Treasury plans to recalculate the value of public sector pensions and introduce a single tier pension could leave the health service facing an annual bill of £2.5bn, HSJ can reveal.
The NHS Employers organisation and trade unions have launched a drive to head off the Treasury’s proposals, which both groups say will result in job losses and service cuts, as well as threatening the long-term future of the NHS Pension Scheme. Tens of millions of pounds in extra savings could have to be found by individual trusts as a result of the change.
The massive price tag emerged in draft proposals to adapt the way pension schemes are valued in order to reflect the latest economic and demographic forecasts, which were circulated to public sector employers and unions last month.
Changes include a revision to the Treasury’s long term earnings growth assumption. It is expected that from 2018 earnings will increase by 4.75 per cent annually − half a percentage point higher than the previous projection. This assumption provides a notional value of the salary earnings for employees across the public sector that is used to calculate the expected costs of pension schemes.
Ministers also propose adding half a percentage point on to the discount rate. This is used to calculate the costs of meeting future liabilities of the pension expressed in - or discounted to − 2013 prices. It is currently based on the consumer price index measure of inflation plus 3 per cent.
These two changes do not impact on individual staff. However independent actuaries hired by NHS Employers are understood to have estimated they will cost the health service an additional £1.7bn from 2015 onwards. It is feared they could result in employers’ pension contributions rising from 14 per cent of salary values to 18 per cent.
Another £800m in cost will be incurred in April 2016 when the government’s new single tier pension is implemented something June’s comprehensive spending review brought forward by 12 months.
The proposals have to be finalised by December in time for pension changes set out in the Public Service Pensions Act to come into effect in 2015. These changes will see a shift to career average pensions, increased contributions and a later retirement age for NHS workers.
The total annual extra cost of the changes equates to £2.5bn for employers.
These new burdens come after NHS England revealed the health service faces a funding gap of £30bn by 2020-21.
A spokesman for NHS Employers said the pension costs “would be unaffordable” and changes to patient services and job losses would be “inevitable”.
“The NHS has strained for several years to maintain coherent planning despite a string of changes and pressures. This potential increase in pension costs, unexpected as it is, would be the most difficult to recover from,” the spokesman said.
Extra costs “of this magnitude could destabilise” the pension scheme, he said, adding that the organisation urged the government to change the proposals “radically”.
Christina McAnea, head of health at Unison, told HSJ the proposals were “ludicrous” and amounted to “the government [taking] money out of the NHS”.
“Unless employers receive funding from the government this shortfall will mean cuts in services and job losses, or employers will be forced to come after pay, terms and conditions again,” she said.
“More and more employers will start to question their membership of the NHS Pension Scheme and if more people opt out of the government will have to step in to meet the shortfall so this is an own goal on their part.”
In March 2011 435 NHS trusts participated in the pension scheme, with 1.3 million active members paying into it.
The scheme is unfunded, meaning payments to pensioners are not supported by assets or investments, with the government picking up the tab.
A Treasury spokesman said: “Valuations are extremely complex and it will take several months to gather all the necessary data, including scheme membership information, and complete the calculations.
“It is not possible to accurately predict this valuation until the process is complete and any attempts are pure speculation.”