A government response to a consultation on proposed changes to NHS pension scheme rules set out significant changes to ‘final pay controls’ last week.
Final pay control rules introduced in 2014 were designed to stop practices artificially inflating partners’ NHS pension by awarding them a significant pay rise shortly before retirement.
However, accountants say the rules resulted in hundreds of GP practices facing substantial penalty payments, often for factors outside their control.
NHS pension scheme
The pay controls relate only to NHS pension scheme members with final salary pension benefits. GPs have long been on career average pension schemes – meaning a pay rise in their last few years before retirement has a limited impact on their pension.
But non-GP partners were until 2015 on final salary pensions, and those nearing retirement age will have significant final salary benefits. As a result, a significant change in profit in the final years before retirement for a practice manager partner, for example, can trigger substantial charges for a practice – affecting all partners.
The Association of Independent Specialist Medical Accountants (AISMA) says more than one in five GP practices have faced penalty payments sometimes in excess of six-figure amounts. The penalties were often triggered by substantial percentage rises in profit shares for non-GP partners whose income rose when other partners left or reduced significantly their sessional commitment.
Changes backed by the government will increase the threshold for penalty payments – with the allowable rise increased from the consumer prices index (CPI) measure of inflation plus 4.5% to CPI plus 7% – and offer new exemptions to reduce unfair charges. Practices could also claim back charges incurred in the past three years.
James Gransby, AISMA vice chair and partner at RSM UK Tax and Accounting Limited, said: ‘The proposals will significantly reduce the number of charges being levied by increasing the cases where exemptions apply.
‘One of the areas that concerned AISMA members was pensionable pay increases for non-GP partners due to an increase in profit share percentage as a result of another partner reducing their sessional commitment. These partners will now be exempt from final pay control rules because another partner leaving the practice has been deemed to be outside the employer’s control.’
The AISMA vice chair said: ‘It is estimated that over 20% of practices have been landed with a final pay controls charge, many with substantial six-figure sums. The rules have now been relaxed and these practices now have a six-month window of opportunity to have these figures revised downwards, or eradicated altogether, if the charge was levied since 1 April 2018 and if they can benefit from the new rules.’
The NHS Business Services Authority, which has operated the final pay control mechanism since its introduction, warned in 2018 that the volume of charges triggered under the scheme had ‘significantly increased’ – and employers had flagged concerns over charges triggered by promotions and other factors that they felt were outside the spirit of the final pay control policy.
The government’s actuarial department said the revised CPI plus 7% threshold marked ‘the point beyond which the volume of cases falls significantly, such that pay increases in excess of this can be considered exceptionally large’.