NHS Pension Scheme: Tapered Annual Allowance

Debate between Julian Knight and Paul Masterton

Tuesday 2nd April 2019 Westminster Hall

[Paul Masterton]

I thank the hon. Gentleman for raising another specific case. I hope the Minister will bear in mind the added weight of evidence.

Another of my constituents, who has worked as an NHS constituent for 14 years at the Queen Elizabeth University Hospital in Glasgow told me that he is employed on a 40-hour per week full-time contract and provides eight hours per week of additional clinical work, making 48 hours in total. He does not do any private practice outside the NHS, but he was hit with an unexpected bill of nearly £17,000 as a result of the tapered annual allowance. The only way the consultant can avoid those charges is to reduce his income below the various thresholds, and the only way he can reduce his income is to reduce the amount of work he does for the NHS. He has told me that he has no desire to do that and would happily volunteer to do extra work occasionally at weekends to tackle waiting lists or fill gaps in the service, but the tax implications make that impossible and he has already stopped doing any extra work.

Another consultant from East Renfrewshire with 16 years’ experience—eight as a consultant—told me that he was actively declining extra work to support stretched services in order to avoid the tax penalties. That means that he does not apply for the discretionary points that are awarded for additional work that is taken on above the normal daily remit, such as developing new services, research and teaching. As the hon. Member for Glasgow North East (Mr Sweeney) said, that impacts not just on the daily running of services, but on the development of a culture of excellence within the NHS.

[Julian Knight (Solihull) (Con)]

I apologise for missing the first couple of minutes of the debate. My hon. Friend is a great thinker on pensions, which is the main reason I wanted to come here today, and I want to ask him a very simple question. Does he wish to dispense with the annual allowance and lifetime limit, or does he want a special dispensation for senior NHS workers, who are quite high-income earners?

[Paul Masterton]

I thank my hon. Friend for his kind comments, which are undeserved. There is a wider issue of the general complexity of the systems of reliefs and allowances in the UK pensions system. I hope not that there will be one single dispensation for one area of the public sector, but that we start to recognise that we need to look at the way the system is operating more generally and to work out whether some of the allowances and reliefs are actually necessary or effective, and whether they should be subject to a broader review.

A recent report showed that over 50% of respondents reported using the NHS “scheme pays” facility to pay off their unexpected tax charges. However, this does not work for all cases, and the amount is effectively treated as a loan that is then paid back from the retirement benefit, with interest charged against the pension at high rates. That means it is usually costlier than paying up front, particularly for younger members. I fear that this issue could see us sleepwalk into a deepening workforce crisis in the NHS and result in consultants leaving the NHS early, even though they still have the skills and experience we need. Those individuals are important not just for patients, but for junior doctors in terms of the training and mentoring they receive on the job.

The British Medical Association firmly believes that long-term changes to the pensions taxation system are required in order to remove the disincentives that exist, and I certainly agree. The Library’s excellent briefing on pensions taxation makes reference to the impact of changes in the annual allowance on the public sector, and notes that the 2017 report of the Doctors and Dentists Review Body requested more evidence about the impact of the annual and lifetime allowance on early departure rates. The Treasury indicated that it would consider revisions to the NHS pension scheme if there was evidence that the number of doctors and dentists taking early retirement as a result of its inflexibility was substantial.

I want to ask the Minister a series of questions, and I appreciate that she might not be able to cover them all today. A number of them fall within the remit of the Treasury, but hopefully she will be able to take those away and arrange for either herself or a Treasury Minister to get back to me. First, what discussions did the Treasury have with the Department of Health and Social Care when the tapered annual allowance was introduced, and was this ever flagged as a potential problem? Secondly, what evidence has the Treasury collected on the numbers of doctors and dentists taking early retirement, following the 2017 report? If the answer is none, why is that the case and when will analysis be carried out of the impact on changes to the lifetime and annual allowances on the NHS? If evidence has been collected, what were the findings of that analysis, and are any changes being considered?

Thirdly, what consideration has the Treasury given to a review of the annual allowance taper more generally, perhaps as part of a wider review into simplifying the incredibly complex system of reliefs and allowances in the UK pensions system? Finally, have the relevant Government Departments had any discussions with the relevant parties on whether permitting more individual flexibility in the NHS pension scheme could be a solution? That is something that NHS Employers is calling for. This issue is not specific to the NHS—I have heard in recent days from armed forces personnel—but it does appear to be an area with a particular problem.

Although I appreciate that many people will not hold great swathes of sympathy for individuals on such high earnings who will still receive high levels of retirement pension that most of our constituents can only dream of, the reality is that if this results in consultants with much-needed expertise turning down work or leaving the NHS altogether, it will have major implications for the provision of services and the quality of care our constituents receive right across the UK, whichever colour of Government is in control of their NHS.

