My Lords, to a certain extent the burden of this Motion is uncontestable; the Government themselves accept that the measures proposed are insufficient because they have put down some further changes that will come before us in due course. I look forward to a further debate. This is an important issue, and I welcome the opportunity for a discussion.
Yesterday, on the winter crisis Statement, the Minister said that
“we should be learning all lessons. I like to think that, three months into my role, I am learning some of those lessons.”—[Official Report, 10/1/23; col. 1316.]
I am pleased to provide the opportunity for the Minister to learn more about the impact that the pension tax rules—the lifetime allowance and the annual allowance—are having on the work that he is undertaking to get our NHS back into shape. I did not seek to intervene yesterday when the Minister made the Statement, as I knew we had today’s debate. Of course, the crisis is not the product of short-term problems but the result of 12 years of political choices—but we are not going to debate that again.
The taxation issues, however, are still highly relevant. It is no good promising extra beds and shorter waiting times if you do not have the staff to provide the care, and there is no doubt that the rules are having an adverse effect on staff retention at senior levels, as well as—possibly even more important—on the morale of the staff whom we depend on. We are all agreed: for example, the last Prime Minister promised to
“stem the exodus of doctors from the NHS”,
and the Prime Minister before that promised to fix the pension tax relief rules. The current Chancellor, albeit before he took up that role, called the situation a national scandal. He also tweeted on 4 August that, among the actions needed to get the NHS back on its feet, the Government should:
“Grant an immediate exemption for doctors to public sector pension rules which are currently forcing them to retire in their fifties in alarming numbers”.
Even the current Health and Social Care Secretary, Steve Barclay MP, has said that the NHS Pension Scheme
“is one of the best in the country, but it’s not working as it should for everyone”,
so I am pleased that the Minister is here and ready to learn lessons. The problem, as he might be the first to acknowledge, is that the real solutions are not in his hands or those of his department. The solutions lie in the hands of the Treasury, which sets the pension tax rules and effectively controls the rules of public service pension schemes. Of course, this is a general problem which I could speak at great length about, but given the crisis we face in the NHS it is right that in this debate we should focus on what can be done in this area for the NHS.
As I have said, my Motion is indisputable. These provisions were inadequate and we have further changes, which are currently the subject of discussion. The Secretary of State has said:
“We need a system where our most experienced clinicians don’t feel they have to reduce their workload or take early retirement because of financial worries”.
This suggests that he understands the problem but, unfortunately, the further proposals currently out for consultation tell us that he does not, and that what has been proposed so far is insufficient. This is where it starts to get technical and the current forum, where slides and spreadsheet presentations are out of order, is not really conducive to a full explanation. Possibly it might be useful to have a meeting, but let us have a go at outlining the issues.
There are a number of problems, not least the lifetime allowance, but I want to focus in this debate on two issues that arise from the annual allowance: the limit on how much extra pension National Health Service employees can accrue each year, tax free. If you exceed the limit, there is a penal tax rate involved on the portion of growth of a member’s pension rights in excess of a defined amount, currently £40,000. It is a penal rate because tax is levied on the money as it goes into the scheme and then again when it is paid out as benefits. Effectively, that is a tax rate on pensions savings of up to 70%. While I am not against high earners paying more in income tax, it still needs to be applied equitably and fairly, and certainly not when people are doing the right thing by providing themselves with an adequate pension.
The growth in pension savings during a tax year, which is limited by the annual allowance, is referred to as the pension input amount. This is the increase in the value of the individual’s pension rights, starting from an opening value immediately before the beginning of the tax year and going to the closing value at its end. It consists of two parts: the increase in the pension that they had previously accrued and the additional pension that they earned during the current year. If, after allowing for inflation, an individual’s pension input amount is more than the annual allowance of £40,000, the individual is liable to pay tax on the excess, so the clear intention is that the pension input amount should consider only growth in pension savings above inflation. There are two major problems with
how this works in practice. First, there is an index mismatch; secondly, there is the problem of negative pensions growth.
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The mismatch is between the index used to increase the opening value of the PIA and that used to revalue the member’s actual benefits. For example, in the 2022-23 tax year, the September 2022 CPI of 10.1% is used to revalue the member’s pension. However, the increase in the CPI used to revalue the opening value of the PIA is based on the previous September’s increase of 3.1%. So while over a year there may have been no increase in the real value of a member’s accrued benefits, they will still have to pay tax—almost certainly at the rate of 40% or 45%—on 7% of the current value of their accrued pension. I hope people are following me there. The amount involved can be substantial, heading towards six figures in some cases.
The Government have acknowledged that there is a problem here and proposed a change. However, what they have proposed is administratively complex and requires changes to pension administration systems, as well as legislation. Scheme administrators are already faced with the considerable challenges of delivering the McCloud remedy, correcting historic age discrimination. It is clearly better to go back to the source of the problem and amend Section 235 of the Finance Act 2004.
The second point is the failure to do anything about the problem of what is called negative pension growth, where the value of a member’s accrued pension is actually falling in real terms. If the member has an accrued pension and its value increases by less than inflation, you get negative pension growth: at the end of the year, the pension is worth less in real terms that it was at its beginning. This problem is difficult to explain given the time available but the key point to understand is that most experienced clinicians, who we need to retain to solve the problems we face, have two pensions where the PIA is assessed separately for each scheme. They have a pre-Hutton reforms pension based on their final pay and a post-Hutton reforms pension based on their revalued average pay.
Without going into too much detail—maybe there is too much already—with current and expected pay increases of less than inflation, the value of the old pension they have accrued can actually reduce in real terms. It will go up in line with the pay increase but is tested against the PIA going up in line with inflation, which will be higher than their pay increase. In fact, over the year, that element of their pension will have fallen in real terms—and that is ignored for tax purposes. However, the value of the new pension that the member has accrued, plus their additional pension accrued during the year, will be a positive amount. In one scheme they have a negative amount, while in their more up-to-date scheme they have a positive amount which will be taxed at a penal rate, even though overall the amount of increase in the pension they have been paid by the National Health Service has not gone up by nearly as much, or might even have declined in total. As far as the member is concerned, it is all one pension, and it is difficult for them to understand why they are being taxed on a declining asset.
The Secretary of State and the department have provided an example of how their proposals will work. I have been involved in that game for long enough to know that, when employers provide a single example, it is rarely an accurate reflection of everything that is happening; there is always an element of cherry picking. That example does not tell us, first, that it is an exceptional case and, secondly, that it is looking only at one year’s figures. To the extent that it is possible to reverse-engineer the figures we have been given, it appears that, because negative pensions growth will be excluded in future years, the individual concerned will still have to pay substantial amounts in tax, even though the total value of the benefits is declining. The likely effect is that the senior clinician involved will stop doing waiting list initiative work to avoid the tapering which will massively increase the tax they pay, despite that additional work not being pensionable.
We have a real problem here for getting the NHS back on track. We need to retain senior staff, and, unless the Government accede particularly on the need to have an effective and efficient system for dealing with the index mismatch—and, especially, on taking into account negative pensions growth—we will continue to have those difficulties.