Sunday, 3 January 2016

Is the NHS Pension Scheme fragile?

Is the NHS Pension Scheme fragile?


This is from NHS BSA FAQs '

Where do the contributions go to?

The NHS Pension Scheme, is an unfunded occupational scheme backed by the Exchequer, which is open to all NHS employees and employees of other approved organisations. Pension contributions for individual scheme members are collected by NHS Employers and are forwarded to NHS Pensions Other income is also received, for example from people transferring from other pension schemes in the form of a cash equivalent transfer that buys a service credit in the NHS scheme.

The income is used to offset the payments that the scheme makes to pensioners or people leaving the Scheme.

Details of income received from 1995/96 to 2009/10 is available here.

Employers and employees pay contributions based on a percentage of pensionable pay. Every four years the Government Actuary conducts a full actuarial review and recommends contribution rates in their Valuation report to the Secretary of State for Health. This is based on the use of a ‘notional fund’ as if all income from the start of the NHS Pension Scheme had been invested. As a result the Scheme is unfunded as there is no actual asset for a ‘pension fund’ on the balance sheet of the pension scheme.

At each valuation any deficit or surplus in the notional fund may result in a recommendation to adjust the level of contributions from the estimated future cash flows of the pension scheme.'

‘‘……… there is no straight link between the pension contributions paid in and the pension paid out.’’


So the NHS employees pay into a pension scheme that has no real money held in it, no asset, no pension fund. This income into the NHS pension scheme is paid out as NHS pension to past/retired eligible employees. Every four years the current employees of the NHS contribution into the scheme is adjusted and set so that the needs of the NHS pensioners can be met.

If you had a new financial entrepreneur offering you such a scheme, you would not pay a penny into it. In terms of the mechanics of how the scheme works it is like a Ponzi. The two differences between a true Ponzi and this one is that the NHS pension is ‘backed by the treasury’ and the primary intention is not to defraud using a fraudulent investment.

Wikipedia states

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator.

Ponzi schemes sometimes commence operations as legitimate investment vehicles, such as hedge funds. For example, a hedge fund can degenerate into a Ponzi scheme if it unexpectedly loses money (or simply fails to legitimately earn the returns promised and/or thought to be expected)………

Promoters also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time, ……………………….

Further commentary

The NHS pension scheme is thought to be ‘gold plated’ which in common understanding means it is secure and provides higher returns than other pensions. It services its commitment by the current contribution of its payers. It has no corpus, no fund, no asset. The pension scheme has already changed rules by delaying access to pension for some.

If the NHS is privatised or if less people worked for the NHS then their contributions could rise (according to the four yearly actuarial valuation) and if very few people are employed by the NHS directly then the NHS pension will fail to legitimately bring in revenue to service its commitment to pensioners.

In effect, paying into the NHS pension could be like paying National Insurance. National Insurance it is not actually insurance with defined benefits claimed against contracted criteria, it is additional tax with benefits decided by government policy. Similarly, the NHS pension, since there is no asset or fund, it becomes dependent on the country’s economy and government policy. There has been significant opposition to the NHS pension changes, yet because it is government policy defined, the government uses its authority to make the changes to cope with what is very fragile.

It is a worry but….
The biggest reassurance is that the NHS pension is backed by the treasury which means as a strong western economy NHS staff pensions are safe.

The concerns are loaded towards/against younger NHS employees. Many are worried about the sustainability of public sector pensions, the CBI in UK talks about a £1trillion pension black hole.

It is best to think of reform of the NHS pension by creating a ring fenced fund which is then backed by the treasury. That will be a sign of mature strong financial management which reduces the vulnerability of the NHS pension. With an aging population, with NHS being the largest employer in UK we are talking about a lot of old people who are or will be ex-NHS, any measure to make their support structures stronger will be worth its while.


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