More than 1,500 National Health Service staff now earn £100,000 or more a year. About 280 are on between £200,000 and £300,000 and 17 get more than £300,000. These numbers, uncovered by the Taxpayers’ Alliance, are more than a year old and come from the 2023-24 financial year. Ann James, who stood down as chief executive of University Hospitals Plymouth in March 2024, was then top of the pile, with £397,500 in total remuneration, including salary, bonus and other benefits. What kind of pension will these people receive when they retire?
Working that out requires you to take an Alice-style leap through the looking glass into the wonderland of civil service pensions, where numbers are big, timescales are long and wild acronyms bound unhindered across the endless veldt of actuarial tables. I am not an actuary, but I had a native guide in the shape of the pensions expert John Ralfe, (also not an actuary), who helped me through some of the concepts and broad numbers. Any mistakes are mine, not his.
The first big difference between private sector and most public sector pensions is how they are funded. Some state bodies, including local authorities and the Bank of England, have private sector-style schemes, which own assets (shares, bonds, property) from which they will pay out to pensions in the future. These assets have been bought over the years from contributions from staff and employers.
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Most of the big public pension schemes, however — the armed forces, the civil service, the NHS — are unfunded. There is no pool of assets. Instead there is a government guarantee to pay what will be needed in the future. Current payments to retired staff are met out of contributions from this generation of workers, topped up as needed from taxpayer funds.
The second big difference is that these schemes provide defined benefits. When you retire, the computer works out what you are entitled to based on your length of service and your pay level. What you get out is not tied to what you have put in. The private sector used to offer these defined-benefit schemes, but now almost all have shut down, to be replaced by defined-contribution systems, where you only get out what you and your employer have put in.
The public sector plans are very big, much bigger than anything that exists in the UK private sector. The annual report for the NHS scheme shows just how big. In the 2023-24 financial year, the scheme covered 7,823 employers: NHS trusts, GP practices, local authorities, arm’s length bodies and others. It had 1.8 million active members; another 800,000 deferred (people who have worked for the NHS, built up some pension entitlement and moved on, or retired people who have not yet taken up their payments); and 1.4 million pensioners.
The calculation of benefits will be familiar to those older readers who had, and hopefully are hugely enjoying, a private defined-benefit scheme. Upon retirement your annual payment is calculated as a fraction of your salary for every year of service. In the NHS the fraction is 1/54th. You build up entitlement as you go: ie 1/54th of your annual salary is added to the pot, so you end up with a pot based on your career average pay. Crucially, the pot is increased each year by the consumer price index rate of inflation, plus 1.5 per cent. Other public sector schemes have different accrual rates and indexation arrangements.
The annual report reckons that to provide that level of benefits in a normal scheme would require contributions from the employer of 23.7 per cent of pay. Employee contributions vary depending on salary, from 5.1 per cent for the lowest paid up to 14.5 per cent for those earning more than £75,663 a year. (Contribution levels have been rejigged since that annual report and the present highest rate is 12.5 per cent for those earning over £63,995.) The scheme’s total liability, the estimated cost of meeting future benefit payments, is £431 billion.
You might think that must mean that the government is constantly injecting cash to keep the benefits flowing. That is not always the case. In the 2023-24 financial year the scheme took in more in pension contributions than it paid out in benefits, so much so that it was able to return £4.3 billion to the Treasury. As Ralfe points out, however, annual cashflows are a red herring when it comes to valuing such a large and long-lived scheme.
Back, then, to the original question: how much should these top managers expect by way of pension? Here is a made-up example. If he or she had worked for 20 years and had average earnings of £80,000 a year, the annual payment on retirement would be 20/54ths of £80,000, so £29,629 a year. The actual number would be different because of the indexation increases and there are complications with personal taxation. Having said that, the big tax issue recently disappeared when Jeremy Hunt abolished the lifetime pension allowance (then just over £1 million) when he was chancellor. That decision was made in part because of pressure from senior doctors concerned about going over their personal allowances.
We do not need fictional calculations, however, as there are real-life examples. Ann James’s pension arrangements are set out in the University Hospitals Plymouth annual accounts. Her annual payment is £75,000 to £80,000 a year and the “cash equivalent” measure of her pension pot is a shade over £2 million. The annual report lists three other staff with pension pots worth more than £1 million.
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What effect does the promise to pay these future pensions have on the government’s finances? The total liabilities of all the public sector schemes are estimated at £1.4 trillion, but that number is not included in the £2.7 trillion national debt. It has always been deemed a “contingent” liability and so able to be excluded. Ralfe thinks that is rubbish: “The government is on the hook for these pension payments. It is a liability like any other and should be included,” he said. Rachel Reeves would almost certainly disagree. Adding in the pensions would take the UK’s debt-to-GDP ratio from 98 per cent to 150 per cent, an increase that would utterly swamp her fiscal rules. It has always suited chancellors to keep the public pension numbers tucked away out of sight but their successors will, at some point, have to confront them.
Dominic O’Connell is business presenter for Times Radio
