Shocked managers' leaders have warned that the government's NHS modernisation plans could be at risk after learning employers will have to almost double their contributions to staff pensions over the next two years.

The extra cost is put at£500m a year by 2001, when NHS employers will be required to pay 7 per cent of pensionable pay, compared with 4 per cent now. The change means employers will meet the full cost of pension increases, which are currently met by the Exchequer.

The government claimed funding for pension increases was included in last year's comprehensive spending review settlement, but it came as a surprise to most managers.

NHS Confederation human resources chair Andrew Foster said: 'If it was announced at the time of the CSR I missed it.'

He described the news as 'frightening' and added that this year's NHS modernisation fund had already been raided for national priorities, such as the above-inflation nurses' pay award.

The NHS Executive proposed to a government actuary investigation of the pension scheme that the employer contribution rate should rise from 4 to 5 per cent from 1 April 2000, and then to 7 per cent from 1 April 2001.

Executive head of employment issues Robin Heron has told senior managers that the NHS scheme is the last public service pension scheme not to fully meet pension increases.

'The government believes that employers should recognise the full cost of employing staff,' Mr Heron says in a letter to chief executives, finance and HR directors, GPs and other managers.

The government actuary's report says the annual cost of pension increases in the year to 31 March 1994 was£468m. Since then, 70,000 staff from GP practices have joined the scheme, bringing the total of contributing staff members to about 900,000.

Nearly 364,000 former NHS staff are receiving pensions from the scheme, at an annual cost of nearly£900m.

NHS Confederation chief executive Stephen Thornton said: 'Are we saying that mental health and coronary heart disease are the priority or is it staff pension schemes?

'If it is the latter, so be it. But then there can't be progress on the other things the government is hoping to do because we can't spend the money twice.'

He said the government should have recognised pensions increases as a legitimate cost pressure to be fully funded.

Healthcare Financial Management Association chair Eric Morton said the change would have a 'significant impact' on the NHS. 'It is 1 per cent on next year's pay bill and a further 2 per cent the following year.'

He added that there had been no suggestion at the time of the CSR announcement that any of the additional resources were already earmarked for such purposes.

'It is fairly bleak. This year is already very difficult,' he said.

'Trusts are heading for significant deficits this year, and the pensions increase will be the first call on available resources before we even look at pay awards themselves.'

See Comment, page 19; Looking Askance, pages 20-21.