Consultation outcome

Government response to the NHS Pension Scheme: member contributions phase 2 and miscellaneous amendments consultation

Updated 22 February 2024

Introduction

The NHS Pension Scheme is designed to offer significant value in retirement to people who have chosen to dedicate part or all of their careers to serving the public through the NHS. Backed by the Exchequer, the NHS Pension Scheme offers the security of a guaranteed income in every year of retirement for its contributing members, on some of the most generous terms available from a pension scheme.

The Department of Health and Social Care (DHSC) keeps the rules of the pension scheme under review to ensure it continues to help the NHS attract and retain the staff needed to deliver high quality care for patients. The consultation proposed changes to scheme regulations that are grouped into 3 sections:

1. Reforming member contributions, phase 2:

• implementation of the second phase of member contribution rate changes
• future reconsideration of the first contribution rate tier
• improving the process of indexing the contribution rate earning thresholds
• ‘real-time banding’ of member contribution rates
• the pensionability of overtime for staff who work part time

2. New employer contribution rate:

• implementation of a new employer contribution rate following results from the 2020 actuarial valuation of the scheme

3. Miscellaneous and consequential amendments:

• permanent removal of the pension abatement rules that applied to members who retired using special class rights and subsequently returned to service
• allowing 1995 Section members who have reached maximum pensionable service to take partial retirement and draw down their pension while continuing to work
• confirmation that the reduction in pensionable pay required to take partial retirement cannot be met by entering into a salary sacrifice arrangement
• making consequential amendments to treat unpaid carer’s leave in the same way as other periods of unpaid leave further to the Carer’s Leave Act 2023, and accommodate the abolition of the Lifetime Allowance in line with the Finance Bill once it receives Royal Assent and becomes an act

This document sets out the responses received to the proposals. It should be read in conjunction with the original consultation document which contains full details of the proposals.

Consultation process

The consultation ran for 10 weeks, beginning on 26 October 2023 and ending on 7 January 2024. The Scheme Advisory Board for the NHS Pension Scheme was formally notified of the consultation. The Scheme Advisory Board comprises trade union and employer representatives. The NHS Business Services Authority (NHSBSA) as scheme administrator drew attention to the consultation through employer bulletins and member newsletters.

The department welcomed any comments or views on the proposals and invited those interested to respond through an online platform.

A total of 160 responses were received.

The responses came from individuals, trade unions, employers and other organisations, including:

• British Dental Association
• British Medical Association
• Devon County Council
• Fairway Training Ltd
• Guy’s and St Thomas’ NHS Foundation Trust
• Hospice UK
• Leeds Teaching Hospitals Trust
• Leicestershire Partnership NHS Trust
• Marie Curie
• Mersey and West Lancashire Teaching Hospitals NHS Trust
• NHS Business Services Authority
• NHS Employers
• North West Anglia NHS Foundation Trust
• Pharmacists’ Defence Association Union
• Royal College of Midwives
• Royal College of Nursing
• Scheme Advisory Board for the NHS Pension Scheme (England and Wales)
• UNISON

1. Reforming member contributions: phase 2

From 1 October 2022, the department introduced changes to the member contribution structure, including changing the amount that members pay for their pension benefits. Under the new structure, the number of tiers and range between the lowest and higher tier was reduced. This also meant that the gap between some tier boundaries was reduced. This was the subject of a previous consultation, NHS Pension Scheme: proposed changes to member contributions. It was decided as part of this consultation process that the reforms to member contributions would be implemented over 2 phases to give members time to adjust to the changes.

Phase 1 put in place an interim set of contribution rates on 1 October 2022, with the earnings thresholds uplifted from 1 April 2023 in line with the Agenda for Change (AfC) pay award for England for 2023 to 2024.

Table 1: current member contribution rates

Tier	Pensionable earnings (rounded down to the nearest pound)	Contribution rate from 1 April 2023
1	Up to £13,246	5.1%
2	£13,247 to £17,673	5.7%
3	£17,674 to £24,022	6.1%
4	£24,023 to £25,146	6.8%
5	£25,147 to £29,635	7.7%
6	£29,636 to £30,638	8.8%
7	£30,639 to £45,996	9.8%
8	£45,997 to £51,708	10.0%
9	£51,709 to £58,972	11.6%
10	£58,973 to £75,632	12.5%
11	£75,633 and above	13.5%

The department intends to take the next step and implement phase 2 from 1 April 2024. This will conclude the 2021 review of member contributions and complete the move to the new tiers and rates.

The consultation document proposed changing scheme regulations to implement phase 2 of changes to contribution rates that were the subject of the previous consultation process. The department also proposed a series of new, additional changes not part of the previous consultation but based on the experience of implementing phase 1 and subsequent tax policy developments from HMRC. The consultation proposed changes in 4 areas:

• implementation of the second phase of member contribution rate changes and future reconsideration of the first contribution tier
• improving the process of indexing the contribution thresholds
• allowing ‘real-time re-banding’ of member contribution rates
• the pensionability of additional hours worked up to full time

Implementation of the second phase of member contribution rate changes and future reconsideration of the first contribution tier

The previous consultation presented the future member contribution rates that would be in force once the second phase of changes had been made. However, the contribution rates were assigned to the earning tier thresholds as they stood in February 2022. Since then, the earning tier thresholds have been increased twice in line with successive AfC pay awards for England from 2022 to 2023 and 2023 to 2024.

This consultation therefore presented the proposed phase 2 contribution rates as decided in the previous consultation but with the earnings threshold tiers increased in line with those subsequent pay awards. The consultation contained further proposals to change the indexing method for the tier thresholds.

Table 2: proposed member contribution rates from 1 April 2024 (without CPI index uplift)

Pensionable earnings thresholds (no CPI uplift)	Contribution rate from 1 April 2024
Up to £13,246	5.2%
£13,247 to £25,146	6.5%
£25,147 to £30,638	8.3%
£30,639 to £45,996	9.8%
£45,997 to £58,972	10.7%
£58,973 and above	12.5%

Future reconsideration of the first contribution rate tier

The NHS Pension Scheme is a mutual scheme. Scheme benefits are costed on the basis that members collectively pay an average contribution of 9.8%. To support participation, the system of tiered contributions provides discounted rates for lower earners that are less than 9.8%. However, the first contribution tier rate is additionally discounted to reflect that individuals earning up to £13,246 may not benefit from net pay tax relief on their pension contributions if their NHS earnings are within their personal allowance and there are no other sources of taxable income. The first tier contribution rate (5.2%) is therefore discounted compared to the second tier rate to replicate the benefit of the missing tax relief.

HM Revenue and Customs (HMRC) has since legislated to provide top-up payments to eligible individuals who have contributed to a net pay pension scheme and have total taxable income below the personal allowance. Further information on the implementation and operation of these changes can be found in a policy paper from HMRC on Pensions relief relating to net pay arrangements.

These top-up payments are expected to be made from the 2025 to 2026 tax year in respect of pension contributions made in the previous (2024 to 2025) tax year, and will be based on an individual’s total taxable income in that previous tax year. HMRC is currently developing the processes for identifying eligible individuals and making top-up payments. Where HMRC identifies that a top-up payment is due, they will contact eligible individuals to obtain details so that the top-up payment can be made directly to the individual. Timings for the top-up payments may vary depending on the individual’s circumstances, such as whether they are also in tax self-assessment.

Summary of consultation proposals

The member contribution rates presented in table 2 were subject of the earlier consultation which concluded that implementation be across 2 phases. The new rates and earning thresholds (as uplifted by subsequent pay awards) are the final step of that process. Accordingly, the consultation did not seek further views on the new contribution rate structure for implementation on 1 April 2024.

The consultation asked for views on the whether the first contribution tier should in principle be removed at a future point in light of developments in tax policy. The availability of these tax relief top-up payments arguably removes the rationale for continuing to provide an extra discounted contribution rate due to no tax relief. The department recognised the importance of timing and suggested that any future removal of the first tier should coincide with the introduction of the top-up payments to ensure that members with total taxable earnings below the personal allowance do not temporarily experience a reduction in take home pay as a result of the additionally discounted contribution rate being removed before the top up is payable.

Consultation feedback

Respondents were asked whether they agreed or disagreed with the principle to remove the first tier of the NHS Pension Scheme member contribution structure at a future point. Of the 160 responses received:

• 95 (59%) agreed
• 23 (15%) disagreed
• 42 (26%) didn’t know

The Scheme Advisory Board, Royal College of Nursing, Royal College of Midwives, and the British Dental Association agreed with the principle of this change. However, in common with other respondents, including the British Medical Association, UNISON and the Pharmacists’ Defence Association Union, significant concerns were expressed about the timing and as yet unknown operation of the HMRC top-up payment arrangements. Many respondents warned that the practical effect of the proposal will be to increase the number of lower paid staff opting out from scheme membership.

Respondents pointed to a significant lag between the date at which members are required to pay contributions and the date at which they receive a top-up payment from HMRC. Concern was expressed that members would have to contact HMRC to obtain top-up payments and the process could prove complex and off-putting. Both the British Medical Association (BMA) and UNISON thought there should be automatic payments to credit members either through payroll or from the scheme.

Respondents felt strongly about the way that this change would be communicated to members. The Royal College of Nursing expressed significant concerns that members affected by the proposal will not equate the increase in contributions with a reduction in income tax. The Scheme Advisory Board said that members would need to be reassured about the reasons for the change and assisted with understanding any potential reduction in their take-home pay over the short term. They warned that failing to communicate this message effectively would increase the risk of opt-outs.

UNISON noted the increase in overall contribution yield from the change is expected to be minimal at around 0.1%. They concluded that it is unreasonable therefore to create such a disproportionate impact on the lowest earning members by increasing their contributions. The Scheme Advisory Board noted that lower earners in the Local Government Pension Scheme will benefit from these top-up payments with no change to their member contributions. They considered that this discrepancy in treatment would be hard to justify to NHS staff and increase potential discontent.

The British Dental Association (BDA) suggested that contribution approaches that seek to provide protections for lower paid members and minimise the risk of opt-outs could be better met either through reducing the overall yield and/or increasing pay, or through new scheme flexibilities that allowed members to pay a lower contribution rate in exchange for lower benefit accrual.

The BMA concluded that the proposal might be something to review in the future once the HMRC top-up arrangements are in place and known to be functioning well. The Pharmacists’ Defence Association Union also thought there should be further consultation in future once timing and arrangements for the top-up payments are known and any unforeseen consequences of the proposed change can be better assessed.

Response

The department is grateful for the detailed responses received on this proposal. We acknowledge the clear message that while there is support for the rationale for removing the tier in response to the tax changes, there are considerable concerns about how the top-up payments will work in practice and the impact on scheme participation by lower earning staff.

We agree and will therefore work with the Scheme Advisory Board to consider and monitor the arrangements that HMRC is putting in place to administer the top-up payments, to understand how NHS staff would access the payments and any support that may be appropriate. This will inform future intentions relating to the first tier. To confirm, there are no plans to remove the first tier as part of these changes. Any firm proposal to do so will be the subject of a future consultation.

The department recognises that the Local Government Pension Scheme may take a different approach though, unlike the NHS Pension Scheme, it does not appear to have a contribution tier designed deliberately to replicate the benefit of missing tax relief.

