NHS Pensions 2014/15 Practice Update (England and Wales)

The draft statutory instrument in relation to changes to the NHS Pension Scheme in England and Wales on 1 April 2014 has been released by the Department of Health. The changes have been devised to protect the taxpayer and current NHS employers, when access to the pension scheme is extended to independent providers (IPs). NHS Pensions are clearly laying the ground rules for IPs, whilst at the same time getting tough with existing employers.

 

Some of the changes practices should be aware of include:-

 

1) A contribution guarantee from employers with a history of non payment.

2) Interest and administration charges on late payments of contributions to NHS Pensions.

3) A charge on employers for awarding excessive pay rises prior to retirement.

4) Employee contribution rates for 2014/15.

These are considered in more detail below:-

1) Contribution Bond/Guarantee

Existing scheme rules allow for a contribution guarantee (i.e. a bond) in favour of NHS Pensions for certain employers who fail to pay their scheme contributions.

The draft legislation makes it compulsory for IPs to obtain such a guarantee. The bond would be obtained from selected banks and other institutions and its value would cover an estimate of 3 months’ contributions, employee and employer, plus 10%. As with other guarantees of this nature there would be a charge for the service from the bank concerned. HMRC applies similar principles in other areas of legislation to protect against non payment.

It remains to be seen whether under the current scheme rules NHS Pensions will take a tougher line with existing employing authorities who are in arrears. Contribution guarantees from existing employing authorities can only be requested if the employer is in arrears and must be in a form approved by the Secretary of State. Clearly the approved form is that laid down for IPs above. It would be advisable not to test NHS Pensions on this, so any practices that are behind or consistently late with paying over their monthly contributions would be well advised to get up to date as soon as possible.

It also sends a strong hint that they will not allow anyone to be more than 3 months overdue, as this is the maximum they would be able to recover under the terms of the bond.

2) Interest And Administration Charges

Interest and administration charges are being introduced for employers who pay their scheme contributions late.

Employers who make their payments of contributions by the current due date of the 19th of the month following deduction, will not incur any charges or interest. However if contributions, in whole or in part, are paid late then this will be deemed a chargeable event and an administration charge will apply.

The administration charge is £100 for each chargeable event. NHS Pensions state that this charge reflects the additional costs incurred by them dealing with late payments, which includes identification, recovery and correspondence with the employer. The charges are payable within 1 month of issue and if not paid by the due date will trigger a further chargeable event and therefore an additional charge of £100.

As well as the administration charge, interest will be charged on overdue amounts at a rate of 3% above CPI (consumer prices index). CPI will be taken from the February preceding the financial year in which default takes place. The rules don’t appear to cater for a one off default, so making payments on time every month is going to be essential.

The new rules will come in to force on 1 April 2014. If there are arrears at that date it will be deemed a chargeable event, thus an administration charge will be due. Interest will also start to accrue from 1 April 2014 until payment is received in full. We would advise those practices who are behind with payments of contribution to get up to date by 31 March 2014.

3) A Charge On Employers For Awarding Excessive Pay Rises Prior To Retirement

Regulations have been introduced to stop the practice of employees receiving enhanced pensions by being awarded substantial pay rises in the years leading up to retirement. If this occurs the employer may be subject to a charge levied by NHS Pensions. These regulations apply to all members of the 1995 final salary scheme. This will include non GP partners, such as practice manager partners and clinical partners, along with all other employees.

In short, members of the 1995 final salary scheme currently have their pension benefits calculated on the best year of their last 3 years of service leading up to retirement, hence the temptation to boost pay in one of these years to secure enhanced pension benefits.

To deter this NHS Pensions are introducing a virtual cap on earnings in the final 3 years of service prior to retirement. This does not mean that pay rises cannot be given to staff in these years, but you need to be careful if they are going be above what NHS Pensions terms normal. The virtually capped earnings figures will be used to calculate a virtual pension, which will then be compared to the actual pension benefits the employee is due to receive.

NHS Pensions will make the check themselves. In the event of the actual pension being greater than the virtual pension, a charge will be levied on the employer. This charge is based on the additional pension the employee is due compared to the virtual pension, and that additional pension is multiplied by a factor of 24. Therefore if the actual pension benefits result in a pension of £1,000 greater than the virtual pension the employer (i.e. practice) would be charged £24,000.

The charge is due 1 month after being notified by NHS Pensions.  Failure to pay is subject to the same charges and interest outlined above for late/non payment of pension contributions.

The virtual cap allows for pay increases of CPI plus 4.5%, with CPI being taken from the February preceding the scheme year of retirement. So if these rules applied in 2013/14 the virtual cap would allow for a pay increase of 7.3%.

This has clearly been introduced to exert some control over final pay and stop the widely used practice of boosting earnings in the final years up to retirement to boost pensions.

This rule does not apply to pension benefits in the 2008 scheme or to individual GPs in either the 1995 or 2008 scheme, where members’ pensions are based on career averaged revised earnings (CARE),

4) Employee Contribution Rates For 2014/15

The draft statutory instrument indicates the proposed rates for employee superannuation contributions for 2014/15. The table below shows the new rates and the increases.

Conclusion

In summary, NHS pensions are getting tougher with employers and looking to close down loopholes that have existed and been used for a number of years. The message coming out is load and clear- if you don’t keep up to date it is going to cost you.

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