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BMA response to DH statement on what NHS pension scheme proposal means for doctors

On 12 June, the Department of Health issued NHS Pension Scheme proposal: what it means for doctors.

We have issued a point by point response which you can read here:
The government says:
The global economic situation has changed since 2008 and finances, both public and private, are under pressure. The Hutton Review said that current public service pensions are unsustainable. Reform is necessary as people live longer than previous generations.

We say:
Reform of the NHS pension scheme took place in 2008 – achieved through negotiation between the government, employers and health unions and which all then agreed made the scheme sustainable for the future. Many of the recommendations for public sector pension reform put forward by Lord Hutton therefore already apply in the NHS. In particular, the cost sharing agreement, which the coalition government has now shelved, would have passed on the costs of improving longevity to staff, not taxpayers. A Public Accounts Committee report in May 2011 found that the reforms to the scheme are bringing substantial savings to taxpayers, with costs set to continue to be sustainable well into the future.

The government says:
Pension reform is required because people are living longer. Today, a 60-year-old doctor retiring can expect to enjoy 29 years of retirement. This means drawing a pension for almost the same time as they worked for the NHS – 36 years. In contrast, a doctor retiring at 60 in 1984 could only expect to enjoy 20 years of retirement. Both would have paid similar amounts for their pension but the extra 9 years would cost approximately £440,000 and the extra cost is picked up by the taxpayer.

We say:
As part of the 2008 NHS pension scheme reforms, a cap on employer contributions was introduced, protecting the taxpayer against future cost increases. The cost sharing agreement also made then would have passed on the costs of improving longevity to staff, not taxpayers.
In addition, tiered contributions were introduced for NHS staff, with higher paid NHS staff paying proportionately more. Doctors’ contributions increased by 42 per cent, from 1 April 2008.

The government says:
The 2008 reforms to NHS pensions are not enough. Despite raising the pension age to 65 for future members, the 2008 reforms did not allow the costs of increases in longevity to be managed fairly or sustainably. The agreement allowed members to remain in their existing arrangements with a pension age of 55 or 60, despite the improvements in longevity from which they had benefited. Future generations of NHS workers and taxpayers would have to pay for the increasing time existing pension scheme members can expect to spend in retirement, with only a limited contribution made by members in the form of higher contributions before retirement.

We say:
All health unions negotiated and agreed the 2008 reforms to make the NHS pension scheme sustainable for the future. They signed up to a cost sharing agreement which would have passed on the costs of improving longevity to staff, not taxpayers.
Since 1 April 2008 all new joiners to the NHS have a normal pension age of 65. Only a tiny proportion of doctors who joined the NHS prior to 1995 have a normal pension age of 55.

The government says:
The current scheme is not financially sustainable. The government pays pensions from the public finances. Currently, the contributions received into the NHS pensions scheme are greater than the cost of benefits paid out to retired members, creating a £2 billion positive cash flow that some describe as a “surplus”. All this means is that the cost of future pension entitlements being built up is greater than those being paid out at the moment. It reflects the fact that the size of the NHS workforce has been growing over the last decade. It does not mean that the scheme is financially sustainable. The current gap between contributions made and benefits paid out is set to disappear by 2016 as NHS workforce growth reaches a plateau and a generation of members reach retirement.

We say:
Under the 2008 reforms, doctors had already accepted that contributions may have to increase in the future to cover the cost of improving longevity. However, these increases were linked to a carefully constructed measurement of costs. Given that the amount being paid into the scheme currently exceeds the amount being paid out, there is no justification for further immediate increases. They equate to an additional tax on NHS staff to help pay for a economic deficit which they did not create.

The government says:
The reforms still provide an excellent pension. The current NHS pension scheme provides the average full-time consultant retiring at 60 with a pension of over £43,000 a year for life and a tax-free lump sum of around £135,000. Compare this with a newly qualified doctor joining the reformed scheme after 2015. He can expect a pension of over £53,000 at age 65 (the normal pension age for new joiners) or a pension of around £68,000 a year at his state pension age of 68.

