A new report suggests the profits made by NHS subsidiaries are to a large degree down to putting employees, who would be in the defined benefit scheme in the NHS, into defined contribution schemes, with VAT savings accounting for further gains. 

Commissioned by Unison, the report by Trinava Consulting published on Wednesday says that around 30% of the annual operating profits of NHS-owned companies come from reduced pension contributions. 

Trinava states that “profit margins excluding pension savings are low, and likely driven by VAT savings”. 

It also suggests that most of the work coming to so-called ‘subcos’ is from the NHS trusts that own them, debunking the assumption that external work would help drive profits. 

“Despite running for many years, very few subcos have won any significant external customers. Their profits mainly come through skirting around tax and employment rules,” said report author Vivek Kotecha. “Likely changes to VAT rules and restrictions on altering workers’ terms and conditions put the future of these profits in doubt, and there is no reason to encourage NHS trusts to set new ones up.”

The NHS Support Federation, a group of researchers and journalists, lists 29 NHS trusts that have created subsidiary companies and eight that have abandoned plans to do so. 

Pensions are driving profits because the difference between public and private sector pensions is now huge. The employer contribution rate for the NHS Pension Scheme is 23.7%, while it can be as low as 3% in DC schemes. The government has ruled out increases to minimum contribution levels in this parliament.

Kotecha says the difference between actual pension costs and the estimated costs if all employees were on NHS pensions “is large and growing yearly” as staff turnover reduces the number of original employees that were TUPEd over.  

“It’s noticeable that operating profit would dramatically reduce (by around 35-45%, excluding FY23) if pension costs were roughly similar to typical NHS organisations,” he writes. 

Unison's outgoing general secretary Christina McAnea said: “This report explodes the myth subcos offer anything other than a way to deny staff the same pay and conditions as NHS workers.” 

She said support staff deserve to be treated like other health workers. “Subcos have never been the right way to deliver health services, and it’s time to return staff stuck in subcos back into the NHS,” she said.

Not all employees have a public sector backer they can ask to provide a DB pension. Unison's membership includes workers in privately run care homes, which tend to employ people on low pay and pension contributions.

Assistant general secretary Jon Richards said: “Every worker needs a pension they can rely upon in their old age. If we want people to work in the NHS and care sectors, it's only right for them to expect a decent income when they retire. The Fair Pay Agreement and national care service will be enormously important steps forward.”

Last year, the government reacted to union campaigns with revised guidance so that new subcos are only approved in limited circumstances, and only where unions support the move and staff receive NHS terms. Unison said that days after the announcement, three trusts in Dorset abandoned plans to shift 1,700 support workers to a subco. 

However, the government did not include existing subcos in the new guidelines. Unison now wants to see current employees of NHS subsidiaries receive NHS contract terms. 

Some of those currently employed by NHS subsidiaries have made their discontent clear. In Yorkshire, more than 180 porters, domestics, catering and security workers employed by AGH Solutions – a private company whose sole shareholder is Airedale Hospital Foundation Trust – have already walked out several times in a dispute with management. 

The issue of a pension cliff-edge between the public and private sector is mainly being fought over on public sector ground, and not just in the NHS. Solent University could see strikes after it moved 286 professional services employees into a subsidiary, removing their access to the Local Government Pension Scheme. 

Creating subsidiaries is not the only way the private sector is creeping into the NHS, education and related providers; for example, increasing numbers of general partnership surgeries or their premises are now owned by private equity houses.