Review Body on Doctors' and Dentists' Remuneration (DDRB): written evidence - 2024-2025 pay round

D. NHS Pensions and Total Reward

General Update

NHS Pensions and Total Reward

46. The NHS Pension Scheme (Scotland) (NHSPS[S]) continues to be an integral part of the NHS remuneration package and remains a valuable recruitment and retention tool.

47. Occupational pension policy in general is reserved to the UK Government. Pension benefits and employee contributions in the NHSPS(S) are tightly constrained by a mixture of UK Government financial and legislative controls and benefits mirror that of the scheme in England and Wales. HM Treasury (HMT) consent is required for the Scottish Government to make changes to the scheme regulations.

48. Reformed public service pension schemes, including the NHS scheme, were introduced in 2015. The statutory framework for the schemes is set out in the Public Service Pensions Act 2013 (the Act), scheme regulations, and Treasury regulations and directions made under the Act.

Introduction of retirement flexibilities to the 1995 Section of the NHSPS(S)

49. In December 2022, the Scottish Government consulted on the introduction of an expansion to retirement flexibilities to include those with membership of the 1995 section of the NHSPS(S). The aim of the changes was to provide more flexibility to members around their retirement options and the ability to continue in employment while claiming their pension.

50. The response to the consultation published by the Scottish Government in March 2023 highlighted that, on the whole, the proposals were well received by stakeholders and most respondents agreed they should be implemented. SPPA therefore proceeded with introducing the expansion of pensionable re-employment retrospectively from 1 April 2023 as well as partial retirement from 1 October 2023.

51. The implementation of these proposals allows senior doctors and dentists who are members of the 1995 section of the scheme the ability to retire flexibly, by taking some of their pension benefits and continue working in a way that suits their work/life balance, while also providing a way to manage pension growth. These flexibilities were already available to 2008 and 2015 scheme members.

Changes to pension rules regarding inflation

52. In addition to new retirement flexibilities, the consultation response also committed to address the disparity between the Consumer Prices Index (CPI) rate that is used for in-service revaluation of accrued benefits in the NHSPS(S), and the rate used for the calculation of an individual’s annual pension growth which is assessed for Annual Allowance (AA) tax purposes.

53. Each year, pensions for members in the 2015 NHSPS(S) (‘the 2015 Scheme’), who are still actively contributing, are reviewed to keep up with the rise in the cost of living. 2015 Scheme pensions are reviewed using the CPI in the year before, plus an additional 1.5%. This is called revaluation, and it usually happens on the 1 April.

54. For GPs, non-GP providers and dental practitioners, this uplift happens to pensionable earnings in the 1995 and 2008 Sections and also take place on the 1 April.

55. Following consultation, the Scottish Government confirmed that from 2023 onwards the revaluation would take place on the 6 April. This change is designed to address a gap between the CPI used to calculate in-service revaluation of 2015 Scheme benefits and the CPI used for working out the pension growth for AA tax calculations. This means that the pension growth calculation will only consider growth in pension benefits above inflation; therefore, removing the risk that a high inflation environment would create larger tax charges for senior clinicians on pension earned above the AA tax limit.

Reform of member contribution rates

56. On behalf of Scottish Ministers, the SPPA published a consultation on 23 May 2023 on changes to member contribution rates in the NHSPS(S). The consultation sought views on the reform of the member contribution structure from 1 October 2023.

57. The consultation document set out the rationale behind the proposed changes to the member contribution structure within the NHSPS(S). It outlined the requirement to address the existing shortfall in contribution income, narrow the range of contribution tiers, now that all members are in a CARE pension arrangement, and to move to using actual pensionable pay, rather than whole time equivalent, to determine contribution rates (as agreed upon in an earlier consultation process in 2022).

58. Furthermore, to protect lower paid staff, the consultation also proposed that adjustments to contribution rates should be done gradually, over a two-year phased implementation period. This meant that the Scottish Government had delayed implementation of these reforms for more than two years as the cost-of-living crisis persisted. These delays aimed to reduce the impact of contribution increases on the take home pay of lower earning staff and mitigate the risk of staff leaving the scheme on grounds of affordability, while also ensuring that the required contribution changes are implemented in a timely manner.

59. However, it was also acknowledged that there were concerns about the retention of senior doctors both in the workforce and in the pension scheme as a result of Scotland falling behind the rest of the UK in the implementation of these contribution reforms. These proposals, therefore, aligned contribution rates in the NHSPS(S), as much as possible, with other health service schemes in the rest of the UK.

