Teachers’ pensions – the challenges ahead
Naseem Nabi, Partner at VWV, explores strategic considerations ahead of the proposed changes to the Teachers' Pension Scheme
Schools will have heard the news regarding the proposed changes to the Teachers’ Pension Scheme (TPS). With effect from September 2019, employer pension contributions are set to rise from 16.4% to 23.6%. Understandably, this has caused widespread concern throughout the sector.
Whilst an increase was expected, the extent of it was not. It was thought employer contributions would rise to 19.1%, and financial forecasts and budgets would undoubtedly have been prepared with that in mind, not the staggering increase now suggested. With no corresponding rise in employee contributions, the burden of the ever-increasing cost of a final salary pension scheme remains with schools. In this article we explore some of the strategic considerations and possible options, at this early stage.
In the first instance, schools should take steps to understand the likely consequential increase in costs and how these might be borne. Such steps must include governor involvement at all levels, not limited to finance and resources committee alone, an awareness of the TPS announcement, current collective action by the associations and the likely financial impact of the change. With the ongoing challenge of ensuring school fees are affordable for parents, an increase in fees to cover the costs may not in itself be an option.
A significant number of schools will already be managing costs closely as a consequence of the ongoing financial climate; with salary costs often accounting for 80% of a school’s budget, this will inevitably continue. Schools should continue to review their staffing structures and timetable to ensure ongoing operational efficiencies. Many schools have reviewed pay scales to manage financial sustainability and to direct pay towards the most effective contributors, improving incentives, performance and reward.
What can we do?
At VWV, we have supported, and continue to support, schools with strategic initiatives to generate additional income streams and/or with mergers or collaborations to benefit from economies of scale. There will now be a greater imperative on governors to consider such projects and/or accelerate their completion.
Whilst the TPS provides a great benefit for teaching staff and is highly valued as a recruitment and retention tool, many schools may also want to assess the benefit against the increased cost and consider whether there are other options.
Schools may be considering whether it is possible to close TPS to new members of staff, instead offering access to an alternative scheme. Under current TPS rules however, this is not an option.
A school that is accepted to offer the TPS must automatically enrol all teachers at the school. In addition, it is not possible to ring-fence different categories of staff to whom TPS may or may not be offered; if the school participates in the TPS, all teachers of that school have an entitlement to membership.
Closure of the TPS may be the other option for consideration. Although this may be unpalatable to some (indeed it is currently a condition of membership of some heads’ associations that heads are members of TPS), it may be considered as one of the options. Any such decision would involve consultation with staff and, depending on the contract of employment, is likely to constitute a contractual change to terms and conditions of employment. Associations requiring heads to be members of TPS would also require consideration.
It was thought employer contributions would rise to 19.1%, and financial forecasts and budgets would undoubtedly have been prepared with that in mind, not the staggering increase now suggested
Occupational pension schemes are sometimes ‘left behind’ on a transaction which involves a transfer of staff to a different employer. Whilst legislation requires transferring employees with such entitlements to be provided with a minimum level of pension provision by the new employer post-transfer, the contributions rates are considerably less. The impact of such decisions on employee relations should, of course, not be taken lightly, that said, however, this is a fairly well-trodden path for commercial school groups when acquiring independent schools. We have also witnessed this approach ripple across the economy as many final salary schemes are closed by large employers, seeking to insulate themselves from the long-term effect of ever-increasing contribution levels.
Schools may want to explore other options, and if consideration is to be given to moving away from the TPS, what alternative pension schemes and other benefits are available that may present a viable alternative. Currently the ISBA is considering the possibility of establishing a new pension scheme for the sector, be this from scratch or in conjunction with an existing provider – we will maintain a watching brief.
If schools need to make changes that affect staff as a result, whether to pay scales, staffing structures or a move away from the TPS, it will be vital to have an effective means to consult with staff. Consideration should be given to establishing an appropriate consultation body, with the appropriate remit, so that any proposed change is considered and implemented in accordance with the law, in accordance with association rules, and with the understanding of staff.