The recent Hutton Report contains two practical recommendations for public sector pension reform; an increase in the normal retirement age in line with the state retirement age, and a move from final salary to career average pensions.
Separately, the tax rules on pensions changed from April 2011, reducing the annual tax deductible pension contribution (‘annual allowance’) from £255,000 to only £50,000 and the total maximum pension pots (‘life time allowance’) from £1.8m to £1.5m.
This article will explore how consultants will be hit by the Hutton reforms, which, despite union opposition, will probably be introduced from April 2015. A later article will look at the tax changes.
Linking the normal retirement age to the state retirement age means 66 for anyone born after 1955, and, compared to the current retirement age of 60, is certainly a significant reduction in the generosity of benefits.
The NHS Pension Scheme estimates for future pensioners have increased by 5 years in the last 5 years, to 91 for men and 94 for women, although this simply means the previous longevity estimates were grossly understated, not that longevity has genuinely increased so dramatically.
What about career average? The current final salary pension works to the advantage of hospital doctors, expecting chunky threshold increments. Under a standard career average scheme pensions already earned, and each year’s future pension, is increased only in line with inflation, regardless of salary increases.
But the Hutton career average pension is not as tough as it seems, and certainly less tough than the private sector – pensions already earned before the change will continue to be increased in line with salary, and each year’s future pension will be increased in line with average earnings not inflation.
The Hutton reforms could also have been much tougher on inflation protection – unlike private sector pensions where pension increases are capped at 2.5% for pensions earned after 2005, Hutton proposes no such cap, so public sector workers continue to be fully protected against inflation.
Furthermore, there has been no earnings cap, at say £75,000, which was widely expected. This was anticipated not so much as a cost saving measure, given the small numbers involved, but because it is ‘fair’ for the highest earners to tighten their belts the most. Hutton argued, unconvincingly, that an earnings cap involves huge complexity and the issue was better addressed by tiered contributions, as at present.
Further good news: the annual accrual will be 1/60th of pension, like the current 2008 section, significantly more generous than the current 1/80th pension and 3/80th cash in the 1995 section.
Overall the direct impact of the Hutton reforms could have been a lot tougher and it certainly leaves NHS doctors with a much better pension than majority of the private sector.
But, of course, the government has already announced two other changes separately from Hutton.
The impact of increasing pensions in line with the lower consumer price index not the retail price index, from April 2011, compounds over several years retirement to make a material difference.
The 3% average increase in member contributions will take any hospital doctor earning over £100,000 from 8.5% to, probably, 11.5% of salary.
We should not see the Hutton reforms as a ‘final settlement’ and pressure from the private sector for further changes will continue. Like painting the Forth Road Bridge, by the time the Hutton reforms take effect in 2015, it will be time to consider further changes.
As well as increasing the retirement age, depending on any changes in the state retirement age, the most likely change is capping pensionable salary at, say £50,000, with a defined contribution pension above this for higher earners.
There is no doubt that consultants will be hit by the Hutton reforms and the taxation changes. The precise impact will vary amongst individuals depending on a complex mix of age, NHS salary, non NHS earnings and personal pensions. Now is the time to be examining the impact and what, in practical terms, they can do about it.