The Teacher’s Pension Scheme

Like many other business sectors, the education sector is struggling with the rising costs of maintaining a pension scheme and unfortunately for many schools these costs are now becoming unaffordable. So what next for the future of the Teacher’s Pension Scheme (TPS) and independent schools?

Employer contributions to the TPS increased to 23.68% in September 2019. Since the announcement of this 40% increase in employer contributions, Independent Schools have been carefully considering their future involvement in the scheme. The impact of Covid on the sector is making this decision even more important for some schools and bringing it back to the top of the agenda for those Governors who may have previously postponed a decision with a “wait and see” approach.

Of course, no one needs reminding that it is an extremely ‘hard sell’ to justify a significant annual increase in fees to parents for the purposes of funding pension contributions with no tangible benefits for their children’s education.

The latest actuarial valuation of the TPS is in progress but unfortunately the outcome will not be known until at least early 2022. It is however expected that the net result is likely to be another increase to the employer contribution.

It is estimated that, as of November 2020, around 170 independent schools have left or have notified the Government of their withdrawal from the TPS since early 2019.

Governors should ensure their discussions on this matter are clearly documented as this decision will have a significant impact on the future of the school. A reminder of some questions to consider include:

• Is the increased cost to the school the best use of charitable funds and is it sustainable in the longer term?
• Is there a risk that contributions will continue to increase in the future?
• Could the TPS introduce a cost to withdraw from the scheme in the future?
• What alternatives are available to the school and how would you choose and administer the governance in relation to a different pension scheme offering?
• How would you implement any consultation process in relation to this change and how would this affect staff moral and retention?
• How would an exit from the TPS scheme affect the school’s ability to recruit quality teaching staff in the future?
• If the school decided to stay in the TPS how frequently should the decision be reviewed?

The Department of Education announced on 11 November 2020 that it has agreed that from spring 2021, Independent Schools will be allowed a “phased withdrawal” from the TPS.  This will allow Independent Schools to choose to opt out of TPS participation for future teaching staff whilst permitting existing staff to remain as active members. New teachers would then be enrolled into an alternative pension scheme.

Draft regulations will be subject to consultation. It is the intention that the final regulations will come into force in spring 2021 and Independent Schools will be able to request phased withdrawal from then. Perhaps this is an alternative to full withdrawal from the scheme for the Trustees to consider, but how will this be perceived as fair for new starters?

If the School does decide to exit the TPS, there will still be significant work to ensure the alternative provision is introduced smoothly and viewed positively by staff. An alternative scheme is likely to have fundamental differences in the way the individual members accrue a retirement benefit and may not actually be personally beneficial despite more options available as to how funds are invested and the options available to them at retirement.

The necessary consultation process is always a difficult time in any organisation. Teachers, especially those with long service, may benefit from discussing these changes with an Independent Financial Planner. By ensuring those affected fully understand the new pension scheme, the choices available to them and how this will impact their retirement plans will ensure genuine engagement and transparency during the consultation.  If your school chooses to offer this support, this should be provided by a Financial Planning firm well versed with these matters and able to conduct a seminar and/or individual financial advice surgeries.

The payroll implementation may also be complex, especially if the School is allowing each teacher to individually tailor their pension contributions (subject to auto enrolment requirements). This may be a good time for the School to outsource their payroll function if they have not already taken this step, in order to reduce the administrative burden on the Bursary team.

This last year has been one of the toughest the education sector has faced. It may be tempting to avoid a decision on the difficult subject of the future of the TPS when the Governors have already been faced with so much disruption this year. However, the financial pressures facing the sector mean that it an unavoidable key risk to be addressed and reviewed once more by the Board.

If you would like to discuss the topics explored in this article, contact Sarah Ediss.