Final pay control concerns re-emerge to add to current pension issues

There are a number of issues relating to pensions that are exercising HFMA members at the moment. The highest profile is probably the annual and lifetime allowance issue, which is resulting in high earners, mostly medics, receiving tax bills in a year that are larger than their increase in pay for that year. 

This is the subject of consultation by the Department of Health and Social Care, and the HFMA is responding to this. The consultation sets out proposed flexibilities for some clinicians.

The HFMA response is that any new flexibilities should be available to all in the NHS Pension Scheme, not just clinicians affected by the tax issue – a case put forward in the editor’s comment, Pension equity, in the last issue.

However, it is also concerned that the proposed arrangements are very complicated and will take a lot of time to work through – by staff members, by NHS bodies as employers and by the NHS Business Services Authority. 

A less high-profile issue that has caused concern recently is final pay control invoices from the NHS Business Services Authority. These are the result of a scheme introduced back in 2014 to stop a perceived risk that employers would or could award employees large pay increases just before they retired in order to boost their pension. 

In summary, final pay controls kick in if a member receives an increase to pensionable pay in any of the three years prior to them retiring or transferring out of the scheme that is more than an allowable amount. Where this is the case, the employer is liable for a final pay control charge in the year the individual retires or transfers out. 

The allowable amount is the smaller of three amounts that are calculated using the pensionable pay in the fourth year before the person retired and the consumer price index (CPI) in February of each of the three years before retirement. It is the difference between the pension that will be payable and the pension that would have been payable based on a final salary that had increased by the allowable amount.

For further information, see section 8 of this year’s NHS pension scheme regulations consultation. 

When the scheme was introduced in 2014, members were concerned about the additional cost pressure. However, very few invoices were received from the NHS Business Services Authority in those early years. This year, however, has seen an increase in the number of invoices received and some of them are for large amounts, meaning that final pay controls have moved up the agenda for finance teams.

An HFMA briefing was due to be published as Healthcare Finance went to press. It is worth noting that from 1 April 2018, the regulations governing the 1995 part of the NHS Pension Scheme have been amended to exempt pay increases resulting from the Agenda for Change pay award from the final pay control provisions.

The Department for Health and Social Care also announced in its response to the consultation on the amendment to the 1995 regulations that it will review the final pay control policy in conjunction with the NHS Pension Scheme Advisory Board.

Looking ahead, two Court of Appeal cases (McCloud and Sargeant) could have an impact on NHS pensions going forward. The court ruled – hfma.to/aj – in December 2018 that the taper arrangements put in place when introducing the career average revalued earnings (CARE) pension schemes in 2015 were discriminatory on the grounds of age. 

The government has indicated that, although the cases related to schemes for judges and firefighters, the remedy would be applied to all public sector schemes. 

Currently, it is not expected that these rulings will have a major impact financially on most NHS bodies, as any additional cost incurred by the NHS Pension Scheme will be subsumed in a future change to contribution rates. In accounting terms, there may be some impact on cash equivalent transfer values, which would have to be explained in remuneration reports. 

A bigger impact would be on NHS bodies that are admitted bodies to local government superannuation schemes. They will have to account for their share of any pension scheme liability as the scheme is accounted for as a defined benefit scheme under IAS 19.