Sky Views: When will the penny drop? The pensions crackdown is damaging the NHS

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By  Ian King, business presenter at Sky News

The German economist Horst Siebert called it the “cobra effect” – an illustration of how a well-intended government policy can, if badly constructed, create perverse incentives in an economy and, ultimately, unwanted consequences.

His example concerned how, during the days of the British Raj, the governor of Delhi became concerned about the number of cobras at large in the city. His solution was to introduce a reward for every dead cobra handed to the authorities.

Before long, though, the cobra population rose. Enterprising locals had begun breeding the snakes in order to claim the reward. The governor abandoned the scheme when the cost of handing out the bounties proved too high. The upshot was that the breeders, deciding the serpents were now worthless, released them into the streets.

A current “cobra effect” can be seen in the National Health Service. In his budget of July 2015, the former chancellor George Osborne cut the amount of tax relief to which higher earners would be entitled on contributions to their pensions. His rationale was that it was costing the Treasury too much in foregone taxes.

Most taxpayers can shelter £40,000 from the taxman in their pension in every tax year. Mr Osborne changed the rules so that anyone earning more than £150,000 a year would see their tax relief “taper” away at the rate of 50p for every extra £1 earned to the point where, for those earning £210,000 or more, they could save a maximum of just £10,000 a year in their pension. Anyone breaking the limit would be hit with a penalty tax rate of 55%.

At the same time, under the guise of saving the Treasury money, Mr Osborne cut the “lifetime allowance” – the amount of savings someone can accumulate in their pension pot – from £1.25m to £1m.

The Treasury was warned the cuts would have consequences. Sir Steve Webb, the former pensions minister, said the taper would create a system of “ludicrous complexity”.

But few people had much sympathy – this was, after all, an arrangement that would only hit the wealthiest in society. The Treasury ignored the warnings. It claimed just 300,000 better-off taxpayers would be affected – barely one in every 100 taxpayers.

The rule changes were introduced in April 2016 and, three years on, their baleful effect is now being felt in the NHS.

Some excellent investigative journalism by the Financial Times has revealed that, on a widespread basis, consultants – the most experienced hospital doctors – are now refusing to work overtime to clear backlogs for fear of being hit with unexpected tax bills.

The paper’s pensions correspondent, Josephine Cumbo, spoke to more than 40 NHS consultants who had been slapped with tax demands of up to £87,000 for breaching the annual limit.

The result has been that waiting times for some kinds of surgery have increased while the FT also found evidence that, in some parts of the country, the risk of delays to cancer diagnosis has increased.

When Mr Osborne introduced the taper, many private sector employers sought to navigate their way through the new rules by capping the pension contributions of higher paid employees at £10,000 a year and making good any shortfall in earnings by topping up their cash salary.

This did, of course, cost the employers and their employees more. But it avoided the risk of those employees being hit with a penalty tax bill.

However, due to the way the NHS pension scheme is run, that option was not possible in the NHS. So consultants – and, for that matter, anyone whose income is unpredictable and lumpy – are exposed to the risk of breaking the rules if their earnings prove higher than expected.

And the only way they can reduce that risk is to either avoid doing overtime or, in the case of some consultants, to leave the NHS pension scheme.

It was revealed in December last year that the number of people leaving the NHS scheme is five times higher than in other public sector pension schemes. A recent Freedom of Information request by the Health Service Journal, an industry publication, revealed that nearly 250,000 workers in England left the NHS Pension Scheme between 2016 and 2018.

The problem is made more intense because, although the taper in theory kicks in at £150,000, someone earning as little as £110,000 a year is at risk of being dragged into the net as it is applied to all earnings – including interest on savings and income from properties.

The damage done to the NHS does not end there. Due to Mr Osborne’s cut to the lifetime allowance, an estimated 2,000 GPs and 1,500 NHS consultants have taken early retirement during the last three years, rather than run the risk of breaking the limit. The result is a growing shortage of family doctors and consultants and an attendant rise in waiting times.

The problem is such that the British Medical Association has held emergency talks with NHS Employers, the body representing more than 200 NHS Trusts in England, about the staffing crisis.

Doctors and their representatives fear, though, that the penny has not yet dropped in government. During a debate in parliament, earlier this week, Jackie Doyle-Price, a junior health minister, admitted it was clear the rules on pensions were having “an impact on the behaviour of practitioners”, but said merely that the government was “listening carefully” to the concerns of NHS Employers.

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