Work Longer for Lower Pension

The implications of Lord Hutton’s report

Lord Hutton’s Independent Public Service Pensions Commission’s final report, published in March, recommends some major changes to public sector pensions. 

This could see NHS pensions radically reformed and will affect virtually everyone in the NHS Pension Scheme.

The background

The cost of public sector pensions has risen dramatically in the last decade, due in part to rising life expectancy and with the costs largely picked up by the tax payer.

When analysing the proposed changes in Lord Hutton’s report and how they affect doctors and dentists, we have to first look at the recent backdrop to the NHS Pension Scheme.

In 2008, the NHS Pension Scheme underwent a significant overhaul following a 3 year review process involving employers, unions and the Department of Health.

This new scheme has seen the normal retirement age move to 65 and an increase in contributions across the board for all 1995 and 2008 NHS Pension Scheme members.

Alongside this, public sector pensions, including the NHS Pension Scheme, are already changing with the move to a Consumers Prices Index (CPI) from a Retail Prices Index (RPI) as the measure of inflation.

With CPI traditionally lower than RPI, this in itself reduces the costs for the NHS when paying out pensions.

So how does Lord Hutton’s report affect you?

There are a number of key recommendations in the report that will have a dramatic effect on your pension and which, Lord Hutton infers, should be in place by 2015.

Delaying implementing the recommendations is, he says, not a viable option.

Move to a career average revalued earnings (CARE) from final salary

Arguing that the link to final salary is inherently unfair, Lord Hutton recommends that public sector pensions move from final salary to the CARE scheme.

This is unlikely to have an effect on GDP’s and GMP’s who already work on the CARE scheme basis. In this profession, you are able to earn higher incomes at an earlier age than say a hospital consultant, so any impact is minimal.

However, for hospital based doctors, the move will have a devastating effect on your pension. All your years as a junior doctor, where only your base is pensionable (not your on call), means that a CARE scheme will dramatically reduce your pension. 

The difference between qualifying as a consultant 12 months before the recommendations are implemented and qualifying 1 year later would have a substantial impact on your pension. 

Why?

The recommendations seem to infer that any service accrued until 2015 would be treated under the rules and regulations that are currently in force. After that date, the new rules would be applied. 

This suggests that, if you qualify as a consultant by 2014, you have secured a pension that is based on a consultant’s salary (£74,504 in England). 

If you qualify a year later, it suggests your pension could be based on an STR grade that has a top level of £46,708 (English pay grade) and not your new consultant’s salary.  

In this example, your pension is therefore based on a salary that is only 63% of your consultant’s salary.

Normal retirement age (NRA) moves to state pension age

The normal retirement age for the new 2008 scheme is 65 but remains at age 60 for people on the 1995 scheme. 

In his report, Lord Hutton suggests that the normal retirement age for public sector workers is the same as the state retirement age. Currently the latter is 65 but the Government are looking to change it to 66 for both men and women by April 2020.

The savings the public sector pension scheme would make by moving back the retirement age 5 or 6 years are huge.

Assuming there is no change to any accrued service to date, doctors and dentists in the 1995 scheme in particular may end up with a two tier pension - some aspects having an NRA of 60 and the remainder going through to age 65, possibly 66.   

If you wish to draw your pension at age 60, you may find that a proportion of your pension is also subject to actuarial reductions.

To summarise

The closer you are to retirement, the less dramatic the impact of these changes. For the younger generation, the impact will be greater. 

We are generally an advocate of additional retirement provision and this can take many forms. It seems more prudent than ever to consider all your options.

Do remember though that the recommendations in Lord Hutton’s report are just that. They are still only recommendations and this article is our interpretation. 

For more information on the report and how it affects you, contact your financial adviser or email us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Article by Max Spurgeon
Director and IFA to Doctors and Dentists
Legal & Medical Investments
April 2011