NHS Pensions and Staffing

Amy Callaghan Excerpts

Wednesday 13th July 2022 Commons Chamber

[Dr Poulter]

Absolutely. The hon. Gentleman is right, and that is one of the recommendations I will make in my concluding comments to the Minister.

It is useful and important to use an example of a particular workforce group. I will focus primarily on the pension crisis faced by doctors by means of an example of the way the pension rules need to be changed. How many doctors could the NHS lose as a result of the current pension rules? There is not an exact figure, but British Medical Association modelling suggests it could be anything from 10% upwards by the end of 2022. We already know that the average retirement age has fallen from 61 in 2007-08 to 59 in 2018-19. There has also been a fourfold increase in the number of voluntary early retirements since 2008, with 30% of consultant retirements and 54.7% of GP retirements in 2020 being voluntary early retirement.

A survey of 800 GPs in Pulse last month found 47% said they intend to retire at or before 60. Respondents gave a number of reasons why they wanted to retire, with problems around pensions being listed as a significant reason. A survey by the Royal College of Physicians last year revealed that more than a quarter of senior consultant physicians expect to retire within three years. A survey by the Royal College of Surgeons showed that 68% of consultant surgeons were actively considering early retirement because of the pension arrangements, and 71% of consultant surgeons were considering reducing their non-clinical commitments, including educational and managerial roles—that relates to the point made by the hon. Member for Central Ayrshire (Dr Whitford)—which has worrying implications for the future training of surgeons.

A British Medical Association survey of more than 8,000 doctors revealed that 72% said that freezing the lifetime allowance would make them more likely to retire early; 61% of respondents said that they would be more likely to work fewer hours; and 41% would be more likely to give up additional roles and responsibilities. At the time of the BMA survey, CPI was only at 0.4%. It is now at 9.1%, and in real terms that is the rate by which the lifetime allowance is reducing each year. The BMA believes, with some credibility, that if it were to rerun the survey now, the results would show a significant increase in doctors intending to retire due to the impact of inflation on NHS pension policies. There can be no doubt that senior NHS workers are looking to leave the NHS in significant numbers, and a significant contributing factor to that—alongside burnout and workload—is the punitive pension taxation policies that they face.

[Amy Callaghan (East Dunbartonshire) (SNP)]

I congratulate the hon. Member on securing the debate and on all the work that he has done so far on this issue; my constituents who have raised this issue with me are incredibly grateful for that work. As he said, the BMA figure shows that roughly 10% of medics would be affected and would potentially leave the NHS. More than 100 of my constituents have been in touch with me over this issue. If we apply the 10% to just the ones who have reached out to me, we will lose at least 10 experienced medics at NHS Greater Glasgow and Clyde. This really significant issue needs to be noticed and action needs to be taken, but not like the action that was taken with the taper, which did not affect enough doctors. We need to see this action from the Minister.

[Dr Poulter]

I agree with the hon. Lady, who, like all Members who have intervened, is strongly advocating for her constituents and for healthcare workers throughout the country. I have been written to by doctors in Scotland in advance of the debate and I know how serious this issue is. I thank all the Scottish National party Members who have come to this debate for their support in raising this issue, which is important for those working in Scotland.

Turning to the technical information—this issue is very technical—why is this happening? The pensions annual allowance allows for the value of a pension to increase by up to £40,000 without incurring penalties. That is completely unsuited to defined-benefit schemes such as that in the NHS, and it should be scrapped in defined-benefit schemes. That view has been supported by Treasury advisers and by the Office of Tax Simplification. However, the Government did not agree with the recommendations and instead only raised the annual earnings taper thresholds to £200,000 and £240,000. Pensions experts were clear at the time, and have been ever since, that although this approach mitigates some of the issues around the taper, it is not an effective solution to issues with the annual allowance, as the unfair interactions between pension taxation and the NHS pension scheme regulations remain. Crucially, it does nothing to affect the punitive effects of the general annual allowance, which is set at £40,000, nor the lifetime allowance, which is set at just over £1 million.

Not only has the rise in taper thresholds not fixed the problem, but the situation has reached a further crisis point due to the combination of levels of stress and burnout across the NHS, the freezing of the lifetime allowance in 2021 and, most significantly, the rapid rise in inflation and the CPI. That is compounded by a flaw in the Finance Act 2004 such that its provisions no longer operate as originally intended—that is, measuring pension growth above inflation. So the situation has reached a crisis point.

To address the long-standing issues of the interaction of pension taxation policies with the NHS pension scheme, it would be sensible to introduce a tax unregistered scheme similar to that made available to the judiciary—as the hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards) outlined—who face similar recruitment and retention problems to those we are beginning to face in the NHS.

It is worth asking why the CPI rise has turned the crisis in retention and recruitment into a disaster for the NHS, particularly this year. There are three major impacts of CPI inflation. First, the Department of Health and Social Care has suggested that, even though CPI is likely to hit 10% by September 2022, the likely pay award for hospital doctors nearing retirement age with final salary schemes will be 2% or 3%. This unprecedented gap between the level of inflation and the likely pay award risks significantly devaluing the pension of members aged 59 or above if they delay retirement by even a single year. There are no late retirement factors in the 1995 pension scheme—the scheme that the vast majority of staff approaching the age of 60 are in. That means that, for every year spent working beyond the age of 60, the level of annual pension that could have been received if they had retired at 60 will effectively be lost.

