Final Pay Control (FPC)

Final Pay Control (FPC)

What is it?

For those of you who keep up with medical accounting, a final pay control (FPC) is a financial penalty, charged to an employer, where an NHS Pension member’s pensionable pay increases above an allowed amount.

It is applicable to all members of the 1995 pension scheme, who have a final salary link. This would be those treated as officers in the NHS Pension scheme, such as practice staff including nurses, but not practitioners i.e. GPs or locums.

Pension benefits for officer and practice staff members of the 1995 pension scheme are calculated using the best annual pensionable pay from the three years prior to retirement. Therefore, if there is a large increase in pay during that period, the pension benefits would also be increased.

This charge was introduced in April 2014 to prevent employers from inflating pension benefits by awarding large pay rises. The charge is made on the employer to repay the excess pension benefits generated.

Pensionable pay is allowed to increase by the lesser of:

• Member’s pensionable pay in the relevant year, or
• The member’s pensionable pay in the previous year plus X (X= inflation plus 4.5%), or
• The percentage increase in the member’s pensionable pay for the current year compared with the previous year.

Currently there are very few exemptions to the charge, the main ones being:

• A pay increase as a result of a genuine move in employment to a new employer with a higher rate of pay.
• Increase in pensionable pay due to cessation of salary sacrifice taken out before 1 April 2014.
• Pension benefits awarded on death of a member.

If you believe you will be caught by a charge, it’s now your responsibility to inform the NHS Pension Scheme using from FPC1, which should be submitted at the same time as the AW8 retirement form.

Who could be impacted?

From our experience, those at risk could be employees, such as practice managers or nurse practitioners, who transition to a partner. Partnership profits can fluctuate from year to year and this uncertainty can lead to an unexpected final pay control.

As a partner, they would be their own employer, so the questions arise: Who is responsible for any final pay control charge? Is there anything in the partnership agreement regarding this issue?

Also, what happens if you’ve identified a potential charge for an employee, but it won’t be confirmed for a while and you have retiring partners? That retiring partner should really pick up a share of the charge, but what provision is included in the accounts.

These are all provisions that should be detailed in the partnership agreement, but often we see no mention of them.

Other groups who can be impacted are employees who’ve had pay rises within four years of drawing their pension. When the pay rise was made, their employers perhaps weren’t aware the employee would opt to draw their pension early, so bringing it within the three-year timescale.

How will I know if I will be impacted?

The rules are complicated, and the result can vary widely from member to member. As a basic rule of thumb, if pensionable pay has increased by more than 4.5%, you could face a problem and we would encourage you seek advice.

Any good news ahead?

Hopefully, yes! The Department of Health and Social Care is consulting on some proposed changes to NHS Pension schemes and one part of that review surrounds final pay controls.

They are currently seeking comments on the proposals and draft legislation, which can be submitted online; the window for submissions closes on 8 April 2021.

A summary of the proposed changes to final pay control legislation is as follows:

• An increase in ‘X’ in relation to the allowable increase in pensionable pay. The proposed change is to increase X to inflation plus 7%.
  An increased list of exemptions where pensionable pay has risen as a result of the following:
  National clinical excellence awards.
• Nationally agreed contract e.g. Agenda for Change pay scales.
• Promotions following open and fair competition, even if with the same employer.
• ALL salary sacrifice arrangements.
• Fluctuations in profit-shares for non-GP providers.

The final exemption, on my list above, will have one of the biggest impacts on final pay controls.

The proposal suggests that, if pensionable pay increases beyond what’s allowed, it will be exempt if:

• the individual profit-share % for the member remained the same, or
• if any increase was a consequence of another partner leaving the practice.

Therefore, non-GP providers shouldn’t be penalised for genuine changes in partnership profits as long as their working pattern remains the same, nor will they be penalised should a partner leave and can’t be replaced, pushing up profits for the remaining partners.

Although we welcome these proposed changes, they aren’t yet legislation so we must continue to follow the existing rules.

Need help?

For more information about this or any other NHS Pension Scheme or tax issue, please get in touch with your usual Larking Gowen contact. You can find contact details on the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk

Louise Dean