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What is the likely impact on GPs of the changes arising from the recent Hutton report on pensions?


20 April 2011

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Question in full:

What is the likely impact on GPs of the changes arising from the recent Hutton report on pensions?(1) Is there any likelihood that GP practices will be taken out of the NHS Pension Scheme?

Question in full:

Question in full:

What is the likely impact on GPs of the changes arising from the recent Hutton report on pensions?(1) Is there any likelihood that GP practices will be taken out of the NHS Pension Scheme?

Question in full:

What is the likely impact on GPs of the changes arising from the recent Hutton report on pensions?(1) Is there any likelihood that GP practices will be taken out of the NHS Pension Scheme?

A: The funding gap in public-sector pensions, resulting from final salary schemes and increasing life expectancy, has been clearly identified by the coalition government as unsustainable. Significant changes will therefore undoubtedly arise from the considerations set out in Lord Hutton's report when the government publishes its proposals in the autumn.(1)

The total pensions paid out by all the public sector schemes in 2008/09 amounted to £32bn. As there is no physical reserve, the pensions paid out in a year are funded by the contributions received in that year. This gave rise to a funding gap of £4.5bn in 2008/09, forecast to double to £9bn by 2012/13 if no changes are made to the schemes.

Lord Hutton's key proposals are to:

  • Switch all public-sector pensions from a final salary basis 
to a career average earnings basis.
  • Introduce tiered employee contribution rates.
  • Cap employer contributions.
  • Raise the age at which people are entitled to draw their pensions to the same age as the state pension.

The planned increase in the state pension age is:

For women by November 2018: 65

For men and women by:

April 2020: 66

April 2031: 67

April 2046: 68

So, how will these proposals affect GPs?
GPs, unlike hospital doctors and nurses, are already in a Career Average Revalued Earnings (CARE) scheme so that the pension is based on the average of the cumulative earnings adjusted for inflation, which removes the distortion of any large salary increases in the last few working years. This change will therefore have a significant effect on consultants, but not on GPs.

Tiered employee contributions have already been introduced for GPs in 2005/06, with the switch from fixed contributions of 6% of superannuable profits to a range from 5.5% to 8.5%. These tiered contribution rates may well increase significantly to close the funding gap. It is feared they could rise to as much as 13% for GPs currently in the 7.5% contribution bracket and to 15.5% for those currently paying 8.5%. Even taking account of the tax relief on superannuation contributions, this would increase the net cost for a GP on superannuable profits of £120,000 by £5,040 per year.

As GPs are in the unusual position of paying their own employer as well as employee contributions, the proposed cap on increases in employer contributions is welcome and will also protect the practice from increased employer contributions on staff salaries.

Young GPs embarking on their careers are now facing the prospect of having to work to age 68 before being able to draw their full pensions. For those already working, the existing benefits to the date of any changes being implemented will be preserved.

We do not yet have the details to know if this means that GPs will continue to be members of the existing 1995 or 2008 scheme and will then join the new scheme, or whether everybody could be amalgamated into the new scheme but with the portion of their pension relating to post-change contributions abated for early retirement if they retired at age 60. It is certain that any change to the normal retirement age will only apply to benefits built up after the date of any amendment.

As the funding deficit of the NHS Pension Scheme has already been partly addressed by the introduction of the 2008 scheme and the tiered contributions, GPs should be less hard hit by the Hutton proposals than others, such as local government employees.

Nevertheless, the impact on younger GPs will be considerable. The Hutton report has not made any direct reference to GP principals being removed from entitlement to be members of the NHS Pension Scheme, but GPs need to be cautious of any erosion of their NHS superannuable profits as a result of income being diverted through private companies, which are not NHS bodies. At present, only companies holding a GMS, PMS or APMS contract are entitled to be NHS bodies; if other services are provided to the NHS through private companies then the income would not be pensionable in the NHS pension scheme.

Reference
1. 
Independent Public Service Pensions Commission. Final Report. London: IPSPC; 2011. Available from: http://www.hm-treasury.gov.uk/indreview_johnhutton_pensions.htm

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