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Thursday 13 July 2023

A pension scheme with a health service attached

By Jon Restell

While the NHS pension scheme is eye-wateringly huge, it is eminently affordable, taking in billions more in contributions than it pays out in benefits. It remains one of the safest investments going, writes Jon Restell.

Jon Restell portrait 2021

Every year the accounts of the NHS Pension Scheme for England and Wales go to Parliament. (Scotland and Northern Ireland each have their own separate schemes.) The accounts for 2021-22 contain the customary eye-watering figures.

There are 1.75 million ‘active members’ – current employees in the scheme – about 750,000 million deferred members, such as ex-employees not yet at retirement age, and just over a million people receiving NHS pensions. So membership covers 3.5 million people in England and Wales. Once you add in their families and dependants, it’s easy to see how the NHS pension scheme has far reaching effects on the financial wellbeing of a large chunk of the population.

Scheme membership goes beyond English NHS trusts and Welsh local health boards. There are around 8,000 participating employers, of which more than 6,000 are GP practices. A smattering of independent providers, either providing NHS services or employing former NHS staff transferred under the TUPE regulation, are also covered.

But the big daddy of all the figures is the overall liability for the scheme. In the latest accounts this is set at £869.9 billion. You could very well say that the NHS is really a pension scheme with a health service attached to it.

Except, of course, this gargantuan pot of money doesn’t actually exist. It is a notional amount that indicates the value of investments that would be needed to cover the liabilities of the scheme if such a fund existed. There is an element of unreality here. The NHS pension schemes, like most other public sector schemes, are unfunded. The state underwrites them. Unless UK plc goes bust big time, your NHS pension scheme is one of the safest investments going and doesn’t need a fund.

The figure on which the Treasury actually keeps a close eye is the net cash cost of the NHS pension scheme: the difference in the amount paid out in pensions versus the amount collected in employer and employee contributions. The last accounts show that the Treasury took in £4.35 billion more in NHS contributions than it paid out in NHS pensions. When cash is king, this is perhaps a truer test of the political affordability of the NHS pension scheme than the notional liability.

While it does have a just for fun quality to it, the liability figure does serve as a proxy marker of the value of occupational pensions in the NHS. It’s highly likely that, from next year, the combined cost of employer and and employee contributions will add up to about a third of total NHS salaries. The number of private sector employers shelling out 25% in pension contributions can probably to be counted on one hand. The value of the NHS scheme does vary by individual and, until the British Medical Association recently brought some extraordinary pressure to bear on Treasury policy, there have been punitive tax charges for some higher earners and staff with long service. But overall the NHS pension scheme is one of the best going, because of its defined benefit nature – now a distant memory in the private sector – and the accrual rate of 1/54th of your salary, indexed to CPI inflation plus 1.5%. The personal fund needed to buy an equivalent annuity is far beyond the means of workers anywhere.

This is why pension provision in the public sector forms a larger and more important part of the employment package than in the private sector. And, for all the broad brush talk of intergenerational fairness, this is also why the pension triple lock is so important for current workers in the private sector, who need the state pension to maintain its value because they will rely on it for their income when they stop working much more than earlier generations or indeed current pensioners.

There are always problems with the detail of how the NHS pension scheme works, which your union and the wider staff side won’t stop trying to fix. But the overall value of the scheme is not one of those problems. It is worth maintaining and defending.

  • Jon Restell is chief executive of Managers in Partnership.
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