A doctor may be well over £100,000 worse off if they retire at 61 rather than at 60. That cannot be right; it is a perverse reward for years of dedicated service to patients. The consequence of the current pension rules will be to push more experienced doctors, nurses and other healthcare professionals to take early retirement at the very time when they are most needed to reduce the covid backlog.

The second pressing issue is that two different measures of inflation are used in the NHS pension scheme. That has a particular impact on those who are on a career average revalued earnings scheme; as GPs are wholly within a CARE scheme, it has the biggest impact on this group of doctors. The current rules use a different CPI value for the opening value: it is based on the CPI rate in September last year, whereas the revaluation of earnings that is built into the NHS pension scheme is based on the CPI rate in September this year. When inflation is stable, last year’s CPI rate and this year’s are similar, so that does not usually present a major problem. However, when inflation changes rapidly, as is happening now, it becomes a very significant problem for many GPs.

For example, CPI in September 2022 is likely to be approximately 10%. Under the scheme rules, the pension will be revalued by inflation plus 1.5% and will therefore increase by approximately 11.5%. However, the opening value of the pension will increase by only 3.1%, which is the September 2021 CPI figure. Therefore, even though the annual allowance is only supposed to test pension growth above inflation, the discrepancy caused by those two different measures of inflation will result in a purely inflationary growth being tested against the annual allowance. For many people, that will use a significant proportion of the available annual allowance, and in some cases it will exceed it entirely, resulting in an additional tax charge simply as a result of inflation. A GP from Scotland who wrote to me before this debate told me that it would result in her receiving a tax bill of about £19,000.

The impact is compounded by the fact that the opposite scenario will occur next year if, as predicted, inflation returns to more normal levels. Although workers in the NHS will receive only one NHS pension, following the public sector pension reforms, many NHS staff are in the 1995, 2008 and 2015 pension schemes. Under the Finance Act, those schemes are all considered separately, so even though one scheme may have negative growth, it is not offset against positive growth in other schemes. For example, if a member had £20,000 negative growth in the 1995 or 2008 scheme and £60,000 positive growth in the 2015 scheme, even though their combined pension growth was £40,000 and within the standard annual allowance, the 1995 or 2008 scheme growth is considered to be zero. Instead, the member is taxed on the £20,000 excess in the 2015 scheme.

In addition, the negative growth in the 1995 or 2008 schemes cannot be carried forward or backward to offset previous positive growth in these years. That effectively means that GPs in particular will face additional annual allowance tax bills of tens of thousands of pounds this year for pseudo growth, the majority of which will be lost next year but with no refund or reduction in the extra tax paid this year. That cannot be right; it will push many GPs into early retirement. This year, a typical GP with median partner earnings of £115,000 will receive an annual allowance charge of more than £32,000 as a result of this flaw in the Finance Act, which incorrectly measures pension growth above inflation.

Thirdly, the current high levels of inflation have exacerbated the impact of the decision to freeze the lifetime allowance.

Let me very briefly offer the Minister some possible solutions. First, we need to address the issue of CPI and rising inflation and amend the Finance Act. As I have outlined, only growth above inflation should be tested against the annual allowance. In this rapidly moving inflationary environment, section 235 of the Finance Act does not do so; two different values are used. Simply amending section 235 to ensure that the opening value is aligned with this year’s CPI—not last year’s—so that the inflationary uplift of benefits is tested in the same year will ensure that only “growth" above inflation would be subject to testing against the annual allowance, as was clearly originally intended by the spirit rather than the letter of the legislation. At the same time, it is imperative to amend section 234 of the Finance Act 2004 to recognise years of negative growth and allow them to be carried backwards or forwards to measure real growth over a longer period.

Secondly, in the year 2022-23, we should allow the NHS in all four nations to replicate the 2019-20 compensation scheme to protect clinicians from pension growth so that they are freed up to work at maximum capacity in the NHS. This is not a “tax perk” for one group, but rather recognises that the annual allowance charges are largely based on non-existent pseudogrowth.

Thirdly, to solve the wider and long-term issues facing senior and experienced NHS staff, we should move to a non-tax-registered scheme. It is clear that in the long term, the solution to this problem is a scheme of that kind for those impacted by pension taxation in the NHS. When faced with similar recruitment and retention problems with the judiciary because of these punitive pension taxes, the UK Government introduced a non-tax-registered scheme which immediately addressed the issue, and resulted in the appointment of more judges. That is a fundamentally fair system. It ensures that the correct amount of tax is paid on pension growth, and as no tax relief is provided on employee pension contributions, there is no requirement to subject scheme members to either the annual or the lifetime allowance.

Senior and experienced NHS workers are not asking for special treatment. They are, however, asking for a fair system: a system that does not penalise them for working more shifts, taking on leadership roles, or staying in the NHS after the age of 60. It cannot be right, at a time when the NHS is desperate to retain its workforce—particularly the senior workforce who are so crucial in training new doctors, nurses and other frontline staff or workers, and advising on the most complex cases—that senior clinicians will actively lose money from their pensions for working for longer, or face huge tax bills on pension growth that they will never see materialise.

If the Government are serious about valuing NHS staff, if the Government are serious about helping healthcare staff to meet the covid care backlog, and if the Government are serious about meeting the needs of patients, they must act now to reform NHS pension rules.