The private sector can learn from the public sector's risk-sharing approach to DB pensions, says the DOH's Tim Sands
The impending death of defined benefit (DB) pensions in the private sector is often the subject of media reports. Employee membership of private sector DB pension schemes fell from 3 million in 2006 to 2.7 million in 2007, according to the Office of National Statistics. Less than half of members of private-sector DB schemes are in open schemes. Commentators cite a number of reasons for this, including the tighter regulatory regime, lower and more volatile investment returns, and increased longevity.
The position in the public sector is somewhat different. The number of active members in pension schemes has grown from 5 million in 2006 to 5.2 million in 2007, with the NHS Pension Scheme accounting for 1.3 million of these. Criticism has often been levelled at unfunded schemes such as that of the NHS, where contributions above the cost of pensioner benefits are used to offset current government spending while any shortfall in the future will be met from future government spending. But the rhetoric about gold-plated pensions disguises a significant shift that has occurred in how risk is shared in schemes such as the NHS Pension Scheme. This may point a way forward for funded pension schemes.
The NHS Pension Scheme was facing significant potential increases in the employer contribution rate of 14%, mainly because of forecast increases in longevity and rises in NHS pay. However, it is greatly valued by staff. A 2004 survey for the NHS Confederation found 70% of employees were satisfied with the scheme, and only 3% were dissatisfied. The NHS needs to retain its highly-skilled staff and it is clear that the NHS Pension Scheme has a strong positive impact on retention because almost half of respondents to the study said it was an important factor in them continuing to work for the NHS.
When the government announced its intention to move the pension age in public-service pension schemes to 65, there was a strong reaction from trade unions and staff, including industrial action in the civil service and local government. Following negotiations, the government agreed not to change the pension age for staff currently in the NHS scheme, but insisted public-service schemes should be affordable to the taxpayer.
To address this, a new deal for sharing costs and risks was reached with the NHS trade unions in which any increases in costs that result from increased employee benefits, such as higher pay progression or longevity improvements, will in future be met by the employee, while the government would continue to carry the financial risk, relating, for example, to higher inflation. This agreement resulted in an initial increase in member contributions of 0.5% on average with possible further rises when valuations take place every four years. The cost-sharing agreement has also led to a stronger role for NHS employers and trade unions in the governance of the scheme and a stronger partnership between the two.
The loss of staff, particularly trained staff, is very expensive to the NHS, resulting in recruitment, training and agency costs. The NHS workforce profile is older than the workforce as a whole and the nursing workforce in particular has disproportionately high numbers of nurses reaching retirement age. The NHS Pension Scheme should play an important part in reducing losses to the workforce and increasing the current average retirement age of 62 years.
DB pension schemes are undoubtedly a costly benefit, but they have a powerful retentive effect. Employers that retain open DB schemes have an opportunity to differentiate themselves and maintain a competitive edge in recruiting and, especially, retaining staff. The NHS experience is that employees are prepared to share the financial risk of DB schemes. This approach provides a way forward for maintaining DB schemes where it supports the business model.
Tim Sands is deputy director of NHS Pensions at the Department of Health
Key Points†
- The NHS Pension Scheme is highly valued by staff and has a significant impact on retention.
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