Pensions tiering all about fairness
30 November 2012
The BMA has been highlighting the triple unfairness of the government's pension reforms.
First, there is the overall approach that puts too much reliance on public sector pensions as a way of improving public finances, and ignores previous reforms.
Second, there is the unfairness across public sector schemes that means NHS staff have to fund almost double the proportion of their scheme’s future benefits compared with civil servants.
And third, there is unfairness to higher earners within the NHS pension scheme, which will mean accruing £1 of pension benefit will cost a doctor significantly more than lower paid staff.
But the unfairness would be significantly ameliorated if the current system of steep, tiered pension contributions is not continued beyond 2015, the BMA says.
From that date, 73 per cent of hospital doctors will no longer have their pensions based on their final salary (the rest will be within 13 years of their pension age, and will have either full or partial protection from the changes).
Completely unjustified
Instead, all doctors will be part of a CARE (career average revalued earnings) scheme. It is this change that makes the higher, steeply tiered contributions — the highest paid doctors will pay in 14.5 per cent of their salaries by 2015 — ‘completely unjustified’, according to the BMA.
Last week, there was a sign of hope that this argument for a ‘flattening out’ of doctors’ contributions beyond 2015 in a CARE scheme was being heeded by the government.
A letter from health secretary Jeremy Hunt to BMA council chair Mark Porter indicates that there is some potential for a fairer contribution structure post-2015. In response to BMA lobbying, Mr Hunt also says that talks on post-2015 contribution rates, initially expected to take place early next year, should be brought forward.
BMA head of pensions Andy Blake says the association agrees there should be some tiering in a CARE scheme, to take account of the impact of tax relief and the need to encourage lower paid staff to join it.
However, he says the BMA would like to see fewer tiers in a CARE scheme than the current seven that exist following the latest increases, which started in April 2012.
Actuarial experts and Mr Blake say there is justification for more tiering in a final salary scheme, because high earners have a greater chance of seeing their salaries and pensions increase with promotions.
‘You get what you pay for’
Mr Blake explains: ‘In 2008, we accepted tiered contributions because it was fair to reflect the differential benefits that different members would earn. However, when we switch to a career-average scheme, there is very little justification for tiering.
‘The reason for that is you are essentially getting what you pay for. You pay contributions based on your salary, and you get a benefit based on your salary.
‘The accrual rate is 1/54th of your earnings in any one year. So someone who is low-paid would get 1/54th of £20,000, and someone who is higher paid would get 1/54th of £50,000 or £100,000. But the cost-per-pound is exactly the same for both of them. So you are getting what you pay for throughout your whole career.’
According to the BMA analysis Public Sector Pension Reform: Challenging Unfairness, hospital doctors moving to a CARE scheme from a final salary scheme experience a 30 per cent reduction in the value of their pensions on a like-for-like basis.
With the current steep tiering, it would mean that a consultant would pay £6.76 for every £1 of annual pension after income tax, a nurse would pay £5.43 for that £1 of pension, and a specialty doctor would pay £6.02.
Lack of alignment
Dr Porter told the Commons public bill committee scrutinising the Public Service Pensions Bill earlier this month that the BMA did not have a problem with lower paid NHS staff paying proportionally less for their pensions than more highly paid doctors; it was just that the current proportion was out of alignment.
Indeed, the 2008 NHS pension scheme reforms involved the BMA accepting a system of tiered contributions, with employees paying either 5 per cent, 6.5 per cent, 7.5 per cent or, for high earning members, 8.5 per cent of their salaries in contributions. Previously, members had paid 6 per cent towards their pensions.
Then, along came the 2010 Comprehensive Spending Review, which demanded that employee contribution rates rose by 3.2 percentage points on average over the three years 2012/13, 2013/14 and 2014/15.
As an example, this new system of seven tiers involves lower paid staff earning between £21,176 and £26,557 contributing around 7 per cent (5.68 per cent after tax relief), and those earning between £69,932 and £110,272 paying in 13.5 per cent (8.10 per cent after tax relief). A doctor earning £110,273 or more will pay 14.5 per cent (8.7 per cent after tax relief).
The BMA says this means doctors earning around £49,000 have seen their contribution rates rise by 108 per cent between 2007/08 and 2014/15. A consultant earning more than £110,000 will have seen a 142 per cent increase. In all, anyone earning full-time pensionable pay of more than £49,000 has seen their rates rise by 6 percentage points. Around 150,000 members of the scheme are estimated to be in this position.
BMA number crunching
Mr Blake says if the current tiering system were transferred to the CARE scheme, the highest paid doctors would pay three times as much as the lowest paid.
‘Pound for pound, you are accruing the same amount of pension, but you are asking someone by virtue of the fact they earn more to pay more for the same scheme,’ he says.
The BMA would like to see flatter tiers in the CARE scheme. Mr Blake says the numbers are still being crunched in terms of the most effective contribution rates. However, he envisages a large middle tier.
He says there should be some tiering to account for tax relief. Higher rate taxpayers get 40 per cent tax relief on all of their pension contributions. Basic-rate taxpayers only get 20 per cent tax relief. If pension contributions were set at one flat rate, the higher rate taxpayer would pay 60p net for every pound they put in, but basic rate taxpayers would pay 80p.
No reduction in overall contributions
Although Mr Hunt’s letter indicates that ministers have an open mind about contribution levels post-2015, Mr Blake says they still expect NHS staff in England and Wales within the scheme to pay an average of 9.8 per cent.
‘There won’t be any reduction in the overall contributions as a percentage of the NHS payroll,’ Mr Blake says. ‘However, [ministers] according to the letter from Mr Hunt, ministers are open-minded about how that is distributed.’
In fact, the health secretary says he thinks the BMA’s points about tiering in a CARE scheme are reasonable and that he expects NHS employers and trade unions to make recommendations ‘to be reached transparently, taking account of actuarial advice, and based on an agreed set of principles that is reasonable and fair to all staff’.
There will be initial talks between the trade unions shortly before talks open with the Department of Health and NHS Employers. Fairness for doctors will be at the top of the BMA’s agenda.
The story in numbers
- £430bn: total savings over the next 50 years expected through the government’s package of public sector pension reforms
- £250bn: estimated savings to the Treasury by 2060 thanks to June 2010 decision to upgrade pensions based on consumer price index instead of the retail price index
- £67bn: savings over 50 years due to 2007/08 reforms to public sector pension schemes covering the NHS, teachers and the civil service.