I am sure that the Treasury did not intend these changes to force experienced and committed consultants, surgeons and GPs to do less work for the NHS, but this is the reality being faced in the hospitals that serve my constituents and the Minister’s. It is good that the British Medical Association and NHS Employers recognise that this is a serious concern and met last week to discuss it, but they have not agreed a solution or a joint action plan. In reality, the ball is in the Treasury’s court.

I absolutely respect and agree with the Government’s position that we need to get the balance right between encouraging saving and managing Government finances, but this issue cannot be easily ignored. Legitimate aims to restrict tax perks for the wealthiest in society are exposing ever increasing numbers of long-serving and highly experienced NHS workers to massive tax charges. If we want high quality care in the NHS in Scotland and across the UK, we need senior doctors who have devoted their professional lives to the care and wellbeing of our constituents. It is ludicrous for us to face a situation in which the pensions system is acting as a disincentive and effectively forcing consultants to choose between working for nothing and affecting patient care.

I hope that this debate provides the first opportunity for us to say clearly that, whether the answer lies in adding flexibility to strict NHS pay and pension terms or with the Treasury using this as a reason to take a fresh look at the ridiculously complicated tapered annual allowance, this is an unintended consequence of the UK’s complex pension regime, which we need to sort out quickly to let those consultants get back to work.

Defined-benefit Pension Schemes

Debate between Julian Knight and Paul Masterton

Tuesday 10th July 2018 Westminster Hall

[Paul Masterton]

I am pleased to hear that, because the Pensions Regulator performs a vital role in overseeing occupational pension schemes. One of the big frustrations on the trustee side—not usually on the employer side—was that the regulator did not seem to have the time or resources to get stuck in or do anything serious to encourage or require an employer to change course. Some of the suggested improvements are very good.

In the past, pension schemes operated in a world of high interest rates and good equity returns. We now live in a different world. Investment decisions reflect ongoing uncertainty and volatility, which has led to widespread de-risking and a preference for investing in bonds and gilts. That has been a huge loss to the UK economy, with funding being taken out of equities. We could do more to look at how to unlock some of the vast sums that sit behind pension schemes.

[Julian Knight]

Does my hon. Friend share my frustration that often UK infrastructure is owned by overseas pension schemes and that, despite exhortations from the Government for schemes to invest more in the UK and in these stable, high-producing assets, they still seem reluctant to do so?

[Paul Masterton]

I do. Big pension funds—Canadian pension schemes and many others—invest a lot, and those investment projects provide good returns. We could unlock huge amounts of money.

Final salary pension schemes will end up in one of two places. They will either be successful and be bought out with an insurance company or fail and end up in the PPF. The hon. Member for Crewe and Nantwich was right that deficits have been pushed up by low gilt yields and low interest rates. Many employers, pushed by their trustees, and to a certain extent by the regulator, have prudent assumptions in their valuation setting, which increases the amount they have to pay in. That can provide a false picture of the deficit, but it does match the reality of trying to buy on the market. There is flexibility in the system, and one thing the regulator is looking at is being more akin to employer affordability in the valuation assumption setting, which should help with some of these problems.

Fundamentally, this drives to a system that is completely linked to the employer covenant. The stronger the employer, the more flexibility there is, which gives much more leverage to play around with assumptions. A weak employer cannot afford to take as much risk, so it is much tighter with its assumptions. That pushes the deficit up, which means more money has to be paid in. It is a self-perpetuating cycle where the weakest schemes, which need the greatest support, do not get it. They need the breathing space, but they have to pay high levels of deficit repair contributions. As my hon. Friend the Member for Solihull (Julian Knight) said, we should consider that many such schemes are legacy schemes, predominantly in old-school manufacturing industries, and many of those companies are shells of what they were in the ’70s and ’80s when their schemes were brought in. Those employers already provide weak covenants, and that situation may only get worse as we move forward.

It is remarkable that “The Purple Book” from the PPF estimates that 3 million DB members have only a 50% chance of seeing their benefits paid in full. The PPF is a fantastic lifeboat scheme to ensure that people still get decent payment of pensions, but we do not really want people to be reliant on it.

I disagree with the hon. Lady about consolidation. What the Government have been looking to do on that is sensible. Lack of scale is crucial. Two thirds of the UK’s defined-benefit schemes have fewer than 1,000 members, and small schemes cannot access the same sophisticated investment opportunities as bigger schemes. Even costs such as advisory fees, accountancy fees, actuarial fees and legal fees are disproportionately high for small schemes. There is a good place for consolidation, but she is right to worry about governance and ensuring that we do not go from a situation under an employer scheme with high levels of governance to one under a bigger scheme where that gets lost. That can probably be worked through in a scheme’s design and set-up. Ultimately, the solution to protecting DB schemes is not governmental but in the economy and the strength of the sponsor or, where available, the parent company. One of the big difficulties is volatility and the lack of certainty around risk.

The Government continue to take steps to pick apart the issues faced by the DB sector. They are doing good work, but fundamentally we need a clear understanding that governance, funding and covenants are intrinsically linked. I look forward to hearing the good story the Minister has to tell on what the Government are doing.