Decision time is looming for the biggest pension scheme in Europe

The NHS pension scheme is the largest centrally administered public service pension provision in Europe, and changing its direction is like altering course on a supertanker – a ponderous and difficult process.

But changes are coming and they will directly affect in excess of 1.3 million people, from consultants to hospital porters, from highly paid managers to catering assistants. Every one of them will have to make a decision next year which will affect their benefits for the rest of their lives.

Following a prolonged period of consultation – never an easy process in an organisation with so many competing interests – a new arrangement was implemented on April 1, 2008, designed to create a sustainable pension scheme fit for the 21^st century.

It was also designed to pare some of the costs off this mammoth venture. Accurate figures are difficult to come by but, to give some idea of the scale of the proposed savings, the Scottish element of the scheme alone intends to deliver around £500 million over the next 50 years.

These sums will be generated by the introduction of earnings-related, tiered contributions, for both the old and new schemes ,so that higher paid staff will pay more for the benefits they draw. The new scheme will also create cost-sharing arrangements between employers and staff to limit expenses.

The NHS Choice exercise, as it is called, allows existing members of the scheme – that is, those who were employed and opted to join the NHS Scheme before 31^st March 2008 – to transfer to the new arrangements and convert all their existing pensionable service into the new scheme. They also have they option of doing nothing and remaining in the original scheme.

But they will only have one opportunity to make the decision – expected to be in the latter stages of 2009 – and their choice will then be binding. So what are the main differences in the arrangements and what should NHS staff do?

The most far-reaching change is that, while existing staff and those joining the scheme up to March 31, 2008 will keep their normal pension age of 60, the new scheme introduces a normal pension age of 65 for new staff. The minimum age for drawing a reduced pension will also increase from 50 to 55 for new entrants.

The new and the old scheme also includes important changes to survivor benefits. Instead of being confined to spouses and civil partners, benefits will be paid to all nominated partners who fulfil certain conditions relating to co-habitation and financial interdependence. As in the pre-2008 deal, survivor benefits will continue to be paid regardless of changes in personal circumstances.  

There will also be different rates of accrual. In the pre-2008 arrangements, beneficiaries get a final salary pension of 1/80^th for each year of service based on the best of the last three years’ pensionable salary. The new scheme provides an accrual rate of 1/60^th for every year of service – based on an average of the best three years in the last 10 years of pensionable salary.

This seems superficially attractive, but it should be remembered that employees in this option would be working for an extra five years.

The new scheme benefits members who choose not to take all or some of their pension until after the age of 65 as they will have the value of their pension enhanced by late retirement factors. The new scheme also allows people who have retired and taken their pension to return to pensionable employment. This is currently not an option.

There is also provision for a new purchase facility for members who wish to increase their benefits and more flexibility for members who wish to convert part of their pension into a lump sum on retirement.

As to what choice NHS employees should make, it obviously depends on individual circumstances. But the keynote in the new scheme is flexibility. There are more options on the table and more opportunity to tailor retirement to suit lifestyle.

Many consultants and senior managers may feel that they are only approaching their professional prime at the age of 60 and may want to extend their careers for a significant period. Similarly, other employees may be perfectly happy to leave at age 60, or even earlier, and so opt to remain in the existing arrangements.

Every employee will be sent an information pack explaining the options available, including personal illustrations of their own situation.

But the time for decision will be on them sooner rather than later and it is a once and for all choice. There is no going back once the decision is made, and it may make very good sense to obtain professional advice to supplement the generalised information the NHS will provide.

 

John McKendrick is Senior Consultant in Financial Services at French Duncan Financial Services Limited, Independent Financial Advisers – Authorised and Regulated by the Financial Services Authority.