Improving the process of indexing the contribution thresholds

In successive years, the member contribution tier thresholds in the NHS Pension Scheme have been increased in line with the value of the AfC pay award for England. The purpose of this is to avoid an increase to pensionable pay due to the annual pay award unintentionally resulting in a take-home pay reduction. This could occur in situations where a member is close to a contribution tier boundary and receives a pay award that tips them into a higher tier. If the value of the move between contribution rates is greater than the percentage value of the award, the member would have a reduction in take-home pay. Even if the value of the pay award was greater than the increase in member contributions, members would still receive less than the full value of the pay award as a result of paying increased contributions. Therefore, increasing thresholds in line with the AfC pay award for England ensures that the largest number of members receive the full value of the award and reduces the possibility that members will move permanently into a higher contribution tier solely as a result of receiving the pay award.

The department consulted and then legislated on proposals to increase member contribution thresholds in line with the AfC pay award for England in May 2023, with the changes having backdated effect to 1 April 2023 in line with the implementation of the pay award.

As part of that consultation process the Scheme Advisory Board expressed concerns in their feedback that there was a need to act quickly, in order to ensure that the implementation of the new member contribution structure aligns with the implementation of the pay award to avoid a position where members temporarily have the value of an award eroded by increased pension contributions.

Under the current process, the department is required to conduct a public consultation process and lay a statutory instrument in the time between the AfC pay award being agreed by the NHS Staff Council and start of the award being paid to staff. In 2023, the pay award was agreed by the NHS Staff Council on 2 May and became payable in June. For staff who are paid weekly, the award became payable in early June.

As highlighted in our previous consultation process to increase thresholds in line with the 2023 to 2024 AfC pay award for England, there is a clear risk that the current Parliamentary process of laying a statutory instrument to uplift the tier thresholds once the pay award has been announced cannot be completed in sufficient time to align with the implementation of the award. This would create a scenario where some members temporarily have the value of the award eroded by increased pension contributions, which would undermine confidence in the award. This is particularly true where staff are paid weekly and are therefore likely to receive the pay award very soon after it is confirmed. In light of this, the department committed to working with Scheme Advisory Board to consider ways in which this process for uplifting thresholds in line with the pay award can be streamlined or improved in future years.

Consultation proposals

To address this, the department proposed amending scheme regulations to insert a clearly defined process for implementing an annual threshold uplift which can be applied without the need for a further statutory instrument each year.

The consultation suggested a set of principles to apply when determining a preferred approach to indexing:

• the need to promote stability in scheme administration and the collection of contributions
• the need to ensure the fairest outcome for all members when applying the index
• the need to implement a system for indexing which is transparent and can be delivered in a timely fashion

With those principles in mind, the consultation set out 2 options:

Option 1: automatically increase thresholds in line with the consumer prices index (CPI)

Under this option, on 1 April each year the earning thresholds for contribution tiers would be increased by the percentage rate increase in CPI as measured in the previous September. A similar approach has already been adopted in the Civil Service and teachers’ pension schemes. This provides a much greater period of time between the value of the index rate becoming known and it being applied to thresholds, compared to the current process of retrospectively applying an uplift in line with the value of the AfC award for England as quickly as possible after the award is agreed.

A CPI increase is also a single rate that would be applied evenly to relevant contribution tier thresholds. This avoids the potential added complexity that could occur with AfC uplifting when the award is not a uniform rate or includes consolidated cash sums rather than percentages, which in turn creates unequal uplifts to thresholds. Over time, if the thresholds for the lower tiers of the member contribution structure are consistently uplifted by a greater percentage than the higher tiers, the overall member contribution structure becomes compressed.

The department is also aware of concerns from staff representatives of the Scheme Advisory Board that the current process of uplifting thresholds in line with the AfC award for England may produce inconsistent outcomes for members who receive a different pay award. The department considers the AfC award for England to be the most appropriate of the pay awards to use in uplifting thresholds, as that award is received by the greatest number of scheme members. However, CPI indexing offers a neater solution to this issue by uplifting thresholds in line with an index that is separate to the value of individual pay awards.

Under this option, the member contribution structure would be set for the period 2024 to 2025 through to 2027 to 2028 scheme years (that is 1 April 2024 to 31 March 2028), and contribution thresholds would be uplifted annually in line with CPI without the need for further amendments to scheme regulations.

Option 2: continue with the current process of uplifting thresholds in line with the AfC award for England

The consultation explained that it is not appropriate to automate this process due to the potential added complexity of the AfC award for England compared to CPI. For example, the value of the AfC award may be applied differently to different AfC bands if pay increases are targeted. This means the scheme would be required to adjust threshold increases to account for areas of higher pay increase. There would therefore be a corresponding lack of certainty going forward in this method, compared to CPI, where the legislation could clearly set out that a single CPI figure is to be applied all bandings and there would be no need for any added calculation or process in between the index figure and the impact on the actual thresholds.

Under this option, the department would be required to observe the parliamentary convention of laying legislation before Parliament at least 21 days before it is due to come into effect. This means it would not be possible to speed up the process of uplifting thresholds to ensure they are uplifting in time for the value of the pay award becoming payable. As a consequence, members would likely temporarily pay increased pension contributions in the first pay periods following the introduction of a pay award.

We anticipate it would take at least 2 months between the pay award being agreed and the uplifted thresholds being applied. Depending on the specific timings each year, this would mean disruption to 2 monthly pay periods following the introduction of the pay award. This is due to the time required following confirmation of the pay award to follow the appropriate parliamentary conventions to amend regulations, and also to allow the national Electronic Staff Record (ESR) payroll system the required time to build the uplifted thresholds into the system and distribute the new structure to employers.

Preferred option

The department concluded option 1 is the preferred approach. Indexing thresholds in line with CPI provides greater clarity for members as thresholds would be uplifted from 1 April based on the CPI figure from the previous September. This provides time for the scheme to make available clear guidance in advance of 1 April each year confirming the new thresholds which will apply. Automating this process also removes the difficult timings associated with the current process.

Freezing the earnings threshold for the top contribution tier

Moving to a new indexation approach could mean that over time the scheme collects member contributions at a level less than the required 9.8% yield. While we do not anticipate that this will be the case, and that indexing to CPI should place no financial pressure on the scheme, freezing the entry point to the highest contribution tier would further ensure the 9.8% member contribution yield is collected.

There is a rationale for freezing the entry point to the top tier should member contribution yield fall short in future, given the freezing of the higher rate income tax threshold until 2027 to 2028. A key principle of progressive tiering is that members who earn more pay more for their pension benefits in order to encourage scheme participation across the workforce. Freezing the entry point to the top tier would have the long-term effect of smoothing the net contribution rates paid by members across the structure. The department invited views on whether freezing the entry point to the top tier of the member contribution structure should be implemented as the default lever to ensure the scheme continues to collect the 9.8% contribution yield.

The consultation noted that the impact of automated indexing would be kept under review and further proposed setting the indexing approach for the next 4-year valuation period (2024 to 2025 through to 2027 to 2028 scheme years).

Consultation feedback

Respondents were asked whether they agreed or disagreed that uplifting thresholds in line with the CPI and automating the process is a suitable approach which complies with the principles outlined. Of the 160 responses received:

• 97 (61%) agreed
• 33 (20%) disagreed
• 30 (19%) didn’t know

The Scheme Advisory Board agreed with the proposal to uplift thresholds by the rate of CPI in the preceding September, noting that although it is not its preferred method for indexation it has practical advantages. Applying a known CPI rate ahead of a new scheme year provides more certainty of contribution changes which would be welcomed by members and allows more time for process changes to be put in place. 

The board considered that uplifting thresholds by CPI or annual AfC increases are both reasonable methods in principle, recognising that neither approach perfectly replicate the salary increase awarded to each member of the scheme. They are acutely aware of instances where increases in gross pay can tip members into a higher contribution tier, eroding the value of a pay award or even reducing take-home pay. Other respondents noted the potential impact of such ‘cliff edges’, with several NHS employees expressing concern that moving away from uplifts based on AfC risks increasing the likelihood of cliff edges again.

The BMA highlighted that the issue of cliff edges disappears with a flat or near flat contribution structure which is their preferred solution. They pointed out that uplifting thresholds based on the AfC (England) award does not cover the annual pay increases for members who are not paid according to that pay framework, and the ‘headline’ pay award has not been applied evenly across AfC bands in recent years. The Royal College of Nursing suggested that a unified increase across England and Wales fails to account for devolution, should one government offer a higher AfC pay award as was the case in 2023 to 2024.

UNISON supported the linking of pension contribution increases to annual NHS pay awards. They concluded that rather than exploring alternative indexation methods, the government should settle NHS pay awards much earlier in the year to avoid the timing issue of a delayed pay award impacting on pension tier thresholds. The BMA expressed a similar view that pay awards should be implemented at the start of financial years.

The BDA concluded that in a system of tiered contributions there is no one-size-fits-all approach that will ensure all members feel that their circumstances are adequately accounted for. They noted that an uplift based on the AfC (England) award ensures the largest cohort of membership is protected against upward drift in contribution rate tiers, notwithstanding the issues created by legislative time pressure and compounded by the lateness of awards.

The Scheme Advisory Board stated that where changes are made to tiers there should be a specific intention to reduce cliff edges and the risk of rises in member contributions undermining pay awards. The Royal College of Midwives expressed their support for this position. The Royal College of Nursing thought that uplifting thresholds in line with CPI is likely to reduce the potential for cliff edge scenarios for members in receipt of annual pay awards. However, they noted that the potential for cliff edges has not been removed entirely.

The BMA felt that linking uplifts to CPI is reasonable but considered that there must be mechanisms to address any issues that arise when pay awards exceed inflation and/or pay awards are not implemented in time for the start of a financial year. They suggested that there should be a review mechanism or ability to uplift the thresholds further when pay awards exceed CPI. The Scheme Advisory Board suggested that a ‘double lock’ could be applied, where tier thresholds are uplifted by the higher of CPI and the AfC increase. The Pharmacists’ Defence Association and an NHS employee working in a managerial capacity both made a similar suggestion, whereby the CPI uplift is applied automatically on 1 April and a later adjustment made once the value of the pay award is known, using the statutory instrument process.

Leicestershire Partnership NHS Trust observed that uplifting thresholds by CPI from April would mean some staff will see a drop into a lower pension tier, which could be reversed once the annual pay award is implemented. This may create arrears of pension contributions due not only for the pay award but for a tier change backdated to 1 April. They cautioned that staff are unhappy when this happens.

With CPI indexing in mind, respondents were asked whether they agreed or disagreed with the proposal to set the contribution threshold for the next 4-year valuation period (2024 to 2025 through to 2027 to 2028 scheme years). Of the 160 responses received:

• 92 (58%) agreed
• 31 (19%) disagreed
• 37 (23%) didn’t know

The proposal concerned setting the contribution rate structure and indexing method for the next valuation period. The BMA agreed that having a confirmed structure for the next period would bring greater stability for pension planning purposes. The BDA concurred and thought that it would be useful for members and employers to have a degree of certainty on the approach taken to contribution rates.

The Scheme Advisory Board agreed with the proposal, but noted the potential mismatch of this period with the timing of implementation of the next valuation results and suggests that the 2 timelines are aligned. They highlighted that if the employer contribution changes from April 2027 in line with the usual timing for implementation of a 2024 valuation result, any necessary member contribution changes identified during the valuation process might not align with the threshold setting period.

