NHS staff can take cautious heart from the news that the government have scrapped the consultation on a 50:50 option for the NHS pension scheme. The Annual Allowance (AA) has had a hugely damaging effect on the availability of care to patients, with almost half of GPs in some areas and about a third of hospital consultants opting to cut their hours and pay to avoid punitive tax charges. It’s clearly laudable that the government aims to find a more flexible alternative “to allow [doctors] to take on extra shifts and treat more patients without losing out financially” – but will it work?
For some, reducing work to avoid the AA charges was simply stupid. Social media is awash with glassy-eyed government careerists, tubthumping politicians, and perfectly-rational independent financial advisors whose take on the situation can be summarised as: “yes, you get a tax bill now – but the pension in the future is worth a lot more, so doctors should be grateful for what they have.”
This, of course, doesn’t encourage people back into work. The pension in the future may be valuable – but if you’re a doctor contributing more than 35% of your pay to the NHS pension scheme, and you then get a five-figure tax bill on top, of course you’ll reduce the amount of work you do. There may be a pot of gold at the end of the rainbow, but people regard being asked to pay more for it now as a loss – and people feel losses more keenly than gains.
This concept of loss aversion is neither controversial nor revolutionary – the Nobel prize-winning work of Daniel Kahneman and Amos Tversky set it out three decades ago, and led to the concept of hyperbolic discounting, which shows people tend to choose a smaller certain reward now over a larger reward that accrues later. A reward in a year’s time is valued at about 50% of a reward now; the current situation suggests that a pension ‘reward’ thirty years hence is valued at a lot less than 50%.
The problem is not just how far in the future the pension is. Doctors look at the repeated changes to the NHS pension scheme over the years, invariably to the detriment of their pensions, and at the increases in the age at which they can take that pensions, and many conclude that the government will simply change the rules again before they get to their pension. The ‘payoff when you retire’ risks looking like the pot of gold at the end of the rainbow: something you never get to. Unless that loss of trust in the government is addressed, it is hard to see simply reversing the financial loss of the extra tax bill as enough to get people taking on more work again.
This loss of trust illustrates that there are other losses to the current situation beyond the financial ones. The NHS Pension scheme (NHS Pensions, and PCSE / Capita for GPs) is a mess. It’s extremely difficult to get accurate information from them, and people don’t want to have to become experts on the complexities of tax rules to decide how much work they do. To give a simple example: how do you decide what percentage you wish to contribute to your pension if the new scheme allows tiered contributions? The brilliant work of Tony Goldstone and the BMA will help for hospital consultants, but not for anyone else – and the time you spend working out what percentage to contribute is time you could be spending doing things you enjoy, instead. The administrative and bureaucratic burden of dealing with the NHS Pension scheme are another loss, and offering tiered contributions may actually worsen it.
Further, the government have made it much harder for themselves by letting a situation come to pass where huge numbers of doctors have already given up work. These are people who are suddenly finding they can reduce their working week significantly for practically no reduction in their post-tax pay or their pension, and can therefore spend more time with their friends and families. The decision to drop the work would have been difficult, because the endowment effect means people tend to overvalue income which they already have – but because doctors have already reduced work, the government have lost that advantage. Effectively, the government are now asking people to do extra work in exchange for a worse pension (in a tiered fashion), and a tax rate of 60% rather than the even higher rates of the AA taper: it is rather like incentivising people to do more work by telling them you’ll now be hitting them with a slightly smaller stick while they do it.
Ultimately, tax rules intended to prevent those earning colossal occasional bonuses from sticking them all in a pension scheme to avoid tax should never have been applied to NHS staff. There are things the consultation should do to have a chance of success – make sure NHS managers can access the solution, not just clinicians; ensure that employers’ contributions are returned, in full, to staff (both the 14.68% currently paid by employers and self-employed NHS staff, and the additional 6% which is currently paid by NHS England to make this up to 20.68%) – but people have lost trust in the government and the NHS Pension scheme, and that is not addressed by relatively minor changes to tax rates. As such, while the government should be commended for scrapping the consultation on 50:50, they should not be surprised if a year down the line they are needing to address the many administrative failings of the NHS Pensions scheme, and the fact that NHS staff have lost trust in the government to handle their terms and conditions fairly.