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A challenging market

This is a challenging time for independent schools nationally in terms of fees and falling student numbers, while costs are increasing. 

One of the key issues many schools are facing is the increasing cost of providing teachers with membership of a defined benefit (DB) pension scheme such as the Teachers' Pension Scheme (England & Wales) and Scottish Teachers’ Pension and Superannuation Schemes (Scotland). 

We know from experience that many schools are looking to deal with these increasing costs by making a move away from their existing schemes, but are struggling to communicate this to their members in a way that demonstrates their continued support for staff.

To help you better evaluate your existing scheme, plus design and communicate your future scheme(s), we've developed this web page resource to provide some easy tips, guidance and takeaways as well as some more advanced strategies.

Blue text links to research and blogs that will provide further reading and lots of hints, tips and ideas. And we will continually be updating this page, so it's definitely worthwhile bookmarking for future reference.

You can use the yellow contents bar at the right to jump between each section, and if you do have any questions or suggestions, please don't hesitate to contact us.

 

workplace-educationThe Teachers' Pension Scheme: background

As you're probably already aware, the Teacher’s Pension Scheme (“TPS”) is available to teaching staff at independent schools based in England and Wales.  Under current legislation, when an independent school makes the TPS available to its teaching staff the offer must be made to all teaching staff. 

This, coupled with increasing costs of membership and changes to the benefits in recent years is making TPS more challenging to justify for schools' staff cohorts.

In addition, the TPS changed the benefits it offered in 2015 and put in transitional measures for staff nearer retirement.  However, similar transitional pension arrangements under the Firefighters' pension scheme have been ruled as unlawful age discrimination (the McCloud judgement) and we await the outcome from the Employment Tribunal to find out what changes and remediation will be required to address this. The UK Government has confirmed it will apply whatever changes are needed as a result of this across all the main public service pension schemes that made similar changes, including teachers’ pension schemes. Whilst the Government has an obligation to cover the cost of these changes for public schools, it remains unclear at this stage what will be expected of private schools that participate in the TPS, but given these will be mandatory scheme changes it is inevitable that private schools will be impacted.

Below is a summary of the TPS:

 

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About the Teachers’ Pension Scheme

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Based on career average revalued earnings which provides benefits based on earnings each year which are revalued annually to keep pace with inflation

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Mandatory employer and employee contributions

Employer contribution rate is 23.68% from 1 September 2019 to 31 March 2023

Employee contribution rates are between 7.4% and 11.7%, based on an earnings related scale

Salary sacrifice is not available for employee pension contributions

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Current accrual rate of 1/57th of pensionable earnings in each year

Revaluation for current members is linked to Consumer Price Index plus 1.6%

Revaluation for deferred members is linked to Consumer Price Index only

Option to choose to pay a higher contribution rate in return for a higher accrual rate

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Normal pension age is State Pension age (SPa), currently up to age 68

Option for those with a normal pension age of over 65 to pay additional contributions to reduce or remove any early retirement reduction that would apply, if they retire before SPa

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Limited access to full retirement freedoms

Tax-free lump sum option at retirement – £12 of lump sum for every £1 of annual pension given up with a current maximum of 25% of the employee's pension fund

Actuarially fair early/late retirement factors on a cost-neutral basis except for those with a normal pension age above age 65 who’ll have early retirement factors of 3% per year for a maximum of 3 years in respect of the period from age 65 to their normal pension age.

Phased retirement arrangements with the additional option of a third drawdown of benefits after 60th birthday

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Death benefits for dependants

Ill health early retirement options

(Source: Teachers' Pensions - relates to post-2015 section of scheme)

 

Resources

Case study: how we helped a school review their pension arrangement

Read more about how a school used our consultancy service to help them change their teachers' pension scheme options

Download now

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Changes to costs and contribution rates

How will you deal with them?

The costs of membership of the DB pension schemes around the UK (TPS, STPS and STSS) have increased substantially over recent years, with an expectation that this will increase again in the future (possibly sooner than we thought due to the McCloud judgement).

Schools need to manage their costs. 

We can help you to assess the impact on your costs of moving to a defined contribution (DC) pension scheme, where you have control over how much you contribute. 

This approach will allow you to have certainty over costs while still providing a valuable benefit to staff.  

Remember, a DB pension scheme provides a pre-determined outcome at an unknown cost to both you and your teaching staff. 

This certainty of outcome can often be a big factor in any change discussions. 

A defined contribution scheme can be beneficial because of the certainty of cost to you and your staff, as well as the additional flexibility for staff to ensure that the amount of money they put in - and how they draw their benefits - fits their lives. 

Fundamental to this change will be finding a provider that can support you and setting a contribution rate that is affordable but valued by your staff.

