NHS pension reform

17.02.2021
Matthew Harrington
Financial Planning

Following the Government’s consultation into public sector pension scheme reforms, they have now published their response, here, outlining their proposals for changes to schemes over the coming years.

These changes will impact all public sector pension schemes, including the NHS Pension Scheme.

Why did this happen?

Following the introduction of new pension schemes in 2015, the majority of members were moved into the new ‘career average’ pension schemes. 

Those members who were less than 10 years from retirement were not affected by this, and those between 10 and 13 ½ years from retirement were moved over gradually.

In 2018, it was judged that the way in which members were moved across amounted to unlawful age discrimination.

The proposals following the Governments consultation seek to ‘remedy’ the discrimination of affected members. 

Am I affected?

The proposed ‘remedy’ from the Government will affect those members who were in service before 31 March 2012 and remained so after 1 April 2015.

Included in this will be members who took a break in pensionable employment of less than 5 years, as well as members that left pensionable employment or took their retirement benefits after 1 April 2015.

Those unaffected by the changes will be members who were less than 10 years away from retirement at 31 March 2012, and those who only started pensionable service after 1 April 2012.

What is going to happen?

Under the Governments response, affected members will be moved back to their legacy scheme (1995/2008 section) for the period 1 April 2015 to 31 March 2022 (the ‘remedy period’). From 1 April 2022 ALL future membership will be in the 2015 section of the scheme.

This will mean that the NHS will need to recalculate your membership for the remedy period, including your level of pension accrual and contributions.

For members who have retired during the remedy period with benefits in multiple sections of the pension scheme, their retirement benefit award will also be recalculated back to the date benefits came into payment – again, with a calculation for over/underpayments.

Recalculations will also be provided for awards of dependant benefits for deceased members, as well as under benefits split as a result of divorce.

What does this mean for my retirement?

The Government intend to manage these changes through a ‘deferred choice underpin’. This means that when you come to retirement, you will be provided with two benefit statements to show how your benefits would have accrued under each scenario.

At that point, it is intended that you will have a choice as to how your benefits accrued through the remedy period are paid. But it will be a choice of one scheme or the other – you will not be able to have partial payments from each scheme for the remedy period.

Will the NHS recalculate pension growth/input for the remedy period?

It is anticipated that schemes will have to provide revised benefit accrual and pension input information to members. Whilst the remedy period is due to end 31 March 2022, the implementation of new systems to account for these changes is likely to take longer to implement, due to the complexities involved.

The government’s response indicates that primary legislation will state that retrospective changes must be introduced by 1 October 2023. Schemes can of course introduce changes sooner.

It is not yet clear how revised pension information will be delivered to members (such as a new Annual Allowance Pension Savings Statement or Total Reward Statement).

Will changes in Annual Allowance charges need to be reported and difference either paid to or refund by HMRC? 

Yes. Under the legislation any overpayment or underpayment of contributions will need to be rectified. Interest will be charged on such payments, with a rate yet to be confirmed by the Government Actuary.

‘…where an individual owes more contributions, they will receive tax relief on those contributions at their marginal tax rate in the tax year the additional contributions are paid. The government recognises that in some cases this may result in less tax relief than the individual would have received had the individual paid those contributions in the relevant remedy period years. In these cases, it will be possible for members to apply for compensation for the difference in the tax relief received.’

In terms of an overpayment of contributions resulting in a refund to members, ‘…the government has decided that individuals will receive a payment to cover the value of their contributions, but with an amount deducted to reflect the underpaid tax.’

 

What about changes to previous Scheme Pays elections or Annual Allowance charges?

Because of potential changes in pension input levels, members may need to amend previous Scheme Pays elections, and this is to be covered under the proposals.

Where an individual paid their original AA charge up front, they will receive a refund. If the individual originally used Scheme Pays to meet the tax charge, then the associated pension debit will be amended as appropriate, and schemes will receive the refund.’

Will I be able to use Scheme Pays if these changes result in an Annual Allowance charge?

Where members have incurred Annual Allowance charges for years through the remedy period, the Government anticipates that pension input will in fact be reduced. However there may be a small minority of members who see an increase in pension input and it is intended that they will be able to make a Scheme Pays election.

What about other changes?

There are still some factors of the consultation that need to be decided (decisions on Additional Pension/ERRBO contracts for example) and we expect more information to be released over the coming months.

The NHS Business Services Authority, responsible for management of the NHS Pension Scheme, have published their initial response here.

Is there anything I need to do now?

For now, no. Schemes will be responsible for completing recalculations of benefits, pension input etc and providing this information to members.

As a result of this information, you may then need further financial planning and tax advice, and this is where we can help you.

 

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