UNISON is concerned about minimising the divergence between contribution tiers and AfC pay bands. They thought that setting the approach for 4 years would be at the outer limits of acceptability, however it risks potentially large realignments being required compared to smaller changes every year. The BMA and UNISON argued that if setting the approach for a period then there should be a review mechanism to evaluate how the outcome matches pay increases, with the option to intervene and address issues within the period. The BDA thought that the department and the Scheme Advisory Board should monitor the yield and distribution of membership across the tiers during the inter-valuation period. They suggested that if it is agreed that the yield is being prejudiced, then there should be the right to make changes before the end of the period.

The Pharmacists’ Defence Association Union concluded that they could support this proposal if their suggestion was adopted of applying CPI with a follow-up adjustment using the statutory instrument process once the pay award is known. They accepted that in an individual year the drift between CPI and an actual award will be small but were concerned about the longer-term impact.

With CPI indexation in mind, respondents were asked whether they agreed or disagreed with the suggestion to freeze the entry point to the top tier of the member contribution structure as the default lever to ensure the scheme continues to collect the 9.8% contribution yield. Of the 160 responses received:

• 69 (43%) agreed
• 49 (31%) disagreed
• 42 (26%) didn’t know

Respondents who commented on this supplemental proposal were united in their disagreement. The Scheme Advisory Board questioned whether this measure was needed as collected member contributions currently exceed the required 9.8% yield and that department projections suggest that this will remain the case without intervention. The Royal College of Nursing and North West Anglia NHS Foundation Trust echoed this view, with the latter viewing it as unfair for more staff to fall into the top tier if there is no risk to scheme viability.

The Scheme Advisory Board, Royal College of Midwives, the BDA and BMA expressed concerns that the 9.8% yield is too high and impacts the affordability of scheme membership. The BMA observed that the yield is significantly higher than other similar public pension schemes, citing 6.5% for the Local Government Pension Scheme and 5.6% for the Civil Service. Both the BMA and the BDA argued that the principle of charging tiered contributions in a pension scheme where benefits accrue using a career average revalued earnings method is inappropriate and unfair. They view a flat rate contribution payable by all members to be the appropriate way forward and solves issues such as the approach to tier threshold indexing and maintaining the required average yield.  

Respondents disagreed with the measure being linked to the availability of higher rate income tax relief on pension contributions. The BDA raised concerns that the commitment to freeze the threshold for paying higher rate income tax may not remain the case. The Scheme Advisory Board cautioned of unintended outcomes as and when the higher rate income tax threshold changes. The BMA concurred and warned that a very high net contribution rate could occur if thresholds for income tax are raised but the entry point for the top tier remains frozen. They also pointed out that the annual allowance serves to limit tax relief and some doctors still receive annual allowance tax charges despite the allowance being raised to £60,000.

Guy’s and St Thomas’ NHS Foundation Trust concluded that freezing the top tier entry threshold creates a contributions cliff edge that undermines the benefit of pay awards. Leicestershire Partnership NHS Trust and several individuals raised concerns about the potential service impact, highlighting that it could have a detrimental impact on the willingness of staff to take on additional hours, disincentivise promotion, affect retention or lead to an increase in opt-outing out of scheme membership. The BMA also suggested that it would increase the risk of opt-outs amongst medical staff, with junior doctors and senior doctors working less than full time who are predominantly female thought to be most impacted by the proposal.

Response

The department is grateful for the thoughtful and detailed responses received on these proposals. We agree with respondents that uplifting based on CPI should provide greater certainty of contribution changes for members, and note the points raised in support for this approach.

We recognise the concern about minimising ‘cliff edges’ and agree with the Scheme Advisory Board’s conclusion that neither CPI nor AfC-based uplifts perfectly replicate the pay increases received by each scheme member. The driver behind this proposal is to avoid the legislative timing difficulties found when applying the AfC uplift approach, whereby some members temporarily have the value of their pay award eroded by higher pension contributions before the uplifted thresholds take effect.

We are therefore attracted to the suggestion by respondents that a ‘better of’ test could be applied, whereby thresholds are uplifted by the higher of CPI and the AfC (England) award. This could operate sequentially, whereby relevant thresholds are automatically increased by CPI at the start of a scheme year followed by a statutory instrument to apply any marginal increases to thresholds retrospectively should the AfC (England) pay award subsequently indicate that should be the case. We believe this approach gives members the best features of each approach. It is true that some members may benefit from a short-term reduction in contribution rate by falling into a lower tier due to CPI indexing being applied at the start of the scheme year, and subsequently go back up to their starting tier upon receiving their annual pay award. This could be viewed as a short-term benefit: paying contributions at the lower rate is effectively an advance on their pay award that is then recouped once the pay award is paid with retrospective effect. 

There was support for setting the approach for a valuation period. We agree with the suggestion raised by several respondents that the effect should be monitored during that period. It may be appropriate to intervene early if the contribution yield becomes significantly out of line with the target 9.8%. Compared to the options set out in the consultation, a ‘better of’ approach for the current valuation period may increase the probability that measures to stabilise contribution yield or recover contribution shortfalls could be required in future valuation periods. The monitoring will form part of the Scheme Advisory Board’s annual workplan. The department commits to reviewing the contribution approach with the Scheme Advisory Board as part of each 4 yearly valuation cycle beginning with the 2024 valuation.

We do not intend to build in any corrective measure pre-emptively as the required yield is being collected at present. We will therefore not take forward the proposal to freeze the threshold of the highest contribution tier. We note that it could be revisited as a potential corrective measure for consideration. 

We disagree with the BMA view that freezing the top tier threshold is not justified because doctors are already subject to a second (the annual allowance) and potentially a third (the lifetime allowance) mechanism to correct for tax relief. The lifetime allowance has been abolished and members who still get annual allowance tax charges after it was increased by 50% to £60,000 are likely to currently earn high enough to be in the top tier already.

Several respondents commented on the 9.8% average contribution yield and suggested it is too high and impacts affordability. The 9.8% yield is the amount that members pay collectively towards their pension rights and is the product of scheme reform over the last decade. In 2010, the Independent Public Service Pensions Commission chaired by Lord Hutton, concluded in its interim report that reform of public service pension schemes was necessary and that there was a case for a fairer distribution of the cost of public service pensions between employees and other taxpayers. The 2010 Spending Review announced that public service workers would be asked to contribute more towards their pensions (an average 3.2% increase) as part of wider reforms to put public service pensions on a sustainable footing. Accordingly, the yield rose from 6.6% to the present 9.8%, with the increase phased in over the 3 years from 2012 to 2013 through to 2014 to 2015.

The 9.8% yield was factored into the costing and design of future pension provision for the NHS, as set out in the 2012 proposed final agreement accepted by the majority of NHS trade unions. The department notes that the system of tiered contribution rates is designed to reduce potential financial barriers to membership for lower earning staff.

The yield compares closely with the 9.6% yield for the Teachers’ Pension scheme. The lower yield in the civil service pension scheme reflects a different historic background of lower pension contributions for the sector, which is taken into account by pay review bodies when considering civil service pay.

Next steps

In conclusion, the department will proceed to implement the proposal to apply a ‘better of’ approach to indexing from 1 April 2024. It will work as follows:

• we will amend scheme regulations to provide an automatic CPI indexation to increase contribution tier earnings thresholds on 1 April each scheme year. The percentage increase that will be applied is the percentage rate of change in CPI over the 12-month period ending with the previous September. Where the CPI rate is unchanged or negative, there will be no change to the earnings thresholds
• in line with current practice, the thresholds for the first tier and entry to the second tier will not be uprated unless the threshold for basic rate income tax changes. This is because the first contribution tier is designed to link to the threshold for basic rate income tax. Scheme members who fall into the bottom tier will work less than full-time hours but are unlikely to receive tax relief on their contributions unless they have an additional income source. The first tier is designed to give these members the benefit of tax relief at source to incentivise pension saving from this group
• it remains appropriate to use AfC (England) as the reference pay award, because it applies to the greatest number of scheme members. However, we are unable to provide in regulations a mechanism for AfC-based increases automatically because the award is not always a flat percentage
• we therefore commit to a process whereby once the AfC (England) award is known, we will bring forward a statutory instrument to apply any marginal increase to tier thresholds in line with the pay award should it be higher than the existing CPI indexed thresholds. The threshold increases would be applied with retrospective effect to 1 April to match the terms of the pay award
• recognising the desire to minimise the time between the pay award going into payment and the increased tiers taking effect, we believe it is proportionate to consult with the Scheme Advisory Board on the contents of the statutory instrument rather than a wider audience. The board comprises representatives of individuals and groups who are likely to be affected by the increase in tier thresholds

The department will work with the Scheme Advisory Board to review the member contribution approach as part of each scheme valuation cycle, beginning with the 2024 valuation. We envisage that any changes that result from those reviews to be timed for implementation alongside any change to the employer contribution rate as directed by the valuation outcome. We will ask the Scheme Advisory Board to monitor the effect of the indexing approach on the contribution yield in the period between these reviews. To confirm, we will not be freezing the top tier threshold.

For the 2024 to 2025 scheme year, the rate of CPI as measured in September 2023 was 6.7%. A small increase is applied to the first tier threshold to reflect the 0.1% increase in the rate for that tier further to the phase 2 contribution changes. This ensures members in the first tier remain within their personal allowance after paying their contribution.

Table 3 shows these uplifts applied to the thresholds and rates proposed in the consultation as implementing phase 2 of the contribution reforms.

Table 3: contribution rates and tier thresholds from 1 April 2024, after CPI uplift

Pensionable earnings	Contribution rate from 1 April 2024
Up to £13,259	5.2%
£13,260 to £26,831	6.5%
£26,832 to £32,691	8.3%
£32,692 to £49,078	9.8%
£49,079 to £62,924	10.7%
£62,925 and above	12.5%

The department will lay scheme regulations to implement these thresholds and rates in table 3 from 1 April 2024, and provide for automatic CPI indexing of thresholds in future scheme years with the exception of the first tier and entry point to the second tier.

Part 5 of The National Health Service Pension Schemes (Amendment) Regulations 2023 (SI 2023/301) made temporary modifications to the 2015 regulations to ensure that the member contributions reconciliation provisions for medical practitioners, non-GP providers and dental practitioners for the scheme year 2022 to 2023 reflect the mid-year contribution rate change that had applied from 1 October 2022. The temporary modifications were set to apply until 31 March 2024. However, in recognition that members may not complete that exercise until after 31 March 2024, we will take the opportunity to extend the lifespan of those modifications alongside making the amendments to scheme regulations to take forward proposals set out in this consultation as indicated. The department will therefore amend part 5 of SI 2023/301 so that the modifications will now apply in respect of the reconciliation exercise for contributions due for scheme year 2022 to 2023 until 31 March 2025.

Real-time re-banding of member contributions

Phase 1 of the member contributions review implemented a change to how contribution rates are assigned to members. From 1 October 2022 contribution rates are assessed based on a member’s actual pensionable earnings rather than their notional whole time equivalent earnings.

Some NHS staff have pensionable pay that fluctuates between pay periods. For NHS Pension Scheme purposes, the frequency at which a member is paid is known as their pay period. At the start of each scheme year, officer members have their contribution rate calculated based on their pensionable pay figure from the previous year. Scheme regulations require that if a member’s rate of pensionable pay changes during the scheme year they will pay a recalculated contribution rate from the start of the next pay period.

The current mid-year reassessment process conducted by the scheme will automatically assess certain permanent changes in pensionable pay (such as a grade change) and apply a new member contribution rate if required from the start of the next pay period. However, fluctuating pensionable pay such as that caused by varying shift patterns requires employers to make a manual reassessment of member contributions and assign a new rate in the following pay period. This process may vary by local employer and has been reported as resource intensive.

