Final Pay Control Charges: What do the proposed changes mean?
A number of changes to the NHS pension scheme regulations are currently working their way through the system, to be effective 1 April 2021. One concerns the contentious Final Pay Control (FPC) Charges in respect of the 1995 scheme. This rule, introduced in 2014, imposes a charge on the employer, including a GP practice, where pay increases in the recent years before retirement mean that a significantly larger pension is earned on the final salary pension arrangement. Where we see most issues are when practice manager partners receive increases in profit through normal commercial activity, but which can result in the practice receiving very high charges.
The Department of Health and Social Care have finally acknowledged that this may produce highly unfair charges and they plan to change the rules. So far, we have seen draft regulations which have been consulted upon and responses made. The Government has now replied with their intentions following final suggestions. Where does that put us?
Nobody denies the genuine intention of the regulations, which is to prevent deliberate manipulation of pay to falsely inflate pension benefits. But the regulations do not define deliberate manipulation. They instead set limits on pay increases and give exemptions in certain circumstances. Anyone falling outside those limits and exemptions are caught despite there being genuine reasons for the increase.
- Percentage increase
The 1995 pension scheme pays a pension based upon the best final salary (or pensionable profit for practice manager partners) of the last three years. Starting with the year preceding that period the FPC charge was previously calculated allowing an increase of CPI plus 4.5% each year to come to an allowable amount. If the actual pay was higher, a charge arose. That percentage is now set to change to 7%. That sounds a generous increase, but the effect on the charge, whilst reducing it, is not as significant as you would imagine.
Salary sacrifice – charges arising from the giving up of salary sacrifice arrangements (which reduce pensionable pay) were exempted from these rules and will remain so under the new regulations.
New employment – where the member takes up a new employment with a new employer. This covers someone gaining a genuine promotion for a new employer. Again, this remains, but is expanded as follows.
Promotion due to fair competition – The previous exemption clearly only covers a position where you change employer, but we see many examples where the promotion can occur in-house. That is due to also become exempted, but only if the increase in pay was the result of open and fair competition. What we expect this to mean is that the higher level job was externally advertised. This creates problems for a practice as records will need to be kept. Where were the advertisements placed? Who attended interview? How many applied? Such details will need to be known should an appeal have to be lodged to dismiss a charge on these grounds.
Agenda for Change (AfC) – the existing rules contained an exemption for pay increases resulting from AfC band increases. These will remain in the main rules but be expanded. General Practice is not obliged to pay under the AfC system. Many practices, however, still set wage levels by benchmarking against the AfC standard. Increases in pay resulting from measurement against a national standard such as AfC will be exempted.
Clinical Excellence Awards (CEA) – where pay increased above the allowable amount by virtue of the receipt of local or national CEAs, FPC charges still applied. There were rules around which body might pay it, depending upon who approved the award, but they were still there. New local awards are no longer pensionable since 2018, so the regulations need only now refer to national awards, which remain pensionable. The new regulations will exempt pay increases resulting from receipt of a nationally approved CEA.
Non-GP partners – there was previously no exemption in this category, but, as noted above, it resulted in unfair charges. An exemption has been introduced to cover this. An increase in pensionable pay arising from an increase in pensionable profits is now to be ignored in three circumstances:
- Percentage profit share does not increase, or
- Another partner leaves the practice, or
- Another partner reduces commitment.
There may well be issues with the above as it may not cover every situation we find in General Practice. Let us say another partner gives up a prior share of income for dermatology work. The PM’s effective profit share may increase, but the allocated share has remained at, say, 20%. If profits increase despite the loss of dermatology work, and no partner has left or reduced commitment, an increase of this nature may be caught. All that has happened is a result of normal commercial activity and business and personal decisions that occur every day.
The measures are a good step in the right direction, but it doesn’t look as though we are out of the woods completely!
A final point to note is that, where an employer/practice has received a charge since 2018 on the old rules, they can lodge an appeal to have it reassessed under the new rules. Be warned – the deadlines for doing so are due to be very tight. If it has happened to you, get your case ready.
If you require any advice regarding the above please get in touch with Dave Walker, Healthcare Services Senior Tax Manager or alternatively contact us here.