It has been rare over the last few years that we have had good news to advise clients of in respect of the NHS pension scheme; in recent months however both the McCloud judgement and the reform of Final Pay Controls have both changed this.
This update will look at the Final Pay Controls and how things have changed for the better.
A final pay control charge can arise where an individual receives an increase in their pensionable pay in the final 3 years before retiring from the scheme above the ‘allowable amount’.
The rules which commenced in 2014 were designed to stop the abuse of the NHS pension scheme whereby a practice gives a large pay increase and hence enhanced pensionable pay to a member of the Officer section of the 1995 scheme in the last few years running up to retirement from the NHS pension scheme. The rules typically caught a single-handed GP with a spouse working within the practice often in a nurse or Practice Manager role.
As with many rules, they seek to solve problems but can actually lead to unintended consequences!
A number of practices have been caught out by these rules and it has now been revealed that more than 20% of GP practices have been issued with a charge some of which are very large indeed.
In our experience practice manager partners have been at particular risk due to the levels of fluctuating profit shares that are not possible to control in the way a salary level is. There have also been instances where for example a nurse retraining as an Advanced Nurse Practitioner has triggered a charge.
Neither of the above scenarios have been at all fair and so for some time these rules have been questioned with NHSBSA and various bodies have asked for reconsideration thereof.
In January 2021 a consultation was as a result launched into the rules and how they might be adapted to improve the fairness of the situation. The consultation period has now been completed and the results have concluded that they make the following proposed amendments to the 1995 scheme regulations:
- Increase the allowable amount of growth from CPI plus 4.5% to CPI plus 7%.
- Create further exemptions to the regulations to remove scenarios where they are not appropriate.
The regulation amendments have now been agreed and will help to remove Final Pay Control charges from many practices or at least reduce them considerably.
Pensionable pay under the new rules can grow by an allowable amount of 7% plus CPI which gives much more scope for rises to be exempt from the charges. Where a charge is not removed it will be greatly reduced.
Looking back at the nurse to ANP example mentioned above the regulations have been amended to remove the penalties previously at risk of occurring when an individual is trained and promoted to a new role commanding a higher pensionable pay rate. It will be necessary for the practice to prove that the promotion process was genuine and that the individual has thus earned the right to the higher level of pensionable pay based on the change in role.
Practice Manager partners have also been considered more fairly. The regulations now include an exemption from a final pay control charge where the practice manager’s profit sharing ratio increases purely as a result of other partners reducing sessions or retiring as this is deemed to be ‘outside of the employers control’.
Furthermore, non-GP partners will also gain exemption from the rules where in the last three years pre- retirement there is an overall increase in practice profits in total, thus affecting their individual share of profit from the practice.
These new rules will apply only to charges levied for the period since April 2018.
It is important now that we talk to clients to establish all that have been issued with a final pay control charge since 1 April 2018 when the rules have been backdated to.
Action Points for Accountants
- There is a six month window from the rules changing for practices to have their circumstances revisited under the new regulations. Action must be taken in this regard.
- Ensure practices are aware of the new regulations because there will remain a risk that final pay control charges will still be applied in some situations. Practices must consider their position when awarding pay rises in all instances.
- Ensure practices understand that any charge levied is on the practice as employer not the individual concerned.
- Consider advising clients where appropriate to give non pensionable bonuses which will therefore not be caught by these rules. This is of particular relevance during COVID-19 as practices seek to reward staff that have worked so hard.
We have for once a situation where sensibility has prevailed.
*The views expressed are the author’s and not ICAEW