Summary of consultation proposals

The consultation proposed amending scheme regulations to allow payroll providers to implement a ‘real-time re-banding’ of member contributions from 1 April 2024. The national ESR payroll system would be the first to do this.

The intention of real-time re-banding is to automate the process of updating member contribution rates for members who have fluctuating pensionable pay that causes them to frequently cross tier boundaries. Assigning an updated contribution rate in the period that pay changes also ensures that members pay a more accurate contribution rate which better reflects their pensionable pay. This is expected to produce a fairer and more consistent outcome for members. It also standardises and automates practices to reduce the administrative burden on employers who use the national ESR payroll system.

The department is aware that there are employers who participate in the NHS Pension Scheme and do not use the ESR, particularly those in primary care. The consultation sought their views on whether they are able to implement real-time re-banding. The department proposed to amend regulations to implement real-time re-banding for employers who can deliver it via ESR from 1 April 2024. However, the existing regulations which allow employers to apply a new contribution rate from the start of the next pay period would remain.

Consultation feedback

Respondents were asked whether they agreed or disagreed that the introduction of real-time re-banding would produce a more accurate outcome for the calculation of member contribution rates. Of the 160 responses received:

• 106 (66%) agreed
• 20 (13%) disagreed
• 34 (21%) didn’t know

The Scheme Advisory Board and Royal College of Midwives concluded that real-time re-banding is an appropriate approach. Concerns were expressed that the potential for variation in contribution rates in each pay period could lead to uncertainty for members and may deter working additional hours. The Royal College of Nursing supported the measure, welcoming the more accurate level of pension contributions that it will bring, especially for members with fluctuating earnings. The BDA noted that it has the potential to deliver a more accurate outcome for employed officer members, with practitioner members being out of scope as being subject to a different process for contributions. The BMA agreed that real-time re-banding will help to address some of the challenges caused by fluctuations in pensionable pay, though concluded that a flatter contribution rate structure with fewer bands would be better approach. They noted that real-time re-banding did not apply to sessional GPs, whose pensionable earnings are annualised for the purpose of assessing a contribution rate, which the BMA considers to be an unfair approach. The BDA emphasised that it would be important for pay to be attributed to the correct pay period, particularly for back-dated pay awards. The BMA asked how back-dated pay awards would be handled under a real-time re-banding approach.

UNISON expressed their support for accuracy but were mindful of administrative capacity limits. An NHS employee who works in a managerial capacity was concerned that the measure could create an unmanageable administrative burden on both NHS Pensions and employer pension administrators. Guy’s and St Thomas’ NHS Foundation Trust concurred and highlighted that variation in monthly pension contributions may lead to more employee queries about the effect on their net pay. 

The Scheme Advisory Board acknowledged that if the ESR payroll system can provide the appropriate member contribution for each pay period then this will reduce administrative burden for employers who use ESR. The board and the Royal College of Midwives emphasised the need for robust testing of any changes to ESR before implementation, given the expected complexity of system changes and the large volume of members that it will apply to. This should be accompanied by clear communications to employers and members.

The Scheme Advisory Board expressed support for a consistent approach being applied to re-banding across different employers and approaches which reduce the local administrative burden. However, they noted that consistency in approach will not necessarily be achieved for employers who do not use the ESR system.

Respondents who were a non-ESR payroll provider were asked whether they have the capacity to implement real-time re-banding. Eight respondents indicated that they are responding as or on behalf of a non-ESR payroll provider. Of these, 4 said they had the capacity to implement real-time re-banding.

Devon County Council agreed that real-time re-banding is preferable but asked for further details on how a change in pay during the pay period would be handled.

The Scheme Advisory Board thought employers who do not use ESR will struggle to meet the demands of manually implementing proposed real time re-banding. They therefore welcomed the proposal to retain existing arrangements for those employers.

Response

The department notes the broad support in principle received for this proposal.

We acknowledge the concerns raised about how the prospect of contribution rates changing from one pay period to the next may disincentivise staff from taking on additional work. This is a function of fluctuating pay, not real-time re-banding. The existing approach also requires employers to re-assess the contribution tier where pay changes. There is no difference between the current method and real-time re-banding in that regard. However, real-time re-banding applies the new contribution rate to the changed pay in the pay period it is earned, which produces the most accurate contribution outcome for members. By contrast the existing method applies the new rate to pay earned in the next pay period, even if pay has reduced or increased again.

In terms of handling back-dated pay awards, real-time re-banding would exclude pay arrears in the calculation to prevent rate changes in the pay period that a back-dated pay award and arrears are paid. The back-dated pay is instead applied to the pay period in which it should have been paid and the appropriate contribution rate deducted from the arrears.

We agree with the need to ensure changes in the ESR payroll system are thoroughly tested and communicated before implementation. These are complex changes and while the department is confident that ESR is capable of rolling out the new approach from 1 April 2024, we believe that a further period of consultation before implementation would be appropriate. This would allow opportunity to set out and invite comment on the lower-level detail of how real-time re-banding would operate before scheme regulations are finalised to facilitate this approach. A later implementation timeframe allows more preparation time for non-ESR employers and payroll providers to adopt this approach, therefore reducing the potential for variation of contribution outcomes between members depending on payroll approach. We will therefore bring forward a further consultation during the course of this year with a view to targeting an April 2025 roll out, beginning with ESR. Meanwhile the current approach as provided by regulations will continue to apply, whereby employers are required to re-assess contribution rates where there has been a change in pensionable earnings.

We note the concerns raised by BMA on the current application of annualisation to assess contributions for sessional GPs. We will review this with the Scheme Advisory Board, which includes the BMA.

The pensionability of overtime for staff who work part time

Payments for overtime are non-pensionable according to scheme regulations. The 1995 and 2008 Sections do not have a definition of what constitutes overtime and instead rely on how this is addressed in employment contracts. The Agenda for Change pay framework provides that for staff who work full-time, overtime is hours worked in excess of 37.5 hours per week and is typically paid at premium rate. For staff who work part-time, hours up to 37.5 per week are paid at plain time, and hours in excess of 37.5 per week are paid at premium rate. Accordingly, it has been long-standing practice that additional hours worked up to full-time are not considered to be overtime and are therefore pensionable.

Partial retirement

On 1 October 2023, the department introduced a new partial retirement option for members of the 1995 Section of the NHS Pension Scheme. This facility allows members to partially retire and claim up to 100% of their 1995 Section benefits while continuing to work and accrue further pension in the 2015 Scheme. The availability of partial retirement is intended to better support members’ work-life balance around retirement and help the NHS to retain valued experienced staff in the workforce.

Members who take partial retirement are required to reduce their pensionable pay by at least 10% for the 12 months following partial retirement. For GPs, a 10% reduction in commitment is required.

Summary of consultation proposals

The consultation proposed aligning the definition of overtime in 2015 regulations to reflect the position that has long existed for the 1995 and 2008 Sections. This means that staff who work part time have any additional hours worked up to whole time automatically pensionable. Any overtime worked above whole time, for both part-time and full-time staff, will remain non-pensionable.

The department also proposed to amend the definition of overtime to confirm that any overtime or additional hours worked by members who have partially retired within the previous 12-months is non-pensionable. This includes all additional work above their contracted hours.

Consultation feedback

Respondents were asked whether they agreed or disagreed with the proposal to amend the definition of overtime. Of the 160 responses received:

• 117 (73%) agreed
• 16 (10%) disagreed
• 27 (17%) didn’t know

The BMA, Royal College of Midwives, Royal College of Nursing, Scheme Advisory Board and UNISON expressed their support for the proposal to align 2015 Scheme regulations to those in the 1995 and 2008 Sections.

Hospice UK also agreed but suggested the proposal implied that employees would have a choice about whether this should be pensionable. They were concerned that this would be very hard to automate from a payroll perspective and thought it would be clearer to all employees if it was clearly stated that hours up to full time are pensionable. The BDA disagreed with the proposal and believed members should have the option to pension any pay in excess of their normal contractual earnings. This view was also expressed by an NHS employee working in an administrative role.

The BMA disagreed with the pensionability of overtime being limited to whole time equivalent hours. They noted that many groups of workers do regular overtime that is paid consistently in monthly pay periods, and said it is unclear why such regular payments are not considered to be pensionable. They suggested that members be allowed the option to choose whether regular overtime beyond whole time equivalent can be pensionable.

The BMA, Royal College of Midwives and Scheme Advisory Board took the opportunity to express concerns about the requirement to reduce pensionable pay by at least 10% for 12 months when taking partial retirement. They pointed to the potential impact on service delivery and reducing capacity in the NHS at a time of pressure. The BMA highlighted that is has been problematic to administer and many people have so far been unable to take up partial retirement. However, given that the 10% rule exists, the BMA supported the proposal to amend scheme regulations to prevent overtime payments being automatically pensionable for the first 12 months following partial retirement. They asked that the option of recycling the full value of the employer’s pension contribution be made available to those forced to reduce their pensionable pay by 10% to meet the requirement.

Some respondents noted that the proposals would create a difference in treatment where additional hours up to whole time are non-pensionable for staff who have taken partial retirement but pensionable for those who have not. One suggested that classifying additional hours up to full time as non-pensionable facilitates members to continue to work at 100% capacity, contradicted the purpose of partial retirement as helping members wind down towards full retirement by reducing their hours or level of responsibility.

The Scheme Advisory Board concluded that clear guidance and potentially improved functionality within the ESR payroll system in relation to partial retirees would be required for the amendment to be effective. Both Mersey and West Lancashire Teaching Hospitals NHS Trust and Leeds Teaching Hospitals Trust asked for further details on how it would be administered in practice. The Scheme Advisory Board noted the importance of clear communication to members so that they understand which elements of their pay are pensionable.

Response

The department notes the general support for aligning the definitions of overtime. This would clarify that any additional hours worked up to whole time are automatically pensionable for members who work part time. This reflects the policy intention as expressed in the 2014 consultation on the 2015 Scheme regulations. Paragraph 4.6 explained that part-time work and earnings would continue to be pensionable in the Scheme up to whole-time.

The proposed definition provides exception where the member has taken partial retirement within the preceding 12 months, in which case those hours would be non-pensionable.

This does create a short-term difference in treatment between groups of members as some respondents have observed. The department believes this is justified and desirable in context of how retirement flexibilities interact with the reality of providing NHS services, especially given the current focus on supporting service capacity as highlighted by respondents.

Employers have been provided with a suite of pension flexibilities to support their older staff continue working longer and not leave the workforce. If an employee wants to carry on working without any change in their job, be it fewer hours or less responsibilities, then a ‘retire and return’ arrangement is the best way of doing this. There is no longer the 16-hour rule to observe. Employers are strongly encouraged to offer terms on re-employment that have continuity with pre-retirement terms, as would be the case where partial retirement is taken.

In principle, partial retirement is exactly as the name indicates - a step down in hours or responsibilities, phasing towards full retirement. It is a voluntary option, and we would expect staff who take partial retirement to maintain their new, reduced scope of pensionable work as agreed with their employer for a minimum of 12-months. However, we do recognise the demands of NHS service provision. The vast majority of the NHS workforce perform shifts or sessions, and an employer may ask willing staff to do occasional extra ones to address temporary pressures - for example covering rota gaps where staff are unwell or have left. We would not want the potential suspension of their pension to rule out the possibility of partially retired staff from responding to help out their employer with short-term, temporary swings in work. It is for this reason that we proposed making additional hours worked above their core contract by partial retirees non-pensionable for the 12-month period. After the 12-month period, those additional hours would be pensionable in the same way as for all other members. If during the 12-month period, partially retired staff change their mind about the number of core pensionable hours they wish to work, then a further change of employment terms can be agreed with their employer to increase their core working hours or programmed activities, and therefore their pensionable earnings up to the 90% limit required by the partial retirement criteria.

