Pension changes for NHS workers

Pension changes for NHS workers

If you work for the NHS, this guide will help explain some of the proposed changes to your pension scheme.

Written by Jonquil Lowe on 19 June 2013


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Despite headline-hitting strike action against the government's new framework for public sector pensions, research by MoneyVista in 2012 showed that almost one in ten (7%) NHS workers surveyed claimed they aren't aware of any pension changes.

Even among NHS workers who were aware of the future changes, there was still wide-spread misunderstanding about how NHS workers fare even under their current pension scheme. Almost half (46%) of NHS workers had no idea how much they are currently due to retire on, and a further 33% only had a rough idea, meaning it's almost impossible for them to work out whether they will be better or worse off under the new scheme.

However, 67% believed the changes will result in them having a smaller pension on retirement. Over a third (34%) thought the changes are unjust and should not be implemented. A main aim of the changes is to cut the cost of the scheme. But there is an element of redistribution as well so that, while many NHS workers will lose out, some could be better off.

Why are public sector pension schemes changing?

All public sector schemes, not just the NHS scheme, are changing. The government wants to contain the cost of public sector pensions, which has been rising steeply, particularly as life expectancy rises. A report commissioned by the government found that a person aged 60 today lives 10 years longer than someone who reached 60 in the 1970s.

How the NHS scheme is changing

The government has set out a broad framework of changes that it wants to apply to most public sector schemes:

  • member contributions have been increasing in stages in April 2012 and 2013, with a third and final increase due in 2014 - but no increase for low earners. The increases for NHS workers in April 2012 and April 2013 are shown in Table 1. Increases for 2014 are still being negotiated
  • from April 2015, if you are in the NHS final salary scheme, this will be replaced by a career average scheme
  • pension rights built up before April 2015 will be fully protected and so your final salary pension from the years you worked before this date will still be based on pay at retirement (or on leaving the scheme if earlier) and payable from your normal pension age for that scheme (60 or 55)
  • normal pension age in the new scheme will increase in line with state pension age
  • you can still choose to retire earlier, but your pension will be reduced
  • you will still be able to swap some pension for a tax-free cash sum (called a pension commencement amount). The government recommends this should be on the basis of £12 cash for each £1 of pension given up which is a very poor deal, given that the £1 of index-linked pension is worth as much as £34 at current values
  • the changes do not apply if you were within 10 years of normal pension age on 1 April 2012. There is also some partial protection if you were within 13 years and 5 months of retiring, by delaying the date at which you switch to the new scheme.

Public sector schemes can implement the changes in different ways to suit their workforce, provided the overall cost of the scheme does not come to more than a ceiling set by the government. The cost to the employer (and ultimately taxpayers) of the NHS scheme is bring capped at 12.1% of the salary bill, with members bearing the costs above that.

 Table 1 Increase in member contributions from April 2012 and April 2013

Your pensionable pay

Contribution rate in 2011-12
% pay

New rate in 2012-13
% pay

New rate in 2013-14

% pay

Up to £15,000

5.0%

5.0%

5.0%

£15,001 - £21,175

5.0%

5.0%

5.3%

£21,176 - £26,557

6.5%

6.5%

6.8%

£26,558 - £48,982

6.5%

8.0%

9.0%

£48,983 - £69,931

6.5%

8.9%

11.3%

£69,932 - £110,273

7.5%

9.9%

12.3%

Over £110,273

8.5%

10.9%

13.3%

Source: Department of Health, Contribution calculator.

How do final salary and career average schemes work?

Final salary schemes and career average schemes both promise a pension at retirement that is worked out as a proportion of your pay.

In a final salary scheme, this is worked out using your pay just before retirement. For example, the current NHS scheme promises 1/60th of pay for each year in the scheme for NHS staff who joined the scheme before 1 April 2008. If just before retiring, you earn £24,000 and had been in the scheme 20 years, your pension would be 20 x 1/60 x £24,000 = £8,000.

In a career average scheme, it is based on your pay throughout the time you have been in the pension scheme. For example, the new scheme is designed to pay 1/54th of each year's pay. If in one year you earned £24,000, you would build up this much pension: 1/54 x £24,000 = £444. If in the next year, your pay were £24,500, you would build up another 1/54 x £24,500 = £454 of pension, and so on. All these bits of pension are added together when you reach retirement.

A final salary scheme is better if you expect to get promotions throughout your working life and end your career on a high salary. Career average schemes tend to be better if you reach your peak earnings relatively early in life and earn less as you near retirement, for example, through switching to part-time work. But career average schemes are not necessarily good for people - mainly women - who take career breaks to look after their family.

Goodbye RPI, hello CPI

Like all public sector schemes, the NHS scheme provides pensions that are protected against inflation. The package of changes outlined above comes on top of a switch from measuring inflation against the Retail Prices Index (RPI) to the Consumer Price Index (CPI). This came into effect from April 2011.

There are three ways that inflation is important for your pension:

  • in a career average scheme, each year's earnings used to work out each bit of your pension are revalued by inflation between the time you earn the pay and the date when you start your pension. In the NHS scheme, a revaluation factor of CPI plus 1.5% is used
  • once pensions are being paid, they are increased each year in line with CPI
  • if you leave the scheme before retirement - say, because you change job - the pension you have built up is increased in line with CPI between the time you leave and the time the pension starts.

It is estimated that uprating pensions already being paid across all the public sector schemes in line with CPI rather than RPI will save the government £1.8 billion a year by 2015-16. That's £1.8 billion less for pensioners.

This happens because the CPI - which, for example, excludes mortgages and Council Tax - tends to rise by around 1.4% a year less than the RPI. If a pensioner starts with a pension of £7,000, after 10 years, he or she will have received over £5,000 less pension in total under CPI indexation and this difference increases to nearly £26,000 after 20 years.

How the pension scheme changes may affect you

The way the whole package of changes may affect you depends on your own level and pattern of pay, and the contribution increases negotiated for 2014.

The chart below shows two examples of how the pension might change: one a high earner with 40 years in the NHS scheme whose earnings have risen on average throughout his career by 5 per cent more than inflation; the other is a lower earner with flat earnings throughout their 40 years in the NHS scheme. For each, the chart compares the pension they would have had if the NHS scheme had been a final salary scheme throughout and the pension they would get assuming the career average scheme starts after they have been in the scheme for 24 years.

It shows how the high earner could lose some pension under the changes (around 5% in this example) while the lower earner could gain (around 10% in this example).

The NHS scheme is developing a calculator which you will find on your scheme's website that let's you see the impact of the changes on you personally.

How the changes might affect a high and low earner

 Public sector pension comparison bar chart

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