Final Pay Controls

Final Pay Controls (FPCs) are a key aspect of the NHS Pension Scheme, designed to limit excessive pension increases in the final years before retirement. Understanding FPCs is essential for employers, as they can lead to significant financial liabilities.

Who Is Affected?

Before 2014, there were no restrictions preventing large pay rises before retirement to increase pension benefits. The introduction of FPCs changed this, affecting 1995 section and 1995/2015 transition members. These sections of the scheme base pensions on final salary calculations, unlike the 2008 and 2015 sections, which are unaffected by FPCs.

Final pay controls impact:

• Practice managers
• GPs with mental health officer status
• Nurses
• Non-GP providers (e.g. Practice manager partners, Nurse practitioner partners)

How FPCs Work

For members under the 1995 section, pension benefits are calculated using the best of the last three years’ pensionable earnings. If a member’s pensionable pay rises by more than 7% above the Consumer Prices Index (CPI) in the final three years before retirement, the employer may face a charge. This threshold is designed to prevent pensions from being artificially inflated.

The allowable pay increase is the lower of the following:

1. The pensionable pay in the relevant year.
2. The previous year’s pensionable pay plus CPI inflation, plus 7%.
3. The percentage increase in the current year’s pensionable pay compared to the previous year.

Example:

In year 1, the allowable amount is the lower of:

1. The pensionable pay in the relevant year – £45,000
2. The previous year’s pensionable pay plus CPI inflation, plus 7% – £39,000 + 8.9% = £42,471
3. The percentage increase in the current year’s pensionable pay compared to the previous year – £45,000 (year 1 pay) / £39,000 (year 2 pay) x £39,000 = £45,000

The allowable amount is £42,471 as this is the lower figure, and there is excess pensionable pay of £2,529 (£45,000 – £42,471).

Although the amount of £2,529 for additional pensionable pay may seem relatively small, the final pay control is calculated on the excess pension benefits based on the excess pensionable pay and would result in a final pay control charge to the employer of £15,591.29.

Impact on Employers

Exceeding the 7% threshold triggers an FPC charge from the NHS Business Services Authority (NHSBSA). This can lead to:

• Financial strain from unexpected charges.
• Complications in negotiating pay increases for senior staff close to retirement.
• Challenges in retaining experienced staff who take on additional responsibilities.

Available Exemptions

Certain situations exempt employers from FPC charges, including:

• Pay increases due to a national contract or framework agreement.
• Promotions that result from transparent and competitive processes.
• Salary sacrifice arrangements ending.
• Changes in partnership profits or share allocations tied to other members leaving or changes in practice structure.

Managing FPC Risk

To mitigate the financial risks associated with FPCs, employers should:

• Keep detailed records of pensionable pay.
• Consider staggering pay increases to stay below the threshold.
• Advertise vacancies externally to ensure a transparent and competitive process.

What To Consider If A Final Pay Control Arises

Where a final pay control arises, the employer will need to agree who stands this charge, in the instance of a GP partnership will this be the current partners or the partners who were there at the time the staff member was employed? Ideally, this point should be covered in your partnership agreement.

If the charge levied is significant, you may be able to agree to repay this to NHSBSA over several years.

FPCs are an essential consideration for employers participating in the NHS Pension Scheme. Proper understanding and planning can help employers avoid costly charges. If you require any further information, please contact a member of the BHP healthcare team.