If members wish to continue in pensionable employment after drawing their pension and want to work pensionable additional hours in the 12-month period, then they and their employer should consider a ‘retire and return’ arrangement instead of partial retirement. In that scenario there are no restrictions on retired staff re-joining the pension scheme upon return and additional hours worked up to full time would be pensionable.

Several respondents questioned the need for the 10% reduction requirement and called for its withdrawal. The design of the partial retirement option for the NHS must have coherence with how other public service pension schemes approach partial retirement for their sectors, where a reduction in pensionable pay is also required. We do not intend to remove the 10% requirement as it signals that there has been a genuine change in working arrangements.

We recognise that some employers are still getting to grips with the new retirement flexibilities. NHS Employers have published guidance on approaches to operationalising partial retirement and retire and return flexibilities. This has been reviewed by NHSBSA to assure compliance with pension scheme regulations. As of the start of February 2024, over 4,500 partial retirement applications have been received by the scheme since the option became available in October 2023, demonstrating a growing successful use of the new flexibility.

We are unconvinced by calls for employer contribution recycling in relation to the 10% reduction in pensionable pay. The scheme regulations do not force anyone to take partial retirement. If a member wishes to draw their pension and resume NHS work without a 10% reduction in pensionable pay then a retire and return arrangement is likely to be more appropriate, given the ‘wind down’ intention behind partial retirement.

We have considered the suggestion that members should have the option of pensioning additional hours up to whole time rather than this being the case automatically. As some respondents highlighted, there is administrative complexity for employers and payroll providers that such a choice would generate. The department understands the desire for greater flexibility over pension contributions and accrual. However, allowing part-time members this option would introduce new flexibility over the extent to which their pay is pensionable. It is likely to have consequences across the membership as no such flexibility exists in relation to members who work full time. For instance, it is possible that members may seek minimal hours contracts with a view to exercising flexibility over the pensioning of additional hours. This could introduce instability for pension scheme finances and disruption for employers. The department is therefore unable to agree that the proposal be extended to include this option.

The BMA argued that members should have the option of pensioning regular overtime worked above whole time. The department is unwilling to agree this. This would represent a new and substantial additional cost to employers. There is also a significant past service cost risk in relation to final salary benefits accrued in the legacy 1995 and 2008 Sections. Members close to retirement would be able to optionally work large amounts of overtime with a view to boosting their final salary pension upon retirement. However, the amount of contributions paid on that overtime would be very modest compared to the long-term cost of paying out the extra pension. Where there is 1995 Section membership, this additional cost would be recouped from employers through final pay control charges, further increasing costs for employers. The BMA contrasted the position with general medical practitioner members for whom all income is pensionable and suggested that the different position for employed members (officers) is an anomaly. We disagree with this view and point to practitioner members being typically self-employed where there is no concept of overtime.

We agree with the observations made by the Scheme Advisory Board on the need for guidance, clear communications, and functionality within the ESR payroll system to support implementation. NHSBSA confirms that ESR already contains the necessary functionality for employers to set additional hours as non-pensionable. A user notice is available that sets out how to apply non-pensionable payment elements in the ESR system.

In conclusion, the department intends to proceed with amending the definition of overtime as proposed. This will take effect from 1 April 2024.

2. New employer contribution rate

Results from the 2020 valuation show an increase in benefit costs, requiring a 3.1 percentage points rise in the employer contribution rate. HM Treasury ministers announced in March 2023 an intention to implement on 1 April 2024 the new employer rates for public service pension schemes arising from this round of valuations. 

Summary of consultation proposal

The consultation proposed amending the 2015 regulations to replace the current employer contribution rate with the new rate of 23.7% effective from 1 April 2024. The 0.08% scheme administration charge will continue to be added on top.

As set out in its SCAPE consultation response, government has committed to provide funding for increases in employer contribution rates resulting from 2020 valuations as a consequence of changes to the SCAPE (superannuation contributions adjusted for past experience) discount rate. For the NHS Pension Scheme valuation, the full 3.1 percentage points increase is a consequence of these SCAPE discount rate changes.

The consultation explained that the funding support commitment is for employers whose employment costs are centrally funded through departmental expenditure. This covers the vast majority of organisations employing NHS Pension Scheme members. All employers will receive some funding support. Most employers will receive funding for the full 3.1 percentage points increase, with the exception of medical schools who will receive support for 2.64 percentage points to reflect the fact that a portion of their employment costs are funded through routes other than the NHS or central government.

The department will distribute this additional funding support via the existing central channels. A central funding arrangement has operated since 1 April 2019 to handle the 6.3 percentage points increase in the employer contribution rate implemented following the 2016 valuation round. This arrangement saw up to 6.3 percentage points of the 20.6% employer contribution rate being paid directly to the scheme administrator (NHSBSA) by either NHS England or the department, or via a separate invoice from NHSBSA, depending on how the employer is funded. This arrangement will continue and expand to include the additional funding to support the 2020 valuation rate increase. This means that the percentage of pensionable pay for which employers are directly invoiced by NHSBSA will not increase on 1 April 2024, with the exception of medical schools, which will increase by 0.46 percentage points, (the department will be invoiced for the remaining 2.64 percentage points increase for medical schools) and departmental arms-length bodies, which will increase by 3.1 percentage points as funding will be provided to these organisations directly. 

This funding commitment, and the central funding arrangement that has operated since 1 April 2019, extends to budgets agreed in the 2021 Spending Review and will be reviewed as part of the next spending review. Spending reviews set out government’s long-term expenditure plans. The most recent review, the 2021 Spending Review, set the budgets of government departments up to the 2024 to 2025 financial year.

Consultation feedback

Respondents were asked if they wanted to provide any comments on the proposed increase to the employer contribution rate from 1 April 2024. NHS Employers reported that employers welcomed confirmation of central funding to cover the full 3.1 percentages point increase for most employers. Leicestershire Partnership NHS Trust commented that there did not seem to be an issue with the increase if the cost is funded centrally.

Hospice UK, representing over 200 charitable hospices, correctly concluded that hospices would see no change in the percentage of pensionable pay they are invoiced by NHSBSA, and that the central arrangement will pay the 3.1 percentage points increase on behalf of the sector. They said this will be hugely welcome as the sector is currently facing significant and increasing costs of delivering care. Marie Curie also welcomed the government’s commitment to continue and extend the employer relief for hospices, noting that this support has been crucial in ensuring their frontline palliative care services continue to be financially sustainable.

The Royal College of Nursing supported the measure providing it is fully funded for all employers delivering NHS services not just those who appear in annex 1 of the NHS national terms and conditions handbook. They expressed concerns that employers without access to additional HM Treasury funding would face a 2.9% cut to the staffing budget, with negative consequences for safe and effective levels of staffing. Accordingly, they called on the government to commit to fully funding this proposal for all employers who deliver NHS care.

UNISON said they are keen to ensure that non-NHS employers are in scope of this funding, particularly in relation to local authority commissioned public health services.

One respondent concluded that the proposal is fine if GP practices continue to pay 14.3% with the balance topped up centrally, otherwise the costs go up well beyond affordability.

NHS Employers said that employers are concerned about the certainty of future funding beyond the next spending review, a theme echoed by the Scheme Advisory Board. Marie Curie raised concerns about the potential impact of changes to the funding arrangements on the sustainability and future delivery of palliative care services.

The Scheme Advisory Board also asked for further explanation of how the funding will work in practice and which employers will be eligible. The BDA thought that guidance should be published outlining how this increase will be funded for the different types of employers who participate in the scheme, including determination employers and independent providers.

The BMA noted that the net surplus cashflow returned to HM Treasury will increase because of the higher employer contribution rate.

One respondent who works for the NHS in an administrative role thought that the employer should contribute as much as possible to staff pensions. They concluded that employers paying a leading contribution rate towards an employee’s pension is one way that the NHS can make itself an attractive workplace for individuals to dedicate their careers.

Response

The department is pleased that the additional funding to mitigate the impact on employer spending plans has been broadly welcomed.

In response to comments provided by the Royal College of Nursing and UNISON, as set out in the consultation document, the department is pleased to confirm that all organisations employing active NHS Pension Scheme members will receive funding support worth 3.1% of pensionable pay, the full employer contribution rate increase, with the exception of medical schools who will receive funding support worth 2.64% of pensionable pay.

In response to feedback from the Scheme Advisory Board and BDA on the practical arrangements for funding support, the additional funding means that, with the exception of medical schools, full funding will be provided to those employers who are directly invoiced by NHSBSA to cover employer pension contributions. Either NHS England or the department will pay the 3.1 percentage points increase to the NHSBSA directly on behalf of employers, with the exception of medical schools whose invoiced rate of pensionable pay will increase by 0.46 percentage points, and departmental arm’s length bodies, whose invoiced rate of pensionable pay will increase by 3.1 percentage points, as they will receive additional funding from the department directly. The existing funding support arrangement will continue (see the NHSBSA website for further information on employer contribution rates). The funding for the 3.1 percentage points increase is additional to this arrangement. These arrangements will be reviewed as part of the next spending review. We recognise the spending review process creates uncertainty about future continuity of this funding support. The timing of the next spending review is unknown at present.

In response to the BMA’s comments on changes to the NHS Pension Scheme cashflow position, the department would like to reiterate that the scheme is an unfunded statutory public service pension scheme with the benefits underwritten by the Exchequer. The scheme is financed by current employers and employees who are members of the scheme, and the overall rate of pension contributions is set following an actuarial valuation and is intended to cover the true cost of accruing future benefits, ensuring fairness to the member, employer and taxpayer. The overall contribution rate has not been designed to match the amount paid out in pensions to existing NHS Pension Scheme pensioners in any given year.

3. Miscellaneous and consequential amendments

Abatement of pension for special class pensioner members who return to work

For most staff, the NHS Pension Scheme does not place any limits on the amount that staff can work should they return after claiming their pension. However, pension abatement has in the past applied to members who retired early with an unreduced pension using historic special class status (SCS) rights but then return to work between age 55 and 60. Abatement is the practice of reducing an individual’s pension payments so that their annual pension plus salary does not exceed their pre-retirement income.

Summary of consultation proposal

As part of the AfC (England) pay deal for 2023 to 2024, the government outlined its intention to further support staff retention and the delivery of NHS services by removing permanently the abatement rule that applied to pension drawn early by members who qualify for SCS rights. The consultation therefore proposed to amend NHS Pension Scheme regulations to withdraw abatement for that group of members from 1 April 2024.

Consultation feedback

Respondents were asked whether they agreed or disagreed that the proposal to amend NHS Pension Scheme regulations has the intended effect of permanently removing abatement for SCS pensioners, as agreed in the AfC pay deal for 2023 to 2024. Of the 160 responses received:

• 112 (70%) agreed
• 12 (8%) disagreed
• 36 (23%) didn’t know

Both the Royal College of Midwives and the Royal College of Nursing supported this measure and noted that they had been calling for it for some time. The Royal College of Midwives considered that the measure could contribute to retaining staff in maternity services by encouraging retired midwives to return to work in the NHS.

