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How privatisation drives NHS pensions into deficit

The NHS pension scheme, like most public sector pensions, is an “unfunded” scheme. On first sight this implies that NHS pensioners have not paid for their pension and, for the political traction that it gives them, the government are happy for the public to be misinformed.

The Hutton report says that NHS employees pay between 5.5% and 8.5% of their salaries into the NHS pension scheme. In most private schemes contributions are paid into a savings scheme, the pension fund, and at retirement this is used to buy an annuity that will pay out the pension. The NHS pension scheme does not have such a fund, which is why it is called “unfunded”.

The National Audit Office uses the term “pay-as-you-go” and explains the NHS scheme with the following diagram:

National Audit Office illustration of NHS pensions

Contributions from employers and employees pay the pensions of existing pensioners. The interesting part of this diagram is the line marked “balancing figure”. If the contributions are not high enough to pay for all existing pensioners the government will pay the difference and if the contributions are more than needed the government receives the excess money.

The NAO gives figures for the NHS pension scheme from 2008/09, summarised here:

Number of pensions in payment 546,158
Average (mean) pension £6,931
Total pensions paid £3.12bn
Total lump sums paid £1.22bn
Number of employees enrolled 609,534
Total employee contributions £2.55bn
Total employer contributions £5.0bn
Balance paid by (or to) the treasury (£2.11bn)

Currently the NHS pension scheme is in surplus, in 2009 it paid over £2bn to the government. The reason for this surplus is the increase in the number of NHS employees over the last decade. However, this means that more NHS employees will retire in the future and this, combined with lengthening life expectancy, means that at some point the pension scheme will go into deficit that the government will have to pay.

For a pay-as-you-go scheme the number of current pensioners has a significant effect on the likelihood of the scheme going into deficit and this has been frequently mentioned by the government. However, what is not mentioned is that such schemes are dependent upon the number of current employees.

The government’s policy is to shift as many NHS services as it can into social enterprises (private, not-for-profit companies) and to the private sector. When this happens, a process called Transfer of Undertakings (Protection of Employment) or TUPE is applied to protect the employee’s terms and conditions. TUPE says that the new employer must provide a pension scheme equivalent to the employee’s previous scheme, but it does not say that the employee can continue to contribute to the previous scheme.

When it was announced that Circle will take over Hinchingbrooke hospital the trust sent a letter to employees pointing out that there is a risk that this could affect their NHS pension:

"[There is a] slight legal risk that a law called "TUPE" could apply on the commencement of the franchise and, if this were to be the case, the slight risk that unless you formally object, your employment could, under TUPE, transfer to Circle. If this happened, it would mean that Circle would become your employer and even though the majority of your terms and conditions would remain the same, you would lose your membership of the NHS pension scheme."

The trust is clearly worried that staff may lose their entitlement to contribute to the NHS pension scheme and will be offered a lesser scheme by Circle. But there is a wider point. As more employees are transferred to the private sector (or social enterprises) the contributions of existing employees will fall, making it more likely that the NHS pension scheme will go into deficit. The government’s policy to change public sector contributions is an attempt to mitigate this problem.

Since the NHS pension scheme is pay-as-you-go it means that transferring employees to the private sector will not only have a detrimental effect on the employee’s future pension, but also on the government’s liability for existing NHS pensioners. However you look at it, such transfers of employment are a bad thing.

Richard Blogger writes about the NHS and social policy at NHS Vault.

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