How your pension will rise under the new contract
GPC negotiator Dr Simon Fradd explains why the new deal will pay dividends for GPs' pensions
he basis of the new contract deal is an increase in total resources of a third over three years. This means there will be a 33 per cent increase in profits if expenses rise by no more than 33 per cent; if expenses rise by less, profits will go up more.
At present expenses form 60 per cent of practice revenue, the rest being practice profits. Thus the expenses-to-profits ratio is one-and-a-half to one.
Consider a practice with revenue of £100,000; expenses are £60,000 and profits are £40,000. If that practice makes savings of 20 per cent on its expenses, these will increase the profits by £12,000. This is an increase of 30 per cent in profits.
If expenses fall by 1 per cent, profits will rise by an additional 1.5 per cent.
The ratio of staff costs to total expenses is the same 60 per cent. Under the new contract, staff costs will increase in two ways. There is the pay increase our staff will be entitled to under Agenda for Change of 10 per cent over three years. Because staff costs are 60 per cent of total expenses this rise only increases total costs by 6 per cent (10 x 0.6).
The second element of any increase in staff costs is the employment of additional staff. This will be almost entirely limited to more nurses. A
28 per cent increase in the wage bill because of increased staff numbers would only add 17 per cent to total expenses (17 x 0.6).
The conclusion from these two elements is an increase in total expenses of 23 per cent. This is 10 per cent less than the overall increase in expenses allowed for in the funding of the new contract. The difference will increase profits by 15 per cent in addition to the basic pay rise of 33 per cent resulting from the overall increase in resources of 33 per cent.
The average net increase in profits is therefore 33 per cent plus 15 per cent or 48 per cent. This figure depends on the accuracy of the promise on the increase in staff numbers, but my colleagues and I believe it to be conservative. It is also an average assumption; some practices, like my own, will have a much lower increase in expenses and others will be higher.
The important thing is the average increase in net profits is the figure that will be used to calculate the dynamising factor. This factor is applied to each and every GP's lifetime earnings pool at retirement. Therefore everybody's pension will increase by this amount regardless of whether their personal income has risen at this rate.
In addition, new elements will become superannuable and will further increase our pensions.
·All locum work and out-of-hours work for an NHS body are to be superannuable, adding 3 per cent to superannuable income and the dynamising factor.
·All NHS work will be superannuable, including items such as fees for Benefit Agency reports, adding between 2 and 5 per cent. I have conservatively modelled this as 1.5 per cent.
·Profits from premises, which at the last Inland Revenue survey for 2000 were £841 per GP, will also be included and increase the dynamising factor by 1.13 per cent.
In calculating the factor, all these effects compound and are multiplied, not added, ie: 1.48 x 1.03 x 1.015 x 1.013 = 1.567.
Pensions are calculated by uprating lifetime earnings each year by the dynamising factor. A GP who is earning £69,000 a year who qualified at age 24 and has 36 years' NHS service at age 60 will have £2.484 million of dynamised earnings. This figure is multiplied by 1.4 per cent to calculate a pension of £34,776.
In three years' time a similar doctor will have the same lifetime earnings if we ignore the higher earnings over the next three years. At retirement the new dynamising factor of 1.567 has to be applied to the earnings pool, which as yet has only been uprated to 2003 values.
So £2.484 million is multiplied by 1.567, producing lifetime dynamised earnings of £3.892 million. Applying the pension factor of 1.4 per cent as before gives a pension of £54,448.