One respondent who works for the NHS in a scientific, therapeutic or technical role commented that abolishing abatement will be welcomed and is a very important change that allows those aged 55 to continue to progress in their careers while accessing their 1995 Section pension using SCS rights. They considered it will have a huge impact on service planning and delivery, and will retain very experienced staff in the NHS.

The Scheme Advisory Board supported the permanent removal of abatement for SCS pensioners. The BMA also agreed as did UNISON, who noted their interest in removing abatement in all circumstances. NHS Employers said that employers acknowledge that removal of abatement has already been agreed as part of the pay deal for 2023 to 2024.

The BDA agreed with the proposal notwithstanding that dentists are unaffected. They noted that it had been agreed outside the remit of the Scheme Advisory Board, which is established for recommending scheme changes, confirming their view that pension and pay policy are interlinked to the extent that discussions on member contributions should form part of the pay review body process.

Response

The department welcomes the positive reception to this proposal and will proceed to lay regulations that implement the change from 1 April 2024.

On the points raised by the BDA, we note that in responding to previous consultations on proposals to extend the temporary suspension of this abatement rule, the Scheme Advisory Board expressed the view that it would be very unhelpful to re-introduce any rules that would discourage retired staff to return to work in the NHS, or to return at reduced capacity. The pay review bodies already take into account pension contributions and other take-home pay considerations when making recommendations on pay for staff groups.

Carer’s leave

The Carer’s Leave Act 2023 provides a new entitlement to one week of unpaid leave per employee, per year (pro-rated for those with different working patterns). The aim is to introduce a further degree of flexibility for working unpaid carers by giving employees the right to be absent from work to provide care for a dependent with a long-term care need.

Summary of consultation proposal

The consultation proposed amending scheme regulations to recognise carer’s leave as an authorised absence from work, and treat that period of leave in the same way as other authorised absences from work, some of which may be unpaid, such as maternity leave.

A ‘deeming’ provision would be inserted into scheme regulations. This means that members who take unpaid carer’s leave will be treated as having continued in pensionable service during the time that they are absent from work. During the period of carer’s leave, the employer will continue to pay contributions based on the member’s pensionable pay as if it had continued at that rate during the period of absence (their deemed pay), and the member will pay any owed member contributions upon their return to work.

Consultation feedback

Respondents were asked whether they agreed or disagreed with the proposal to make consequential amendments to NHS Pension Scheme regulations to provide a deemed pay figure to members who take unpaid carer’s leave. Of the 160 responses received:

• 106 (66%) agreed
• 9 (6%) disagreed
• 45 (28%) didn’t know

The Scheme Advisory Board was highly supportive of this proposal and concluded that it ensures members on carer’s leave will be able to accrue pension benefits while they are absent from work. The BMA was fully supportive of this proposal and considered it an entirely fair approach. UNISON and the BDA also expressed their support, as did the Royal College of Midwives who noted that midwifes and maternity support workers are a predominantly female workforce and often have caring responsibilities of both children and older adults. The Royal College of Nursing also supported the measure, reflecting that it is consistent with the existing approach to other authorised absences from work.

NHS Employers reported that employers agree that it is right that the scheme reflects the Carer’s Act 2023.

One respondent who works for the NHS in an administrative role disagreed with the proposal, commenting that actual pay should be used not deemed pay because pension is built up in the 2015 Scheme using a career average revalued earnings methodology.

Response

The department welcomes the positive support for this proposal and will proceed to lay regulations that implement the change from 1 April 2024.

Carer’s leave is unpaid so using actual pay would result in no pension accrual for that period. Instead, the deemed pay approach assumes that the rate of actual pay received before the break continues during the break. This ensures that members are able to take time away from the workplace to care for dependents with long-term care needs without missing out on the valuable employer contribution to their pension savings.

Abolition of the lifetime allowance

The Finance Bill, introduced to Parliament on 27 November 2023, delivers the changes required to abolish the lifetime allowance and to clarify the tax treatment of lump sums and lump sum death benefits paid from registered pension scheme. These measures are covered in clause 14 and schedule 9 of the Finance Bill 2023 to 2024 and have effect on or after 6 April 2024.

The following links hold additional information about the abolition of the lifetime allowance and proposed draft schedule 9 bill changes:

• Abolition of the Lifetime Allowance from 6 April 2024

• Lifetime allowance guidance newsletter - December 2023

Summary of consultation proposals

Subject to the bill becoming an act of Parliament, the consultation proposed making consequential amendments to scheme regulations to update relevant definitions and ensure the smooth operation of current provisions and any future requirements relating to the lifetime allowance after the date of abolition.

Consultation feedback

Respondents were asked whether they agreed or disagreed with the proposal to amend scheme regulations with the intended effect of removing reference to the lifetime allowance. Of the 160 responses received:

• 99 (62%) agreed
• 16 (10%) disagreed
• 45 (28%) didn’t know

The BMA expressed full agreement and endorsement of the proposal. The Scheme Advisory Board supported this proposal in theory but noted that any changes would need to be made in the context of HMRC determinations in relation to the lifetime allowance. NHS Employers said that employers agree that the proposals will have the intended effect of removing reference to the lifetime allowance in scheme regulations. Furthermore, they commented that employers have welcomed the removal of the lifetime allowance as a mechanism to increase capacity within the workforce and for senior clinicians to take on additional work without financial penalty resulting from pension savings tax.

The BDA commented that the proposal seems to be an appropriate move in the current political and legislative context. UNISON noted that the proposal appears to be following government policy.

The Royal College of Nursing supported this measure and considered that it renders pension contribution recycling options obsolete. They would welcome steps to remove pension contribution recycling arrangements on the grounds of scheme sustainability.

Response

The department notes the support received for this proposal.

Subject to the bill becoming an act of Parliament, we have identified that consequential changes are required to:

• the 1995 regulations - regulations E5A(7) (partial retirement pension) and T2A (deduction of tax: further provisions)
• the 2008 regulations - regulations 2.D.5(6) (partial retirement (members aged at least 55)), 3.D.5(5) (partial retirement (members aged at least 55))
• the 2015 regulations - regulation 84(5) (election for partial retirement (members over normal minimum pension age))
• the transitional regulations - regulation 31(3) (partial retirement)
• the NHS additional voluntary contributions (AVC) regulations - regulations 11 (retirement and dependants’ benefits)

The department will proceed to lay regulations that amend these regulations from 1 April 2024 in 2 ways. First, to ensure the continued operation of the partial retirement facility in the regulations listed above, we will substitute references to ‘lifetime allowance’ with ‘lump sum and death benefit allowance’. For partial retirement, scheme regulations require that the amount of pension drawn must not be less than 0.05% of the member’s lifetime allowance - to avoid administrative burdens from pensions of trivial value being drawn. The Finance Bill provides for a new ‘lump sum and death benefit allowance’ which matches the current lifetime allowance of £1.0731 million and is a reference test against which the amount of pension saving that can be drawn as a tax-free lump sum is limited.

Second, the NHS AVC regulations list the various retirement and dependants benefits that an NHS AVC member or their beneficiary can take. The current list includes a ‘lifetime allowance excess lump sum’. From 6 April 2024 there will be the potential for a ‘pension commencement excess lump sum’. This will therefore be added to the existing list of benefits that can be taken.

There are references in the following regulations to the lifetime allowance that will become redundant but in doing so are not expected to affect the operation of the scheme:

• the 2008 regulations - regulations 2.J.8 (deduction of tax) and 3.J.8 (deduction of tax)
• the 2015 regulations - paragraph 16 (deduction of tax), part 7 and schedule 3
• the NHS AVC regulations - regulation 16 (information)

The department will remove those references in the next available statutory instrument that amends scheme regulations.

The Royal College of Nursing suggested that steps be taken to stop pension contribution recycling arrangements on grounds of scheme sustainability. Pension contribution recycling is a matter for individual employers. The department does not have legal powers to mandate they operate or do not operate such arrangements.

Partial retirement: maximum service

On 1 October 2023, the department introduced a new partial retirement option for members of the 1995 Section. This flexibility allows staff to partially retire and claim some or all of their pension, while continuing to work and accrue further pension in the 2015 Scheme. However, the existing regulations do not permit members of the 1995 Section who have breached the maximum service limits (known as ‘non-pensionable members’) to partially retire.

Currently, these members can claim their benefits and join the 2015 Scheme if they later return to work. This is known as ‘retire and return’.

Although retire and return provides members with a similar option in terms of pension accrual, we understand that this process may not be as seamless as taking partial retirement, because this does not require members to resign from their jobs.

To complete the package of retirement flexibilities, we intend amending scheme regulations to make the existing partial retirement option available to non-pensionable members of the 1995 Section who are active members of the 2015 Scheme.

Summary of consultation proposal

The consultation proposed amending the 1995 regulations to allow non-pensionable 1995 Section members to take up the partial retirement flexibility from 1 April 2024.

Consultation feedback

The Scheme Advisory Board supported the proposal, as did NHS Employers who explained that employers welcomed partial retirement being made available to members in this group.

Response

The department welcomes the positive reception to this proposal and will proceed to lay regulations that implement the change from 1 April 2024. While we expect few members of the 2008 Section will have reached maximum service, the existing provisions that allow non-pensionable members of that section to take partial retirement will also be updated so that the option is available to such members who are also active members of the 2015 Scheme. This will ensure that partial retirement provisions work consistently across both schemes so that all members accessing partial retirement will be required to have an appropriate reduction in their pensionable earnings in the 2015 Scheme.

Partial retirement: salary sacrifice 

Members who take partial retirement are required to reduce their pensionable pay by at least 10% for the 12 months following partial retirement. For GPs, a 10% reduction in commitment is required. Scheme regulations state that in order to access partial retirement, a member must have a reduction in their pensionable pay of at least 10%, as a result of a change to their terms of employment.

The partial retirement policy aims to support members’ work-life balance later in their careers, and a gradual transition towards full retirement. We therefore expect members to reduce their pensionable working commitment in return for drawing down their pension while continuing to work.

Where members enter into a salary sacrifice arrangement, under the rules of the scheme their pensionable pay reduces. However, we do not believe that salary sacrifice is an appropriate way of accessing partial retirement, as it does not require any change to a member’s pensionable working commitment.

Summary of consultation proposal

The consultation proposed amend scheme regulations to clarify that where a member enters into a salary sacrifice arrangement, this does not constitute an eligible change to their terms of employment for the purposes of taking partial retirement. We propose to make this change effective from 1 April 2024.

Consultation feedback

Respondents were asked whether they agreed or disagreed with the proposal to clarify the partial retirement regulations to expressly exclude access to this option via entering into a salary sacrifice arrangement. Of the 160 responses received:

• 78 (49%) agreed
• 21 (13%) disagreed
• 61 (38%) didn’t know

NHS Employers welcomed clarification of the regulations relating to partial retirement and therefore agreed with the proposal. They commented that employers are seeking clarity on how to use partial retirement as a tool for retention while not impacting overall workforce capacity. They concluded that the proposed change gives further clarity.

One respondent who worked for the NHS in a scientific, therapeutic or technical role suggested that it may be difficult for staff to reduce their hours by 10% and could choose to leave instead.

Another individual expressed concern that some trust HR departments are unsure about how to apply the scheme rules regarding partial retirement and suggested instances where requests to reduce hours have been refused or individuals have been made to take unpaid breaks to retire.

UNISON relayed similar concerns and highlighted difficulties for their members in getting agreement from the employer on acceptable terms. They suggested that there should be more flexibility for employers and members to negotiate the size of any reduction, suggesting 10% be an upper limit.

