My Lords, I congratulate the noble Lord, Lord Davies, on highlighting a really serious issue in terms of the workforce situation within the National Health Service. I commend him on his clarity and ability to explain an incredibly complicated situation. I also congratulate my noble friend and welcome him to his position. I know that he is in listening mode and that the Government really want to sort out the problem; it has been hanging over the National Health Service for a number of years.
Small changes have been made to try to address different parts of the problem, but we are left with a situation where, partly because of the legacy of unexpected tax bills that hit senior staff and lowered morale at points over the past three or four years, we currently face a new problem that did not exist before and which has added to the difficulties faced by NHS staff: inflation. The NHS Pension Scheme, as with other public sector pension schemes, is an excellent scheme; the benefits provided for the majority of members are generous and of extremely high value relative to the salaries of most of the workforce. More than 1 million members are in that scheme, and the Government, in their new regulations, have commendably sought to widen the membership of the NHS Pension Scheme. Again, I commend the recent consultation measures that have been put forward; for example, bringing in more primary care network staff so that they do not have to keep opting in but can be automatically included.
I also welcome the attempts to attract back some of the people who have retired early from the NHS or left it for a number of reasons over the past few years. Were they to come back under the old rules, they would face extra penalties; however, those penalties are being removed. I again offer my noble friend and the Government my full support on trying to get people to come back flexibly, take partial pensions and make new contributions and to remove the limits
on the number of hours worked—all of which is to be welcomed in allowing retired staff to rejoin the pension scheme.
There is also an attempt to address the inflation calculation problem, whereby the base for calculating the end-of-year inflation is being moved to 6 April so that it will take a base at a similar level of inflation to the previous year. However, that is a one-year fix, so it is not going to solve the long-term issue.
Given the cost to taxpayers of unfunded public sector pensions and, in my view, the right of public servants to expect good pensions, we need to recognise that there is a real problem for some groups of members for whom something which is supposed to be a brilliant workplace benefit has turned into a workplace penalty because of illogical tax rules. More senior and long-serving earners—and now even middle earners, not just the highest earners—are finding that their supposedly tax-free pension contributions are causing them to receive huge tax demands that can even exceed the extra earnings that they may make from taking on an extra shift or doing some overtime, so they are effectively paying to work for the NHS. That is not intentional; the rules in theory are having unintended consequences in practice. The tax system rules that the Treasury has devised are intended to limit the extra tax-exempt pensions so that taxpayers do not have uncapped, extra-large bills going forward, but, in practice, there is complexity, a lack of transparency and perhaps inappropriateness in applying rules that might work for defined contribution pension schemes to defined benefit pension schemes—as well as in trying to limit not only the amount of money going into the scheme each year but the amount built up over the long run. Surely, if you limit the amount that goes in on an annual basis, you should not need to punish people if they have a big pension at the end—is that not the point of building up pensions? I urge my noble friend perhaps to meet a group of interested Peers and representatives from the Treasury to try to work through how we can fix some of the illogical tax rules.
I have identified four elements of the pension scheme that are not working: the annual allowance itself; the tapered annual allowance, on which the Government have gone quite a long way to try to ensure that the increased level at which that bites in the NHS has taken some of the sting out of what was a problem lower down the scale before; the lifetime allowance; and the 20-times pension calculation, regardless of whether you take early retirement. The latter means that it will be advisable for many people to retire in their 50s—as soon as they can—if they are just coming up to the lifetime allowance, because the 20-times calculation will be applied to the pension at that stage, rather than to stay on, work longer, wait until they have a bigger pension and slip over the limit.
There is the inflation calculation, as the noble Lord, Lord Davies, has mentioned, the index mismatch and the failure to have any offset for negative growth. Again, if we were to be able to change Sections 234 and 235 of the Finance Act 2004 to better allow the total pension calculation that accrues above inflation, that would at least address some of this issue.
A final element that I would like to highlight is that there is the possibility for members who face tax charges to have those charges paid by the pension
scheme. It is called “scheme pays”, and effectively it means that you get a lower pension later on because the pension scheme has paid your tax bill today. But what we need to do is to take away the punitive interest rate charged for the calculation made for the “scheme pays” amount. Right now a member is charged CPI plus 2.4%, effectively 12.5% to borrow money from their pension scheme, meaning that they get a lower pension later on.
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All these things are complicated, but each of them needs addressing if we are actually going to put a stop to the situation that we have ended up in—which is that the pension rules that were meant to be, and in most cases are, a really good benefit for staff, have ended up incentivising people not to work. That is obviously counterproductive from everybody’s perspective, certainly at a time when we need to attract and retain staff—and one might argue that the most senior and more experienced staff are the ones we least want to entice to leave. That is what is happening in the NHS today.
I urge my noble friend to look at the interaction between the pension schemes, the 1995 scheme and the post-Hutton reform schemes. One particular question that arises—and I wonder whether my noble friend could write to us if he cannot answer it today—is that I am conscious that the McCloud remedy is coming in, so people will be put back into the situation that they would have been in if they had been in the final salary scheme all the way through from 2015, as we go forward. What will happen to the tax bills that have already been levied, or any other bills that may be associated with that? Will that just be ignored, or will we have another complex series of tax negotiations that the Treasury needs to sort out?
I commend the Government on what they have done so far, but I also regret that there is not enough movement or radical change to allow the NHS Pension Scheme to stop discouraging senior and valuable staff from leaving and stop interfering with and undermining the morale of the staff that we have.