Doctors’ pensions will still be amongst the highest in the public sector.

They will also be significantly higher than the vast majority of the working population. The average NHS pension is around £7,300 a year.

The NHS pension scheme will remain one of the best available. An inflation-proof pension of £68,000 a year would require a pension pot of nearly £2 million in the private sector. Most taxpayers will have to work longer and contribute more for their pensions with no hope of getting benefits as good.

We say:
The NHS pension scheme has always been a very important part of the remuneration package that attracts doctors and other staff to work in the NHS. Recognising the importance of ensuring the future viability of the scheme, doctors helped negotiate the major 2008 reforms.

Under the 2008 reforms, there was an increase to the normal pension age for new NHS staff, from 60 to 65, and a cost sharing agreement was made, passing on the costs of improving longevity to staff, not taxpayers. In addition, tiered contributions were introduced, with higher paid NHS staff paying proportionately more – ensuring that lower paid staff were not subsidising the pensions of higher paid workers. Doctors’ contributions increased from 6% of their salary to up to 8.5% – a 42% rise.

It is simply not possible to make a fair comparison between public sector and private sector schemes. NHS pensions are calculated using an entirely different formula to the defined contribution schemes which are now common in the private sector. This method of pension calculation is possible because all the contributions are, in effect, lent to the government at an agreed rate of interest rather than being invested in tradable assets as in private sector funds. This is economically efficient and is a helpful arrangement both for the government and for the scheme.

The government says:
Most staff do not have to work until their state pension age in order to get the same level of pension expected under existing arrangements. For the same pension and lump sum, the average 40-year-old consultant would only need to work an extra 2.5 years and a 24-year-old doctor starting out on their medical career a little after the age of 66. Those who can expect to live longer are being asked to work longer.

We say:
A doctor who retires at age 60 with a normal pension age of 68 would lose approximately 40% of the pension that they had paid for over a career of approximately 37 years.

The government says:
Higher paid NHS staff do not pay an unreasonable amount for their pension. Doctors contribute a similar proportion of their salary as other NHS staff on much more modest incomes but usually achieve better benefits. Tax relief on pension contributions means that from April 2012, a consultant earning over £110,000 would contribute 6.54% of their salary after tax relief (9.9% before tax relief) whilst a nurse earning a quarter of that would pay 6.4% after tax relief.

We say:
Higher earning doctors will be paying 14.5% for their pensions from April 2014 and they also face a tax rate of approximately 50% if their pensions exceed the reduced annual allowance or lifetime allowance.

Pensions in payment are taxable in the same way as income. The doctors described to in the example will be higher rate tax payers in retirement so, despite the fact that they have received tax relief on their contributions, they will contribute 40% of their pensions to the exchequer throughout their retirement.

The government says:
Those closest to retirement will see no change. All NHS staff within 10 years of their pension age will remain in the current scheme. Limited protection will be provided to staff who are outside this group but within 13.5 years of their pension age. This means around 35% of the NHS workforce will see no or little impact on their pension arrangements. All staff will have the pension that they have accrued by 2015 fully protected.

We say:
All NHS staff will have to pay higher contributions – the first increase happened on 1 April 2012. Contributions for many doctors went up from 8.5% to 10.9% and by April 2014 will be up to 14.5%.

The government says:
Pension reform affects all public servants not just NHS staff. Pensions are one element of wider remuneration packages that, of course, vary between different sectors. For example, the average salary of a civil servant is around £23,000 a year, for a nurse it is around £31,000 and for a secondary school teacher £36,000. Civil servants pay a lower contribution rate towards their pension compared with other public servants. However, pay levels for civil servants have always taken this into account.

We say:
Higher paid NHS staff pay proportionately more for their pensions than most other public sector workers. By 2014, some doctors will see deductions of 14.5% from their pay for their pensions, compared to 7.35% for civil servants on similar salaries, to receive similar pensions.