The BDA disagreed with the proposal, arguing that the 10% requirement is an unnecessary administrative burden on employers and members. Accordingly, they concluded that salary sacrifice arrangements should not be excluded as a valid mechanism for meeting the requirement.

The BMA reiterated their disagreement regarding the 10% requirement and called for its removal. They noted that the NHS pension scheme for England and Wales treats salary sacrifice for pension purposes differently to NHS pension scheme in Scotland. In England and Wales, salary sacrifice arrangements have the effect of reducing pensionable pay, which upon cessation creates growth in the value of final salary benefits accrued in the 1995 and 2008 Sections as pensionable pay increases again. The BMA labelled the effect on final salary pensions as ‘pseudo-shrinkage’ followed by ‘pseudo-growth’ which they argued can result in significant and unfair annual allowance tax charges. They also viewed it as inconsistent and unfair to consider salary sacrifice schemes as reducing pensionable pay for annual allowance purposes but not partial retirement purposes.

The Scheme Advisory Board was undecided on the proposal and suggested that it may be at odds with a desire to increase workforce capacity in the NHS. They recognised the principle that individuals should be taking steps to phase towards retirement when they partially retire. However, they were concerned that the proposal reduced the flexibility for employers and staff to structure their income in an optimal way for them.

The Royal College of Nursing and Leicestershire Partnership NHS Trust disagreed with the proposal and thought it may be inconsistent with the other proposal to classify as non-pensionable any additional hours worked by partially retired staff in the 12 months after reducing their pensionable pay to take up the option.

Response

The department is grateful for the responses to this proposal. The comments received on the necessity and application of the 10% reduction requirement are responded to in the section that considered the proposal to amend the definition of overtime.

We welcome the Scheme Advisory Board’s recognition of the principle that individuals should be taking steps to phase towards retirement when they partially retire. As set out in relation to the proposed amendments to the definition of overtime, we expect those who take partial retirement to meet the required reduction in pensionable pay through genuine changes in their working arrangements, for example, a redesign of job role or fewer hours in their current position.

By contrast, salary sacrifice schemes such as car leasing that is common in the NHS, do not prompt any change in working arrangements. Taken to an extreme, it sounds a stretch too far for an individual to say they have partially retired by leasing a new car. Accordingly, the department intends to proceed with the proposed amendment. This would mean that salary sacrifice arrangements entered into on or after 1 April 2024 do not count towards meeting the 10% requirement.

On the difference between the NHS pension schemes in regards pensionable salary sacrifice, the department notes that the Scottish Public Pensions Agency recently clarified their position on salary sacrifice. A circular dated 8 December 2023 (pdf, 95.5kb) confirmed that all new salary sacrifice arrangements, including for ultra-low emission vehicles, would in future be non-pensionable, with the exception of childcare vouchers and cycle to work schemes. This moves the Scottish approach significantly closer to that operated in England and Wales.

Salary sacrifice arrangements are voluntary and the effect on pensionable pay is clearly stated in scheme literature. There is a saving to individuals on their income tax and pension contributions which are not payable on the sacrificed pay. The tax changes announced at Budget 2023, specifically the 50% increase to the annual allowance to £60,000 and allowing the offset of negative pension input amounts, creates more headroom and carry forward of any unused allowance from previous tax years to accommodate the annual allowance implication of spikes in pension growth when salary sacrifice arrangements end. The department disagrees with the view that it is inconsistent and unfair to consider such arrangements as reducing pensionable pay for benefit accrual purposes but not contributing towards the 10% reduction for partial retirement. There are different purposes in play - for partial retirement a reduction in pensionable pay is a measurable proxy for a change in work commitments signalling a phasing towards retirement.

The department will proceed to lay regulations that implement the change from 1 April 2024.

Public sector equality duty

Background

The public sector equality duty is set out in section 149 of the Equality Act 2010 and requires public authorities, in the exercise of their functions, to have due regard to the need to:

• eliminate unlawful discrimination, harassment and victimisation and other conduct prohibited by the 2010 act
• advance equality of opportunity between people who share a protected characteristic and those who do not
• foster good relations between people who share a protected characteristic and those who do not

This involves having due regard, in particular, to the need to:

• remove or minimise disadvantages suffered by people due to their protected characteristics
• take steps to meet the needs of people from protected groups where these are different from the needs of other people

The equality duty covers the 9 protected characteristics:

• age
• disability
• gender reassignment
• marriage and civil partnership
• pregnancy and maternity
• race
• religion or belief
• sex
• sexual orientation

The department considered the impact of the proposed changes in the context of this duty and set out an initial analysis in the consultation document.

Consultation feedback

Respondents were asked if there were any further considerations and evidence that they thought the department should take into account when assessing any equality issues arising as a result of the proposed changes.

The Scheme Advisory Board said it is not aware of any other equalities issues arising as a result of these proposals. They noted that the Local Government Pension Scheme has set up a gender pensions gap working group and a similar group for the NHS Pension Scheme could be formed. The Royal College of Midwives supported this suggestion and highlighted that higher earners are more likely to be men who would benefit from the reduction in contribution rates.

An individual who works in the NHS as a consultant psychiatrist commented that special class abatement rules if resumed potentially discriminate against part-time workers, in particular women.

UNISON urged the government to develop and consult on a mechanism for the NHS Pension Scheme that allows members to temporarily reduce their pension contributions during periods of financial hardship. They considered that this could help prevent groups of workers covered by equality legislation from opting out of scheme membership due to affordability issues.

The BDA highlighted the need when assessing contribution rates to aggregate part-time employments where an individual works these concurrently. They pointed to the lower contribution rate that is payable where those employments are considered separately and contrasted it with the position of a full-time worker with similar earnings who pays a higher contribution rate.

Response

The department is grateful for these observations. We note the interest in exploring the gender pension gap in the NHS and will discuss this further with the Scheme Advisory Board, noting that differences in pensions in payment by gender today are a reflection of past differences in earnings and career paths between men and women. We recognise the desire for contribution flexibility to address temporary affordability issues. The department notes that the scheme operates a system of tier contributions provides discounted rates for the lowest earning members to help lower financial barriers to maintaining membership.

On the issue of aggregating part-time roles, the department agrees with the BDA and remains committed to the position expressed in the previous consultation response on contribution changes. We note that other public service pension schemes, such as the teachers’ and Civil Service, do not aggregate earnings across concurrent part-time posts. However, given the greater potential for working concurrent part-time posts in the NHS, we believe that aggregation should be pursued to help maintain equity and fairness in the scheme. In doing so it is essential that the administration approach allows aggregation to be applied consistently across employers without being unduly onerous. NHSBSA has been asked to explore the practical issues involved and potential routes to delivering aggregation administratively. The department will work with the Scheme Advisory Board and NHSBSA to consider the findings and assess next steps.

Updated analysis

Member contribution changes

A full equality analysis was carried out as part of the previous consultation which set out proposals for the delivery of the phase 1 and phase 2 member contribution structures. In preparing to implement the second phase of contribution rate changes, we have considered this analysis and are of the view that the conclusions remain valid and relevant.

The following sections set out an equality analysis for the further proposals relating to member contributions which were not included in the previous consultation. This considers potential future removal of the first contribution tier, adoption of automatic annual CPI indexation to uplift relevant contribution tier boundaries, and amendment of the definition of overtime definition to make additional hours worked up to full time pensionable except where the member has taken partial retirement in the preceding 12 months.

Age

While the proposed changes will be applied to all members, we have considered the potential impact on members in different age cohorts.

The table below shows the NHS Pension Scheme membership by AfC band and age, as of June 2023, using data from the ESR system. It is important to note that the ESR does not cover staff working in primary care or the independent sector, some of whom may be eligible to join the NHS Pension Scheme.

Table 4: pension scheme membership by AfC band and age at June 2023 (source: ESR data)

Notes:

• the hyphen (-) in some fields indicates that there were fewer than 100 people in the group and so have been excluded from the analysis
• the N/A row indicates people who are recorded on non-medical occupation codes but do not have a listed AfC pay band

	Under 25	25 to 29	30 to 34	35 to 39	40 to 44	45 to 49	50 to 54	55 to 59	Over 60	Total
Band 1	-	-	79%	80%	83%	83%	86%	88%	69%	78%
Band 2	93%	91%	91%	91%	92%	94%	94%	93%	78%	90%
Band 3	90%	89%	90%	91%	93%	95%	95%	94%	80%	91%
Band 4	89%	88%	88%	90%	93%	95%	95%	95%	80%	90%
Band 5	90%	81%	75%	81%	90%	94%	95%	93%	79%	85%
Band 6	90%	88%	86%	90%	93%	96%	96%	93%	80%	90%
Band 7	87%	89%	89%	92%	94%	96%	97%	93%	81%	92%
Band 8a	-	87%	89%	91%	94%	96%	97%	93%	82%	93%
Band 8b	-	90%	88%	91%	94%	96%	97%	94%	81%	93%
Band 8c	-	-	88%	90%	94%	96%	97%	94%	82%	93%
Band 8d	-	-	92%	93%	94%	96%	97%	93%	79%	93%
Band 9	-	-	-	92%	93%	94%	96%	91%	71%	91%
Medical	90%	88%	85%	86%	91%	95%	95%	89%	62%	87%
N/A	79%	81%	83%	85%	86%	89%	90%	84%	70%	83%
Total	90%	86%	85%	88%	92%	95%	96%	93%	78%	89%

The table shows a general trend of increasing pension scheme membership from the 30 to 34 age group up to 50 to 54. Membership then reduces from age 55 to 59 and over 60, because these are the age groups at which pension benefits begin to be claimed.

The following table shows the distribution of members by age who work part time, as of June 2023, using data from the ESR system.

Table 5: NHS staff who work part time and full time by age (source: ESR data)

Age	Full time	Part time	All
Under 25	7%	2%	5%
25 to 29	15%	6%	12%
30 to 34	16%	12%	14%
35 to 39	13%	14%	13%
40 to 44	11%	13%	12%
45 to 49	11%	11%	11%
50 to 54	12%	12%	12%
55 to 59	10%	13%	11%
Over 60	6%	17%	10%

The above table shows that staff are more likely to work part time as they age. For example, under 25s make up 5% of the overall workforce, but 7% of the full-time workforce and only 2% of the part-time workforce. By contrast, over 60s make up 10% of the overall workforce, but account for only 6% of the full-time workforce and 17% of the part-time workforce.

The first tier of the contribution structure is more likely to apply to members who work part time in the NHS. This is because there are no AfC pay bands that pay salaries low enough to fall into this tier on a full-time basis. It is therefore likely that a larger proportion of staff who make up the first tier of the contribution structure are older. Should the first tier be removed then in theory the availability of tax relief top-up payments from HMRC should offset the financial impact from paying a higher contribution rate. The department will reassess this in light of experience of the top-up arrangements which have not yet been implemented.

The proposed CPI indexation applies a flat rate increase to contribution tier thresholds for all members, except for those whose earning fall within the first tier (there is no indexation of the first tier and entry threshold for the second tier). This increases the potential for part-time workers, which may become more likely with age, to see their contribution rate increase through a pay award putting them into the next contribution tier.

