With the costs of teachers’ Defined Benefit (DB) pensions on the up, Independent schools in the UK continue to wrestle with the difficult decisions that result.
Over 200 schools have already formally exited or confirmed their intention to do so, and it appears that many more expect to leave the Teachers’ Pension Scheme (and its Scottish equivalents – note that where we refer to ‘TPS’ we mean defined benefits teachers’ pensions throughout the UK) in the near future due to the level of employer contributions.
Schools are already very aware that the employer’s share of contributions to TPS rose to 23.68% of teachers’ pay in September 2019 and will remain at this level until 2023 for Scotland or 2024 for England and Wales, when they are expected to rise again.
Some independent schools seem reluctant to leave the TPS earlier than other schools in their area, due to the perception that it will then make it more difficult to recruit talented and experienced teachers who value their membership of TPS.
This is an emotional, political, and of course financial topic, with many different arguments for and against change.
For how long the status quo can continue given the high current costs, and the expectation of further increases from 2023/4, is of course a matter for each school to consider very carefully.
We’ve written previously on the background to the significant increases in contributions for sponsoring employers and on the key issues for independent schools to consider, as well as on the recent legal decision regarding the McCloud Judgement on public sector pension reforms.
There’s a lot going on and things have been moving quickly in the last eighteen months or so.
So, where are we now and what do we believe is on the horizon?
Here are the key points for anyone who is new to the subject or needs a quick briefing:
Contribution increases from September 2019 will remain in place until 2023/4 when the next review will be announced. We can only expect further increases from 2024, with another significant increase in employer contributions. How much is too much?
The public sector pension reforms introduced in 2014 and 2015 were intended to alleviate the cost of providing future service final salary benefits to public sector workers. The McCloud Judgement effectively means that the Government needs to make good on any shortfall in pension benefits had the original version of the workers’ defined benefits pension scheme remained available. The Government has lost its appeal against this judgement and the consequences will affect teachers, although the details of how any remedies are to be provided remain to be worked out through the various Employment Tribunals from which the judgement originated.
TPS currently requires participating employers to make the scheme available to all eligible teachers. Changes will soon be introduced to allow schools to offer an alternative arrangement to new recruits, with the TPS remaining in place for current members. This is likely to be introduced later in 2021. We don’t believe this will be an attractive option for independent schools for two key reasons: (1) it won’t reduce the high level of employer contributions for current members, it just avoids further increases as new teachers join the payroll; and (2) it creates a two-tier approach to pensions for teachers in each affected school, which may not be desirable.
There has been considerable resistance to independent schools leaving TPS, particularly from teachers’ unions, which is to be expected. Unions have briefed their members with a robust defence of their right to remain in the TPS. Clearly there are strong arguments on both sides, and it’s essential that teachers are provided with clear and balanced information so that they can reach an informed opinion.
Schools that decide to leave TPS need to select an alternative defined contribution workplace pension. A great deal of attention has been given to the providers of certain pension arrangements, particularly those who have marketed themselves as specialists in the independent school sector. Whilst the selection of a suitable provider is important, we suggest that this is secondary to carefully considering the design of a school’s proposed new pension arrangement. In particular, decisions about contribution levels and connected benefits such as death-in-service cover are absolutely essential before a specific pension scheme is selected.
We are able to provide schools with an unbiased opinion on the key issues and assist in explaining changes, and the potential consequences of those changes, to teaching staff. We have a ‘toolkit’ available to assist independent schools in managing and communicating the change from defined benefit to defined contributions, with a focus on engaging with teachers who need clear high-quality information.
As usual we will continue to monitor progress and developments on this complex subject, so please look out for updates from us from time to time.
We would be very pleased to hear from any independent school that needs advice or requires a second opinion. Here are the key areas where we believe we can help:
We offer a free one-hour initial consultation to independent schools if you and/or your governing body would like to explore any of the above further, or want to discuss your school’s particular circumstances.
Please don’t hesitate to get in touch.
Topics: Workplace Savings