Growth in NHS agency workers and the reduction in the Lifetime Allowance – unlikely bed fellows?

The Lifetime Allowance (LTA) is scheduled to reduce to £1m in April 2016. This was a Labour party aim too, so I suspect we will not see this change if there is a new Government.

The unintended consequences of a reduction in the LTA are that senior employees throughout UK plc will give serious thought to their continued membership of company pension schemes. They may well not wish to face a 55% tax charge on accumulated retirement benefits greater than £1m. It is unlikely that this same group will simply accept the loss of further pension accrual without compensation from their employer in the form of extra salary, especially when there may well exist a route by which they can significantly increase their earnings, and with this increase go about funding through various savings vehicles, such as Individual Savings Accounts (ISAs), the gap in their retirement income needs.

This morning, Andy Burnham the Shadow Secretary of State for Health was on the Today programme discussing the state of affairs with the financing of the National Health Service (NHS), specifically the subject of agency workers. Apparently, the growth of recruitment from this source is considerable and is detrimental to NHS finances. His stated objective is to try and reduce the dependency on agency workers and thus help to reduce costs for the NHS. With the reduction in the LTA effective from April 2016, is this not a forlorn hope?

I would not be surprised, with the LTA falling to £1m, to see large numbers of employed staff aged 55 or over leaving/retiring from the NHS when they realise they can avoid and/or reduce their exposure to the 55% tax charge by doing so. It is likely that at £1.25m for the remainder of the 2015/16 tax year, a number will seek to retire pre April 2016, with this trend merely continuing into the years ahead.

However, let us suppose that the NHS can’t afford to lose these highly skilled, experienced and long-serving employees (which might seem a statement of the obvious) and in turn, these same Doctors, Consultants and Nurses don’t in fact want to give up their employment and reach for their slippers at age 55. What’s to be done? Market economics suggest that it is unlikely that this group will simply resign their pension scheme membership and thus accept a lower benefit package, rather they will leave and seek re-employment via agencies where pension membership is not a material element of the package, but where this same package is significantly greater than that which was paid as an NHS employee. Andy Burnham’s attempts to reduce the cost and dependency on agencies will, I suggest, be hampered by the lower Lifetime Allowance resulting in the most experienced and valued NHS employees leaving direct employment and realising a higher pay packet, at tax payers expense, via agencies.

As the Government seeks to increase its tax take (yet another raid on the pensions piggy bank) by targeting employees with pension funds valued at more than £1million, a level which will impact a growing number of middle income earners, as tax payers, we will in fact end up funding increased costs of employment within the NHS. Indeed, this same scenario can be played out in any number of public sector organisations. Is this good value for the tax payer?

2 thoughts on “Growth in NHS agency workers and the reduction in the Lifetime Allowance – unlikely bed fellows?

  1. Conor Ellis August 5, 2015 - Reply

    It is a fair point to consider that many staff may leave the NHS, if they can envisage they will breach the £1m cap, now being put in place. Arising from that, one can see how this could link to driving the agency agenda that political parties have made statements simulataneouly on increasing 7 day services/ working and on reducing reliance on non NHS staff.

    A separate point that should be noted by NHS staff, that the pension cap is mostly a public sector issue, in which significantly fewer staff in the private sector ever see the cap as an issue, given their pensions do not offer anything even close to this type of reward ( final salary pensions). Most commercial companies got rid of these at the turn of the century. The Institute of Fiscal Studies in 2014 concluded public sector workers earn a 1/5 more per annum than the private sector, when pensions are factored in. A point worth considering in the fuelled debate about annual increases/standards of living etc.

  2. conor Ellis August 5, 2015 - Reply

    With the LTA reducing again in 2016, one can see a number of senior NHS staff deciding to join agency or self employment .This has two impacts, the first is the so called “brain drain” as experienced staff are replaced by less experienced, the second that this flies in the face of both aiding the 7 day working that poiticians have made great store of. All of this occuring at a time when the NHS clinical service numbers on demographic factors alone (particularly for medics) will struggle over this Parliament.
    A further point should be noted. The inference is that this could represent a real cut to public sector workers pay. It does for those who breach the cap. However it should be looked at in the context that final salary pensions have mostly disappeared many years ago from the private sector package. According to the Institute of Fiscal Studies in 2014, when pensions were counted as part of lifetime earnings public sector workers were often a 1/5 better off than the private sector. Most private sector staff pension holders won’t come close, even to to the newly reduced threshold. Something that should be taken account in terms of the strength of feeling towards the cap. The issue remains though, its likely people will opt out if it personally effects them and the public sector may then rehire from various sources those same staff.

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