60. The Scottish Government response to this consultation committed to move forward with the phased implementation of proposed reforms over two years as originally set out in the consultation document. However, having assessed the feedback, a final revised contribution structure was taken forward which aimed to strike the right balance between flattening the contribution structure and protecting take-home pay of lower and middle earners, and the affordability of the scheme. The phased implementation of these changes began on 1 October 2023, which included a reduction in highest contribution rate, for those earning over £68,223, from 14.7% to 13.7%.

UK Spring Budget 2023 tax changes

61. At the UK Spring Budget on 15 March 2023 the UK Government announced the following changes to the AA and Lifetime Allowance (LTA) pension tax rules which were effective from 6 April 2023:

• The AA was increased from £40,000 to £60,000. Individuals continue to be able to carry forward unused AA from the 3 previous tax years
• The minimum Tapered AA was increased from £4,000 to £10,000 and the adjusted income threshold for the Tapered AA was also increased from £240,000 to £260,000.
• The LTA tax charge was removed from 6 April 2023 and will be fully abolished from 6 April 2024. However, the maximum Pension Commencement Lump Sum was frozen at its current level (£268,275).

62. In addition to reforming the pension tax thresholds, the UK government also announced changes to the way open (career average) and closed (final salary) public service pension schemes are considered for AA purposes. Open and closed public service pension schemes for a given workforce are to be considered to be linked for the purposes of calculating AA charges. This will allow members of a public service pension scheme to offset any negative real growth in their legacy pension scheme for AA purposes against positive pension input amounts in the reformed schemes, thereby reducing AA charges that may result from reformed scheme accrual.

63. The changes to the AA and moves to abolish the LTA are welcome and will support staff retention by removing most senior doctors and dentists from the impact of pension tax. Pension tax has previously been identified as a barrier to senior clinicians remaining in workforce and from working more hours due to the risk of incurring a significant pension tax charge.

McCloud Remedy – Removing age discrimination from the NHS Pension Scheme

64. The reformed NHS Pension Scheme (Scotland) 2015 was introduced as part of wider reforms implemented by regulations made under the 2013 Act. As part of these reforms, public service pension scheme members within 10 years of retirement were originally given transitional protection, and so remained in their legacy pension schemes. Other members who were between 10 and 13.5 years from retirement were also given some protection, on a tapered basis.

65. In December 2018, the Court of Appeal found this protection to be discriminatory against younger members. This has become known as the ‘McCloud judgment.’ The UK government accepted the judgment applies to other public service schemes, including the NHS, and has set out how the discrimination will be remedied. This is known as the ‘McCloud remedy.’

66. On 10 March 2022, the Public Service Pensions and Judicial Offices Act 2022 received Royal Assent. The main purpose of the Act is to support implementation of the McCloud remedy in the public service pension schemes. Secondary legislation in support of this Act was made in two phases.

67. The first phase of secondary legislation delivered the “prospective remedy”. That is, all active scheme members moved to the reformed scheme from 1 April 2022 and the legacy schemes were closed to future accrual from 31 March 2022. The second phase of secondary legislation delivered the “retrospective remedy”. That is, the implementation of the deferred choice underpin which gives eligible members a choice between legacy scheme and new scheme benefits for service between 1 April 2015 and 31 March 2022 (the remedy period).

68. The second phase of secondary legislation was subject to consultation which ran between May and July 2023. This consultation addressed the retrospective changes needed to delivery remedy in full. These regulations will deliver changes such as:

• Implementing Deferred Choice and Immediate Choice
• Facilitating the return of remediable service to the legacy scheme
• Establishing how remedy information must be provided to recipients
• Facilitating the correction of pensions already in payment, including the underpayment and overpayment of pensions
• Rectifying the pension contributions for pension scheme members, pensioners and dependants in relation to voluntary additional contributions arrangements

69. These regulatory changes required to the NHSPS(S) in order to implement the retrospective remedy were made by secondary legislation which came into force on 1 October 2023.

2020 Employer Cost Cap Valuation

70. The affordability of the scheme for tax payers and employers is managed through the scheme valuation process and the employer cost control mechanism, known as the employer cost cap, which was introduced to the scheme in 2015. The employer cost cap ensures that the risks associated with pension provision are not met solely by the taxpayer but are shared with scheme members. The cost cap operates symmetrically, so that if valuations show that costs have risen or fallen from a target rate, or outwith a corridor of +/- 2% around the target rate, steps would have had to be taken to bring them back to target. It applies to ‘member costs’, such as increases in life expectancy or salaries.