Whilst a DC scheme doesn't provide a guaranteed level of benefit, it does have these advantages amongst others:

  • Providing an affordable and flexible pension
  • An efficient way to save that will help employees save towards good retirement outcomes
  • Transparency over their savings and costs
  • The option to pay contributions via salary sacrifice – a cost-effective way to boost savings (there's more on this below)

Teachers' pension schemes

The DB challenge

Read on for more of our thoughts on reviewing
teachers' Defined Benefit arrangements:

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Top tips
Counting the cost of the Teachers' Pension Scheme / Scottish Teachers' Pension Scheme
Teachers' pension schemes are changing.  Here's our blog on what you need to know if you're considering a review
Join our new LinkedIn group
to get our latest insights for independent schools and network with your peers
Top tips for a pension review
If you're thinking of reconsidering your teachers' pension scheme options,
read our 4 top tips

 

"We greatly value the support provided"

“Punter Southall Aspire has been working with us for more than a decade. We greatly value the consultancy support provided, in that it serves to guide us through the often complex nature of pensions. Throughout our relationship, Punter Southall Aspire has proven reassuring, comprehensive and professional. This has enabled us to take prompt and effective action where required. We have also welcomed their support in ensuring that our member communication is clear and informative. We commend them for the service they offer."

Richard Gammage, Bursar, Lord Wandsworth College

“As a registered charity we rely heavily on appointed professionals to assist us in the ever changing world of pensions and Punter Southall Aspire have done this for over 20 years now. Their ongoing consultancy and annual governance service focuses our minds and ensures that we continue to remain compliant and offer a good quality pension scheme to our employees.”

Steve Roche, Head of Finance, Archdiocese of Birmingham

“Punter Southall Aspire provided the detailed advice and support we required to make the necessary changes to our internal policies and procedures and to communicate the arrangement to our employees. [...] Overall, the expertise and service provided by Jon was integral to the success of the project..”

Stuart McLean, Associate Director of Pensions & Benefits, London Business School

CONTENTS

Pension contributions

Using salary sacrifice for pension contributions

Have you considered using salary sacrifice for your pension scheme?

It may seem complicated, but the benefits can be substantial.

There's no denying that choosing how employees’ pension contributions are paid is complex. 

There’s a lot of choice and the benefits and/or savings between the different options can be substantial for both employers and their employees. 

 

For example, the table below shows five different ways to approach the same employee pension contribution, each with a very different outcome. 

If this was your own pension contribution, which option would you choose?

Employee contribution Method Amount invested in pension pot Employer NI savings2 Employee NI savings3 (gross pay increase)
£1,000 £1,000 deducted from gross pay, or £800 deducted from net pay + £200 basic tax relief £1,000 £0 £0
£1,000 £1,000 salary sacrifice. Employer and employee keep their NI savings £1,000 £138 £120
£1,000  £1,000 salary sacrifice.  Employer keeps their NI savings.  Employee reinvests their NI savings in their pension £1,120 £138 £0
£1,000 £1,000 salary sacrifice. Employer reinvests their NI savings in the pension.  Employee keeps their NI savings £1,138 £0 £120
£1,000 £1,000 salary sacrifice.  Employer and employee reinvest their NI savings in the pension £1,258 £0 £0

Assumptions: 
Employee is a basic rate taxpayer entitled to 20% tax relief.
All earnings subject ot NI rates of 13.8% employer and 12% employee

 

"The benefits and/or savings between the different options can be substantial for both employers and their employees"

What we do

Learning from experience

We have supported a number of schools in reviewing their employee benefits, including:

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Benefit strategy

Reviewing whether continuing to provide a DB pension is sustainable

If an alternative approach is needed, it's important to understand the level of benefits the School will provide going forward.  We can help design an employee benefit package and pension contribution structure that's flexible and valued by staff.

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Pension provider

Reviewing the pensions market to find a future pension provider that provides a cost-effective yet valued benefit to teaching staff, whilst supporting the Board of Governors in ensuring robust due diligence on the future provisions has been documented. 

As part of this we'd consider the Aviva Pension Trust for Independent Schools (APTIS) proposed by ISBA.

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Communication and change management

Supporting schools in delivering a clear message to staff around the need and rationale for change as well as providing important pension education to help your staff understand the change. 

This is a crucial part of any pension change project, particularly when moving away from a benefit that has historically been very valuable.  In our experience, clear, accurate and open discussions through the change process are key to ensuring the teaching staff continue to value the overall benefits they receive from you as their employer.

Resources

4 top tips for reviewing your pension scheme

Thinking of reviewing your teachers' pension scheme? Here's what you need to know

 

 

Get my copy

Top tips
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Future-proofing your staff's pensions

Helping you help your staff

We can also help you monitor your pension arrangements for both teaching and non-teaching staff. 

We've supported a number of independent schools in ensuring that their pension arrangements are providing a secure and valued benefit while meeting their legal duties as an employer. 

To find out more about how our governance service can support your school, download our Ultimate Guide to Good Governance:

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Teachers' Pension Schemes

Looking to manage your pension costs?

Here's what you need to consider

If your school wants help managing staff pension costs,  now might be a good time to review your existing DB scheme. 

Exiting the current scheme may not be the right option for all schools but we can support you in assessing the impact.

If you decide to go forward with a pension change, it will no doubt be a challenging time for the school.  We can help you navigate this through:

To talk about how we can help you, click here to contact us or fill out the short form below.

Teachers' Pension Schemes

Here to help

Spend 30 minutes with one of our consultants and receive a free communications audit.