The NHS Pension scheme – retire and return

Neil Bhan from DAC Beachcroft examines the likelihood that the government will restrict ‘retire and return’ flexibilities under the NHS pension scheme.

Jeremy Hunt recently suggested he will restrict the current ‘retire and return’ flexibilities under the NHS Pension Scheme to ensure that senior staff cannot gain financially by accessing their pension/lump sum and then returning almost immediately to the NHS to continue in full-time work.

It is likely that he will achieve this by extending the existing rules on abatement of pension. In essence abatement is the principle that an employee's new salary plus their pension on returning to employment cannot be more than their salary prior to retirement. There are two broad possibilities in respect of reforming the current retire and return flexibilities:

Firstly, the Government could seek to increase the impact of abatement by reducing even further the level of benefits payable in respect of individuals who retire and return and fall to be caught by the abatement rules. In practical terms this would mean that future earnings upon return to work would have more impact on any ongoing pension entitlement. It is likely that any such change could only be applied in respect of future retirees, and could be viewed as inconsistent with the pension reforms introduced during the Government's last term, which were centred on promoting rather than penalising various forms of flexible retirement.

The other possible extension of the abatement rules (which is perhaps more likely to occur), would be to introduce changes which curtail the overall numbers of individuals who are currently eligible for retire and return without being affected by abatement. Currently abatement will potentially apply if you are under the NHS Pension Scheme’s normal pension age (age 60 in the 1995 section, or 65 in the 2008 section and the 2015 Scheme), and return to NHS employment following retirement on the following grounds:

• Ill health (whether as an active or deferred member)
• In the interests of the efficiency of the service
• If you have mental health officer (MHO) status and retire and then return to NHS employment before age 60

Currently abatement will not apply if you retire and take your pension benefits, and return to work outside of the NHS. It will also not currently apply if you return to NHS employment having retired on the grounds of:

• Voluntary early retirement
• Redundancy
• Having reached normal retirement date (ie abatement does not currently apply in respect of any re-employment beyond normal pension age).

Abatement won’t currently apply to any benefits claimed via draw down (under the 2008 section of the NHS Pension Scheme).

An obvious extension to the abatement regime could be introduced by making it applicable in redundancy and/or voluntary early retirement cases (although it should be noted that with voluntary early retirement one’s pension will be actuarially reduced to reflect that it is being paid earlier than normal pension age, which would make it less likely that abatement would bite if it was introduced).

Such a change could also be viewed as counter-intuitive in the face of recent Governmental reform of both private and public sector pensions, and would not assist with flexible workforce planning. However, looking to the longer term, there is a possible rationale for the Secretary of State’s confirmation that retire and return is problematic in its current form.

His alignment with the current negative publicity in the media regarding retire and return is consistent with a wider proposition that NHS pension benefits are still too expensive/generous in general, and that the Department of Health/Treasury should follow through on long-term Hutton Report recommendations by changing the NHS Pension Scheme from a career average-defined benefit arrangement to being calculated on a defined contribution basis. It should be stressed that we have no evidence that the Government intends to suggest that the NHS Pension Scheme should move to a defined contribution basis in the foreseeable future. The cost savings from such a prospective change would potentially be huge, and this approach actually would be more consistent with the Government's recent pension reforms.

Depending on what changes he introduces, the Secretary of State will be mindful of the risk of a legal challenge to any new pensions legislation. A further unintended consequence of any changes to broaden the applicability of pension abatement, is that it may discourage senior NHS managers from returning to the NHS, resulting in a scarcity which will actually drive up overall senior remuneration – which is presumably contrary to what the Secretary of State wishes to achieve.

Inevitably the issue of NHS Pension Scheme membership sits within the wider context of an employer's overall remuneration policy, and employers are advised to consider taking legal advice before implementing changes in this complex area.

Neil Bhan is a Partner at law firm, DAC Beachcroft LLP, and heads up the firm's NHS pensions team.