Summary of the final agreement


16 / 4 / 2014 00:00 AM

The proposed final agreement on the scheme design for changes to the NHS Pension Scheme, to be introduced in 2015, has been published.

Proposed final agreement

A full copy of the proposed final agreement is available on the Department of Health website. The outline summary set out below highlights the key points for employers under the following headings:

Transitional protection for existing members

  • All accrued rights are protected and those past benefits will be linked to final salary when members leave the scheme. Existing arrangements with respect to the Uniform Accrual Formula for MHOs will continue to apply for staff who move to the new arrangements.
  • The current rules requiring staff in the 1995 scheme to retire, take all benefits and be prohibited from further pension scheme membership will be retained but with the following changes. Staff on taking their 1995 benefits after the age of 55, will be able to defer their 2015 benefits but without the possibility of further accrual in the NHS Pension Scheme.
  • All active NHS Pension Scheme members in the 1995 arrangements with a current Normal pension Age of 60 or 55 ,who as of 1 April 2012, have 10 years or less to their current normal pension age or are over their current normal pension age will have their future benefits protected. This will be achieved by their remaining in the 1995 arrangements on their current benefit terms until they retire.
  • Members in the 1995 arrangements who are within a further 3 years and 5 months of their current normal pension age, (i.e. up to 13 years and 5 months from their NPA) will have limited protection with linear tapering so that for every month of age that they are beyond 10 years of their current normal pension age, they lose 2 months of protection. At the end of the protected period, they will be transferred into the new pension arrangements.
  • All active NHS Pension Scheme members in the 2008 arrangements who as of 1 April 2012 have 10 years or less to their current normal pension age of 65, or are over 65 will be given protection by their being allowed to remain in their current arrangements until they retire. A tapered arrangement (on the same basis as above) will apply those within a further 3 years and 5 months of their current normal pension age as of 1 April 2012. However, whilst these members are covered by protection, they will be given a one-off option prior to 2015 to opt-out of protection and transfer to the new scheme in 2015. This opt-out is being made available because modelling of the impact of the new scheme on these protected members has suggested that the majority could be better off if they transfer to the new arrangements.
  • Members with protection who leave active service and return within five years will be able to return to their current arrangements with final salary linking if they are in the fully protected group. If they are in the tapered protection group, they will return to the scheme arrangements that they would have been in had they remained in service, again retaining final salary linking. Members not covered by protection will be able to re-link their accrued rights to final salary on retirement if they return within five years. Those who return after more than 5 years will, as now, be offered the choice of converting their past service to the current scheme terms on a Cash Equivalent Transfer Value (CETV) basis or leaving it as an accrued benefit without final salary linkage.
  • The anticipated costs associated with the protection outlined sit outside the costs of the reference scheme. The cost of the choice exercise to opt out of protection is accommodated within the cost ceiling set for the reference scheme.

