Background
The Teachers’ Pension Scheme (TPS) is a government-created defined benefit (DB) pension scheme. It is highly regarded by teaching staff due to the generous nature of the benefits that it provides.
The TPS has over 2,000,000 members and is one of the largest pension schemes in the UK.
Every four years, an actuarial valuation of the TPS takes place to ensure that ongoing contributions from members/employers are sufficient to meet the obligations of the scheme.
The 2016 valuation by the Government Actuary’s Department revealed that the scheme was £22bn in deficit, £7bn up from the previous valuation. Economic conditions and increased longevity contributed to the increase. The employer contribution rate of 16.48% rose to 23.68% from September 2019 as a result, a 43% increase.
For a salaried teacher at £40k, an additional contribution of nearly £2,900 per annum is required by the employer. A typical independent school could face increased costs of anywhere between £100k and £500k annually.
What are schools doing?
Financial constraints dictate that TPS exit is a serious consideration – the increased TPS cost is often unaffordable and is the straw that finally broke the camel’s back for many. We are aware that around 70 independent schools have already left the TPS.
The remaining schools (there are over 1,100) are currently thinking very carefully about their options, with many facing difficult decisions.
A clean break from the TPS?
The TPS is an ‘unfunded’ arrangement – current pensions are paid from the contributions being made by members and employers.
Crucially, employers can withdraw all of their employees without any penalty. This is important as in other multi-employer schemes the exit penalty would effectively be the school’s share of the substantial deficit (£22bn) – which could be millions.
Crucially, employers can withdraw all of their employees without any penalty
Independent schools can therefore make a ‘clean break’ from the TPS if they so wish, and now could well prove to be a golden time to do so as the government has made noises about possibly introducing exit penalties.
This would be very bad news for schools.
How do schools leave the TPS?
Schools can’t simply withdraw from the TPS and leave their employees with no ongoing pension provision.
They would fall foul of ‘automatic enrolment’ obligations and would attract the attention of The Pensions Regulator.
Before a school withdraws, they need to undertake a consultation process to explain their rationale to the employees, proposing an alternative pension arrangement to replace the TPS. This process needs careful consideration, as undertaken badly, the impact on employee relations and morale can be very negative.
What is replacing the TPS in independent schools?
A defined contribution (DC) scheme is very common. There are few risks associated with DC schemes for employers as the employer contribution is agreed from the outset, and ongoing costs can be accurately budgeted for.
DC schemes involve both the employee and employer contributing on a monthly basis, and the money is invested in carefully chosen investment funds.
A substantial ‘pension pot’ can be built up – based upon the contributions paid and the investment returns gained. Unlike a DB scheme, however, there is no guarantee as to the future pension that will be paid.
We have decided to leave the TPS, what do we need to think about?
Leaving is a time-consuming process and there are a number of important factors to consider, including the selection of a replacement pension arrangement (as well as alternative provision of life and income protection cover) and the communications required with the employees of the school. Communication is a vital element of the consultation process and needs to be managed very carefully.
From a legal perspective, the school will need to examine existing contracts of employment to check whether membership of the TPS has been specified contractually for their teachers. Legal or HR advice should be sought.
What is clear is that many schools will require professional advice to assist them through what can be a difficult process.
