHSC, there isn't a clear case that annual allowance tax charges are creating retention and productivity issues in the non-clinical NHS workforce. However, the Department has invited submissions on whether non-clinical staff exceeding the annual allowance is leading to a reduction in NHS capacity and impacts patient care.
Whilst the approach of continuously opting in and out of the Scheme has allowed some individuals to manage their pension growth, the Department wants to offer a more structured option within the Scheme. The Department therefore proposes to amend NHS Pension Scheme rules to provide a new 'flexible accrual' facility. The proposals will allow eligible members to:
- Choose (before the start of each scheme year) a personal accrual level in 10% increments and pay correspondingly lower employee contributions. For example, 50% accrual with 50% contributions, or 30%:30% or 70%:70%. Based on their income expectations for the year ahead and the amount of pension already built up from previous years, individuals can set their accrual at a personal 'safe' level that is unlikely to lead to a tax charge.
- Fine tune their pension growth towards the end of the scheme year by updating their chosen accrual level when they are clearer on their total earnings, e.g. go from 50%:50% to 60%:60%. The updated accrual level must be higher than initial level, and will have retrospective effect from the start of the scheme year. Contribution arrears relating to the higher accrual level would be payable by the member and employer before the end of the scheme year.
In addition, under the proposals:
- Where clinicians choose a lower level of accrual and pay correspondingly lower contributions, the employer will also pay lower aggregate contributions. However, it is important to understand that the flexibility relates specifically to the cost of accruing the pension benefit. There is also a cost to providing full ancillary benefits (death in service lump sum, survivor pension, ill-health retirement cover). Also, part of the employer contribution relates to recovering a shortfall in meeting the cost of past benefit accrual in the NHS Pension Scheme as identified through each actuarial valuation of the Scheme.
- Where a member elects to increase their accrual level later in the year, both the member and employer are required to pay the associated higher contribution rate. As the increased accrual level is backdated to the start of the scheme year, so too would be the higher contribution rate. This will create arrears of both member and employer and member contributions that must be paid by the end of the scheme year for the higher accrual level to apply during that year.
- Ancillary benefits such as 'death in service' life assurance and survivor benefits would continue to be provided in full, together with ill-health retirement cover.
The Department proposes that eligibility for this flexible accrual option be contingent on meeting two tests. The individual must:
- be employed in a role that requires registration with an appropriate healthcare regulatory body; and
- demonstrate a reasonable expectation that their prospective NHS commitments would result in pension growth exceeding their annual allowance.
The NHS Pension Scheme currently operates a "Scheme Pays" facility, through which individuals can meet their annual allowance tax charges by choosing to have it deducted from their pension pot at retirement. Under Scheme Pays the pension scheme pays the tax charge on behalf of the member directly to HMRC. This creates a debt that is repaid at retirement where the charge value plus interest is deducted from the member's pension before it is put into payment.
However, the current way that the NHS Pension Scheme operates Scheme Pays may not provide a clear insight on how it affects member pensions. The consultation proposes an alternative method that seeks to provide greater transparency for members. This would involve annual member benefit statements showing the Scheme Pays deduction as a pension debit so that they can see the adjustment to their pension at retirement as it increases with interest each year and compare this with how the accrued pension also increases over time though annual pot revaluation or salary increase.
Staff who are high-earners early in their career may incur annual allowance tax charges frequently throughout their career. Whether staff pay their annual allowance charges by using Scheme Pays or in cash upfront will be an individual decision and depend on their circumstances. Central to this decision is a clear understanding of how at retirement the size of a Scheme Pays deduction from the pension compares with the final value of the pension growth that led to the tax charge, i.e. does the additional pension outweigh the debit?
Where members choose to opt-out of the scheme because of annual allowance tax charges, some employers are considering or have actually started paying the members the value of the unused employer contributions. This already happens for GP partners who retain within the practice the employer contribution that is included in the payment received for performing their primary care contract. Although the Department is committed to the NHS Pension Scheme remaining a cornerstone of the reward package for all staff , the Consultation recognises that "for scheme members who do or are likely pay annual allowance tax charges, alternative reward options could be appropriate".
Paying unused employer contributions as additional salary
A number of points arise from the Consultation:
- The Consultation notes that recent NHS Employers Guidance on approaches that employers can consider taking to mitigate the impact of pension tax on their workforce in this tax year, included "consideration of recycling unused employer contributions into salary". The government states that its response to this new consultation will provide clarity around such approaches after the government's flexibilities are introduced. Although the government is reserving its position at this stage on whether it will expressly allow recycling of unused employer contributions into salary after April 2020, it is possible that the Government will take a more permissive approach to any such policy which is already in place before the Consultation closes on 1 November 2019, or possibly the later date on which it formally responds to the Consultation.
- DHSC "is committed to the NHS Pension Scheme remaining a cornerstone of the reward package for all staff. However, it recognises that unlike scheme members who do not pay annual allowance tax charges, "the incentive for other individuals to maintain contributions to their pension may be less and so alternative reward options could be appropriate".
- The proposals expressly state that employers would have "the discretion to consider paying any unused employer contributions where members take up flexible accrual". A purpose of the flexible accrual proposal is to enable almost all high-earners to participate in the NHS Pension Scheme. In the light of the design of the proposed flexible accrual facility, it is considered that if employers decide to add the value of unused employer contributions to staff pay, they would pay the balance as a non-recurrent lump sum at the end of the year. "Such a payment will contribute toward the member's threshold income for the purpose of assessing their annual allowance. Contribution rates are subject to change following future scheme valuations and therefore the amount available as unused employer contributions could go up or down in future".
- "The government's response to this consultation will set out the circumstances in which employers may wish to provide unused contributions from the next scheme year to staff who take up flexible accrual. The Department is clear that decisions on paying unused employer contributions will remain a matter for individual employers to take." The Consultation notes that in making their decision, employers will need to consider any equality and affordability issues.
- The aim of the policy is to mitigate the impact of the annual allowance on NHS capacity, not to advantage specific groups. On the information currently available, the Department considers that it is reasonable and proportionate to the aim to target flexibility to high-earners only as they are the group affected by the annual allowance tax.
- Whilst the aim of the policy is not to advantage high earning members but instead it is to attenuate the disincentive to perform the services that the NHS needs because of their tax position, a consequence of this is that their take-home pay will increase. Given that lower earners are more likely to be constituted from groups with protected characteristics (for example, younger members, women, disabled staff, staff with certain religious beliefs or are part of particular ethnic groups), the Department wants to consider further the fact that, by offering flexible accrual to high earners only, the difference in take-home pay between low and high earning members is likely to increase.
Following the conclusion of the Consultation on 1 November 2019, the Department will (taking into consideration recommendations made by the NHS Pension Scheme Advisory Board in the near future) publish a consultation response which will set out how the government will proceed. Should Regulations be required, there will be a further consultation period for stakeholders and the public to consider and comment on the detailed changes being proposed. These intentions could of course become disrupted by political developments and the fallout from Brexit.
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