71. In May 2021, at the request of HM Treasury, the Government Actuary (GA) carried out a review of the cost control mechanism and made a number of recommendations. On 24 June 2021, the UK Government launched a consultation on three proposals based on recommendations made by the GA. The proposals were to; design the cost control mechanism so it considers only benefits built up in the newer reformed schemes, widening the corridor from 2% to 3% of pensionable pay and introducing an economic check, so that a breach of the mechanism would only be implemented if it would still have occurred had long-term economic assumptions been considered. In response to the consultation on 4 October 2021, the UK Government confirmed it has decided to proceed as proposed and the revised cost control mechanism would be used for the 2020 scheme valuations.

72. The 2020 valuation of the NHSPS(S) was based on data as at 31 March 2020. The valuation indicated that the core cost cap cost of the scheme lay within the 3% cost cap corridor. As there was no breach of the cost control mechanism there was no requirement for Scottish Ministers to consult on changes to the scheme.

73. In addition to the cost cap breach, following a consultation on the SCAPE discount rate methodology, the UK Government announced on 30 March 2023 a reduction in the SCAPE discount rate used in the valuation of unfunded public service schemes, from 2.4% to 1.7%. A reduction in the discount rate will – all other things being equal – increase the contributions employers are required to pay. That is because the rate ‘discounts’ future pension costs to a figure in today’s terms. A lower discount rate means a smaller discount for the employer. Changes in the discount rate are not included when assessing changes in the employer cost cap.

74. The UK Government committed to provide funding for increases in employer contribution rates resulting from the 2020 valuations as a consequence of changes to the SCAPE discount rate. The funding commitment is for employers whose employment costs are centrally funded through departmental expenditure. HM Treasury has confirmed that, for devolved administrations, the Barnett formula will apply. The 2020 valuation confirmed that an increase in the employer contribution rate from 20.9% to 22.5% is required from 1 April 2024.

Impact on affordability

75. High participation in the NHSPS(S) suggests that the scheme remains affordable and a valued benefit for NHS staff. Participation in the pension scheme by hospital Doctors and Dentists^[15] remains high at 90.8% at the end of Quarter 4 2022-23. However, this is down 2.4% against Quarter 4 2021-22 (93.2%). This figure is also less favourable on comparison to scheme participation rates for all NHS staff which stands at 91.9%. However, more recent participation rates for medical and dental hospital staff, as at 30 September 2023, show a participation in the scheme of 93.2%.

76. Participation amongst General Practitioners^[16] (GPs) decreased to 79% as at 31 March 2023 from 85.3% at 31 March 2022. However, there is an indication that levels of GP participation fluctuate through-out the year as members opt in and out of the scheme, and a snapshot of participation in any given month may not accurately reflect total participation across the year. Most recent participation figures, as at 1 July 2023, see participation rates increasing to 83%. Most recent General Dental Practitioner (GDP)^[17] participation in the scheme stood at 81.9% in the scheme, up 0.2% on the previous year. Participation rates remain a regular consideration of the NHS Pension Scheme (Scotland) Advisory Board.

77. Opt out Figures for the period 1 April 2022 to 30 September 2023 showed 279 GPs and 11 Dental Practitioners had withdrawn from the scheme. We are unable to identify the number of hospital doctors and dentists who have opted out because SPPA pension data does not distinguish between job roles only between “officer members” (those employed) and practitioner members (GPs and Dentists). When members opt out of the scheme, they do not always give a reason. Some may opt out of the scheme in one employment because they are already in the scheme in respect of another employment.

Retirement Trends and Pensions

Number of doctors and dentists taking early retirement:

78. There were 67 GPs and 22 GDPs who had taken early retirement between 1 April 2022 and 31 March 2023 which was down on figures for the previous year (81 GPs and 21 GDPs). However, current data indicates an overall increase in early retirement figures with 97 applications received across both groups by November 23.

79. The retirement application form does not request reasons why a member is taking early retirement, so this type of detail is not held by SPPA. Also, SPPA would not be notified where a member takes early retirement and re-joins the workforce without re-joining the pension scheme. The pension data held by SPPA does not distinguish between job roles, so it is not possible to provide early retirement figures for hospital doctors and dentists.