In the fourth part of our series on contract management pitfalls, we look at the risks arising out of varying the terms of construction contracts.
If you think politics is rather a minefield at present, then the world of pensions is something akin to Lewis Carroll’s Alice in Wonderland.
There appears to be a lot of falling down rabbit holes and things that you once thought one way are rapidly becoming otherwise. Fortunately for Alice, she was able to wake; if only Mr Carroll could bring such a happy ending in the current pension landscape. It is difficult to see how we will get a happy ending in the pension scenario unfolding in 2019.
For employers with employees in the unfunded public-sector schemes, such as the NHS Pension Scheme (NHSPS) and the Teacher Pension Scheme (TPS), the Government is consulting on increasing employer contributions for both schemes. For teachers, the proposed increase is almost 40% (from 16.48% to 23.6%) although currently, the Government has indicated that they will make some sort of contribution towards this cost for publicly funded schools. The NHSPS consultation, which opened mid-December 2018 and closed on 28 January 2019, proposes an increase for employers from 1 April 2019 from 14.3% to 20.6%. One would imagine, given the rather limited consultation period over the holiday period, that the Government had pretty much made up their mind regarding this increase and the consultation was a mere tick-box exercise.
In July 2018, the Government promised that NHS funding would grow on average by 3.4 per cent in real terms each year from 2019-20 to 2023-24, with an additional £1.25bn each year to cover specific pensions pressure triggered by such a hike in contributions. For health and social care providers who have NHSPS members as employees, this extra funding might elude them. If that is the case, this is a sizeable additional cost that they will have to budget into the business. Not an easy ask for a sector where the margins are narrow, and the room for financial manoeuvres is restricted, to say the least. It could certainly make employers think twice before recruiting individuals participating in the NHSPS. Clearly, in service provision contracts, it might be impossible to avoid such individuals transferring as part of the contract.
For more background information regards the increase in employer contributions, please read our ebriefing from September 2018.
Lower paid employees, however, may benefit from the changes that are currently keeping finance directors awake at night. Employee contributions might reduce, or the rate at which their benefits are earned might increase. There has been a fall in the costs attributable to employee characteristics, including a lower than expected increase in life expectancy. Under the cost control mechanism introduced in 2015, this means that employees should pay reduced benefits or earn increased benefits. The Government has indicated that in the NHSPS this might mean that employees earned 1/48.1th of their average salary each year instead of 1/56th. In fact, due to a recent case impacting on public sector schemes, the Government has paused this change, as the cost control calculations are affected by the case.
This might be a good news story if other reports of employees struggling to remain part of their pension scheme were not so concerning. In recent research by the Financial Times, numbers of employees opting out of the NHSPS were five times the rate of those opting out of the Local Government Pension Scheme. Royal London (a pension provider) calculated that the opt-out rate for the NHSPS is about 16% based on calculations between 2015 and 2017. It appears that an increasing number of employees would rather have the money in their pocket for whatever reason rather than locked away for the future. One NHS trust has started recruiting with a salary package that offers more cash in hand and no pension provision. The reported take up of these roles has been enthusiastic. For some NHS employees, the contribution rate of 7-9% appears just too much in the face of the rising cost of living, which has yet to be matched by their rising salary. Whilst the potential for an ever more comfortable retirement is very real, the affordability of the years before those halcyon days might mean they never come.
At the other end of the earning spectrum, higher earners are also turning away from contributing to a pension. Their reasons are less to do with keeping their families solvent and more to do with tax efficiency. The Government is increasing the lifetime allowance, but not so much as to mean that it is still the most tax efficient place to invest monies. A change to the accrual rates would only exacerbate this situation as it will mean that wealthier employees will earn more pension rights, which in turn will attract more tax.
Navigating the changes
- For employers with employees in the NHSPS, the budgetary concerns are real and immediate and mean some tough budgetary decisions going forward from 2019/2020. Discussing the problem with trade bodies and other members of the sector is advisable to glean what other providers are planning to do. The tension between wanting employees to prepare for their futures, and so encouraging them to continue in their pension scheme, balanced against the crippling cost of the scheme for employers, is uncomfortable.
- Health and care providers who have employees in the NHSPS should check the service contract to see whether they are eligible for additional funding.
- Providers negotiating contracts going forward where they are likely to inherit NHSPS members may want to negotiate indemnities to protect themselves against future contribution hikes.
- Whilst an ideal scenario for employees would be for the Government to reduce the employees’ contribution rate instead of increasing the accrual rate, this would still hit the employers, as their contributions would remain high and the number of employees choosing to engage in the scheme may increase, or the drop-out rate may decline.
For more information on this briefing, please contact Doug Mullen.
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