The department believes this difference in treatment is proportionate to the intended policy aim of the first tier. The purpose of the first tier is to provide an additionally discounted contribution rate in recognition that (assuming no other source of taxable income) members with NHS earnings at this level are within their personal tax allowance and will not benefit from tax relief on their contributions. The upper threshold for the first tier and entry threshold to second tier therefore tracks the personal allowance and it would undermine the policy intent of targeting this discount if that threshold was raised by CPI. This is the same approach as taken under the current AfC based increases to tier thresholds.

Turning to the proposal to amend the definition of overtime to make clear that any additional hours worked up to whole time are automatically pensionable for members who work part time, except where the member has taken partial retirement within the preceding 12 months in which case those hours would be automatically non-pensionable.

This does create a difference in treatment between groups of members based on their age. The department believes this is a proportionate measure to support the overarching aim in providing retirement flexibilities of supporting NHS service delivery and capacity.

In principle, partial retirement is exactly as the name indicates - a step down in hours or responsibilities, phasing towards full retirement. It is a voluntary option, and we would expect staff who take partial retirement to maintain their new, reduced scope of pensionable work as agreed with their employer for a minimum of 12-months. However, we do recognise the demands of NHS service provision. The vast majority of the NHS workforce perform shifts or sessions, and an employer may ask willing staff to do occasional extra ones to address temporary pressures - for example covering rota gaps where staff are unwell or have left. We would not want the potential suspension of their pension to rule out the possibility of partially retired staff from responding to help out their employer with short-term, temporary swings in work. It is for this reason that we proposed making additional hours worked above their core contract by partial retirees non-pensionable for the 12-month period. After the 12-month period, those additional hours would be pensionable in the same way as for all other members. If during the 12-month period, partially retired staff change their mind about the number of core pensionable hours they wish to work, then a further change of employment terms can be agreed with their employer to increase their core working hours or programmed activities, and therefore their pensionable earnings up to the 90% limit required by the partial retirement criteria.

Sex

The Equality Act 2010 lists ‘sex’ as a protected characteristic. Data for the NHS Pension Scheme is also divided by sex. However, it is important to note that sex and gender are 2 different concepts. A person’s gender identity is not always the same as the sex assigned to them at birth, and some people may not identify as having a gender or as non-binary. Gender reassignment is also a protected characteristic under the Equality Act 2010.

The proposed changes will apply to all members regardless of sex and gender identity. We have considered the potential impact of the removal of the first contribution tier on members from this perspective, with a particular focus on work patterns.

Data from the ESR as of June 2023 shows that 76% of the NHS workforce are female. However, 90% of the part time NHS workforce are female. Part time is defined as having a whole time equivalent (WTE) of less than one. Therefore, it is likely that women make up a greater proportion of the membership who currently occupy the first contribution tier. Should the first tier be removed then in theory the availability of tax relief top-up payments from HMRC should offset the financial impact from paying a higher contribution rate. The department will reassess this in light of experience of the top-up arrangements which have not yet been implemented.

Ethnicity

The proposed changes will apply to all members, regardless of their ethnicity. However, we have considered the potential impact on members from different ethnic backgrounds.

In line with other protected characteristics, we have assessed the proportion of staff who work part time by ethnicity. The following table uses data from the ESR at June 2023, and shows the proportion of the NHS workforce who work part time and full time by ethnicity.

Table 6: proportion of NHS staff who work full time and part time by ethnicity (source: ESR data)

Age	Full time	Part time	All
Any other ethnic group	4%	1%	3%
Asian or Asian British	16%	8%	13%
Black or black British	9%	5%	8%
Chinese	1%	0%	1%
Mixed	2%	2%	2%
White	63%	80%	69%
Not stated	4%	3%	4%
No data recorded for ethnicity	1%	1%	1%

Table 6 shows that the largest differentials between full and part time working are found in the Asian or Asian British, black or black British, and white ethnicity groups. For example, Asian or Asian British staff make up 13% of the NHS workforce, and account for 16% of the full-time workforce and 8% of the part-time workforce, suggesting this ethnicity group are less likely to work part time. Black or black British staff make up 8% of the workforce, and account for 9% of the full-time workforce and 5% of the part time workforce, suggesting this ethnicity group are less likely to work part time. White ethnicity staff make up 69% of the overall workforce, and account for 63% of the full-time workforce and 80% of the part-time workforce, suggesting that this ethnicity group are more likely to work part time.

It is likely that white ethnicity staff therefore make up a larger proportion of staff who work part time. This suggests that a larger proportion of the first contribution tier are white ethnicity staff. This is a relevant consideration for the policy of not increasing the first and second contribution tier boundary in line with CPI (or AfC-based increases). The effect of this is described and justified in the age section above. Should the first tier be removed then in theory the availability of tax relief top-up payments from HMRC should offset the financial impact from paying a higher contribution rate. The department will reassess this in light of experience of the top-up arrangements which have not yet been implemented.

Disability

The proposed changes will apply to all members regardless of disability. However, we have considered the potential impact on those with disabilities.

The NHS Workforce Disability Equality Standard 2022 sets out that 4.2% of the NHS workforce declared a disability through ESR in 2022, which is an increase of 0.5% since 2021. The number of people declaring a disability in the NHS Staff Survey has also increased from 20.1% in 2020 to 23.2% in 2021. These figures are significantly lower than the results of the annual population survey. The latest results from 14 September 2023 show that there were 27,915,900 people in employment aged 16 to 64. Of these, 5,078,800 were people of working age who have a long-term physical or mental health condition that affects their day-to-day activities or who have a work-limiting disability. This is an overall percentage of 22.44%.

There is some data to suggest that disabled people are more likely to work part time. Data from the Office of National Statistics (ONS) on disability and employment shows that working disabled people were more likely to work part time than non-disabled people, with 34.1% of disabled people working part time in comparison with 23.1% of non-disabled people. This data was included in the previous consultation document to deliver phase 1 of the member contribution changes but remains the most recently available data.

Based on the above figures, removing the first tier is likely to have a greater impact on people with disabilities as they are more likely to work part time. This is a relevant consideration for the policy of not increasing the first and second contribution tier boundary in line with CPI (or AfC-based increases). The effect of this is described and justified in the age section above. Should the first tier be removed then in theory the availability of tax relief top-up payments from HMRC should offset the financial impact from paying a higher contribution rate. The department will reassess this in light of experience of the top-up arrangements which have not yet been implemented.

Pregnancy and maternity

There is no available data on this group in relation to the NHS workforce or NHS Pension Scheme membership. However, we have considered the potential impact of the proposals on members who have this protected characteristic as part of our analysis on sex.

Religion or belief, sexual orientation, gender reassignment and martial or civil partnership status

Available data on people with these protected characteristics, both in the NHS Pension Scheme and the NHS workforce as a whole, is limited. However, we have considered the potential equality impacts of the proposed changes for members who share these protected characteristics and those who do not.

As contributions to the NHS Pension Scheme apply to all members equally and are based on pensionable pay, we do not consider that the proposals raise any specific issues for members in relation to their religion, sexual orientation, gender reassignment or marital or civil partnership status.

New employer contribution rate

The requirement to introduce a new employer contribution rate following the conclusion of the 2020 scheme valuation does not engage any protected characteristics. Employers pay the same contribution rate for each member.

Special class abatement

The proposed amendment to NHS Pension Scheme regulations to remove the mechanism of abatement for special class status members is a continuation of a provision initially provided by Section 45 of the Coronavirus Act 2020. Therefore, DHSC’s equality analysis for the permanent removal of abatement remains consistent with the initial analysis performed at the introduction of the Coronavirus Act.

See the government’s equality analysis for the Coronavirus Act 2020.

Miscellaneous amendments

Partial retirement: maximum service

We have considered the impact of the proposal to allow members who have previously breached the maximum service limits to access partial retirement on members with protected characteristics. This proposal will be available to all eligible members, regardless of any protected characteristics. We consider that the only characteristic that is relevant here is age.

Because members who have breached the maximum service limits in the 1995 Section are likely to be older than other members, by virtue of the fact that they have been in service for longer, the proposal to allow these members to access partial retirement is likely to have a positive impact on older members.

When partial retirement was first introduced, we considered that as it was likely to be in these members’ financial interests to take full rather than partial retirement and given that they can now retire and re-join the 2015 Scheme, it was unlikely that not allowing them to access partial retirement would lead to any potential impact occurring in practice. Our view is that this remains the case, however this proposal will offer them an additional option.

Partial retirement: salary sacrifice

A full equality analysis was undertaken to inform the partial retirement policy as implemented on 1 October 2023.

The department’s view is that in order for staff to partially retire, some reduction in pensionable workload is required to signal a step towards full retirement in future. We recognise that entering into a salary sacrifice arrangement presents a loophole that could undermine the policy intention.

On initial assessment, we are not aware of any potential impacts on members with protected characteristics that may result from not being able to use salary sacrifice to reduce their pensionable pay rather than by reducing pensionable workload as the policy intends.

Members, regardless of any protected characteristics, will remain able to enter into salary sacrifice arrangements if they wish.

Conclusion and next steps

The department is grateful for the responses received, which have helped test the proposals and provided valuable insight.

Following this consultation, the department intends to proceed with proposals to amend scheme regulations with the following effect from 1 April 2024:

• implement the second phase of member contribution rate changes and apply an automatic CPI indexation of relevant contribution tier thresholds on 1 April annually. Table 7 shows the rates and earning thresholds that will apply from 1 April 2024, inclusive of CPI indexation. The department commits to a ‘better of’ test and applying any marginal increase to thresholds based on the AfC (England) pay award if this is higher than CPI. We are unable to automate this test in scheme regulations, which will need amending to apply pay award related increases. We will operate this approach for the next valuation cycle with interim monitoring of the effect on contribution yield

Table 7: contribution rates and tier thresholds from 1 April 2024, after CPI uplift

Pensionable earnings	Contribution rate from 1 April 2024
Up to £13,259	5.2%
£13,260 to £26,831	6.5%
£26,832 to £32,691	8.3%
£32,692 to £49,078	9.8%
£49,079 to £62,924	10.7%
£62,925 and above	12.5%

• amend the definition of overtime to provide that additional hours worked by members up to full time are pensionable, except where a member has taken partial retirement in the preceding 12 months
• implement a new employer contribution rate of 23.7%, plus the existing 0.08% scheme administration charge
• remove permanently the pension abatement rules that apply to members who retired early using special class rights
• recognise periods of carer’s leave as an authorised absence from work and treat in the same way as other periods of unpaid authorised absences
• allow 1995 Section members who have reached maximum pensionable service to take partial retirement
• confirm that the reduction in pensionable pay required to take partial retirement cannot be met by entering into a salary sacrifice arrangement
• make essential changes to ensure existing scheme rules continue to operate as intended and accommodate requirements arising from new legislation that abolishes the lifetime allowance

The department will not proceed at this time with proposals to amend scheme regulations to facilitate the ‘real-time re-banding’ payroll approach to member contribution assessment. We will bring forward a further consultation in the spring on the lower-level detail of this approach and supporting regulations, with a view to enabling a 1 April 2025 common implementation for ESR and broader range of payroll providers.

In relation to proposals on potential future removal of the first contribution tier, the department confirms its intention to work with the Scheme Advisory Board to consider and monitor the arrangements that HMRC is putting in place to administer the top-up payments. This will inform future intentions relating to the first tier. There are no plans to remove the first tier as part of these changes. Any firm proposal to do so will be the subject of a future consultation.

The department will now proceed to lay before Parliament a statutory instrument that will amend scheme regulations to give effect to the changes as confirmed in this document. NHSBSA as scheme administrator will write to all members informing them of the changes.