The main parameters of the new scheme from 2015

  • a pension scheme design based on career average
  • an accrual rate of 1/54th of pensionable earnings each year with no limit to pensionable service
  • revaluation of active members’ benefits in line with CPI plus 1.5 per cent per annum
  • a normal pension age equal (NPA) to the state pension age (SPA), which applies both to active members and deferred members (new scheme service only). If a member’s SPA rises, then NPA will do so too for all post 2015 service (see annex A). Those within ten years of current NPA are excluded and accrued rights in pre-2015 schemes will also be related to current NPA
  • pensions in payment to increase in line with inflation (currently CPI)
  • benefits to increase in any period of deferment in line with inflation (currently CPI)
  • member contributions on a tiered basis to produce a total yield of 9.8 per cent of total pensionable pay in the Scheme
  • optional lump sum commutation at a rate of £12 of lump sum for every £1 per annum of pension foregone up to the maximum limit on lump sums permitted by HMRC
  • the current flexibilities in the 2008 section: early/late retirement factors on an actuarially neutral basis, draw down of pension on partial retirement and being able to retire and return to the pension scheme will be included in the 2015 scheme
  • ill-health retirement pensions to be based on the current ill-health retirement arrangements but with enhancement for higher tier awards to be at the rate of 50 per cent of prospective service to normal pension age
  • spouse and partner pensions to continue to be based on an accrual rate of 1/160th. For deaths in retirement, spouse and partner pensions will remain based on pre-commuted pension
  • the current arrangements for abatement (for service accrued prior to and post 2015) will be retained
  • lump-sum on death in service will remain at two times actual pensionable pay
  • for members who in the new scheme have a normal pension age higher than 65 there will be an option in the new scheme to pay additional contributions to reduce or, in some cases, remove any early retirement reduction that would apply if they retire before their normal pension age. Only reductions that would apply in respect of years after age 65 can be bought out and the maximum reduction that can be bought out is for 3 years (that would apply to a member with a normal pension age of 68 or higher)
  • added Years contracts in the 1995 section will continue on compulsory transfer to the 2015 scheme
  • additional pension arrangements will continue
  • the Public Sector Transfer Club will continue and further consideration will be given to the best way of operating it in the reformed schemes
  • employer contribution cap (see below). 

Fair Deal

The Government agrees to retain Fair Deal provision and extend access to public service pension schemes for transferring staff. This means that all staff whose employment is compulsorily transferred from the NHS under TUPE, including subsequent TUPE transfers, will still be able to retain membership of the NHS Pension Scheme when transferred.  These arrangement will replace the current provisions for bulk transfers under Fair Deal, which no longer apply.

A partnership review will be carried out fulfilling the commitment to consider reforming the terms of access to the NHS Pension Scheme for staff working in AQPs, APMS services and for staff working in other services funded under the National Contract for NHS services.

NHS Pension Scheme Choice exercise

The NHS Pension Scheme Choice Exercise has entered its final stages (ending 31 March 2012). This exercise allows staff an opportunity to choose to transfer their total pensionable service from the 1995 Section to the 2008 Section and to move to the 2008 section of the Scheme. It is recognised that the implementation of the changes set out in the proposed final agreement may mean that some members who chose to remain in the 1995 section and are not covered by full protection, may wish to change their retirement plans and retire later. For this reason, these staff will be offered a second chance to transfer to the 2008 section for their service up to 2015 on the same conversion terms as originally agreed. This is likely to take place in 2013 or 2014.  This opportunity will not be offered to those with full protection in the 1995 Scheme and those who have already chosen to move to the 2008 Scheme.

Reviewing members’ contribution levels and scheme opt out rates

The Government remains committed to securing in full the Spending Review savings of £2.8bn by 2015 from increased members contributions, and will consult formally on the implementation for the years 2013-14 and 2014-15 before the new scheme is introduced. The Department, NHS Employers and unions will consider the impact of the recently published 2012-13 contribution increases, and scheme opt-out rates, before taking final decisions on how future increases will be delivered.

Future increases to state pension age (SPA)

The Government’s view is that in the new scheme, for pension accruals post 2015, normal pension age should be set equal to SPA.  This will mean that each scheme member will have an individual normal pension age dependant on their date of birth.

This change may impact more on certain categories of staff within the NHS. As a result, it is agreed to set up a tripartite review between DH, NHS Employers and the NHS Trade Unions on addressing the impact of working longer in the NHS with particular reference to staff in frontline and physically demanding roles including emergency services.

Employer cost cap

A cap on employer contributions will be introduced to cover unforeseen events and trends that significantly increase scheme costs. The employer cost cap is intended to provide backstop protection to the taxpayer and will be based on already agreed cap and share principles which underpinned the changes introduced in 2008.

25 year guarantee

The Chief Secretary to the Treasury intends to protect the scheme from further reform for a period of 25 years, outside of the processes agreed for the cost cap noted above.

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