I’m sorry to say this, but the question of whether to stay or leave has reared its head once more. But don’t worry, this time it’s pension schemes. That’s not much better, you say? Again, I’m sorry, but the independent education sector is currently facing some tough decisions.
So, let us start at the beginning, get advice from financial experts, look at how different schools are approaching the situation and consider the future to, hopefully, help you in your decision-making.
The Teachers’ Pension Scheme (TPS), used by the majority of private schools and all state schools, announced an employer contribution increase in September 2019 from 16.48% to 23.6% (a rise of 43%)1. This is because the government changed the rate used to calculate the liabilities of public-sector schemes.
While the government helped state schools and further education colleges with the increased cost, this was not the case with private schools.
A ‘phased withdrawal’ is currently being considered, closing the scheme to new staff members and allowing existing staff to remain in the scheme, but no decision has been made yet2.
It’s another budget squeeze for schools and while some can manage, others will struggle – Tes3 reported in January that 100 private schools will be leaving the scheme. Admittedly, more private schools will be able to swing it than not – a National Education Union (NEU) freedom of information request showed there were 1,171 independent schools in the TPS as of March 2019 – but nevertheless, the cost impact is huge.
So says Neil Barton, head of business development, trustee solutions, at pension and investment organisation Broadstone. He told IE his thoughts on the schools leaving the scheme: “We are not at all surprised by this and have been working with a large number of schools to manage their pension position for over 12 months now. The TPS employer contribution increase of 43% is a huge additional cost for independent schools to deal with.
The TPS employer contribution increase of 43% is a huge additional cost for independent schools to deal with
“Independent schools are already facing a number of current and potential future financial challenges including the possible introduction of VAT on school fees. Schools have had to decide if they have the necessary reserves to deal with this increase or whether they can raise school fees to cover the additional cost – which is not easy in a competitive market.
“There is also no guarantee whatsoever that the TPS employer contribution rate won’t increase again in the next few years. Many schools have therefore concluded that from a risk mitigation perspective, exit from the TPS is the only option.”
How much more will schools pay?
“For a school that was, say, paying £250,000 employers’ contribution, this will increase to over £350,000 if the school decides to stay in the scheme,” says Mark Cummins, partner at accountancy and taxations solutions firm TC Group.
He continues: “For larger or more financially sound schools there is more scope for them to be able to absorb some of the increase, but I can’t see there being many schools who are able to stay in the scheme and not pass on some of the cost hike by increasing fees at a higher rate than normal. This in itself is a huge issue because school fees have risen significantly over the last 10 years.
“The reality is, being part of the scheme is unlikely to be sustainable for most schools and, you can argue, unjustified (for those that are charities, is it a good use of charitable funds?). And will the rate increase even further? There is a probability this will happen.”
Despite the financial impact, Andrew Morris, assistant general secretary of NEU, told IE of the consequences of leaving the TPS: “Withdrawing from the TPS is a dangerous road for any independent school to go down. A school’s success is all down to people: leaders, teachers and support staff. They have to attract and retain quality teachers, and to do this they need to offer access to the TPS. If they don’t, they risk seriously damaging the school.
“The government has to ensure that we have sufficient professionally qualified teachers available to all schools. Having a single TPS which enables teachers to move between schools, including between sectors, without hindrance helps this.
“Removing pension rights in the independent sector will reduce teaching’s overall attractiveness and indirectly affect state education as well as independent education.”
Withdrawing from the TPS is a dangerous road for any independent school to go down
It’s clear that schools are seeking advice; Parminder Gill, advice policy consultant at financial services mutual Wesleyan, confirms: “We have seen an increase in demand from schools, whichever camp they find themselves in, who want to give their staff transparency about the situation.
“Irrespective of whether or not an independent school withdraws from the TPS, it is essential that teachers understand what this means for them and their long-term retirement plans.”
Can savings be made elsewhere?
“If schools are going to make financial savings in other areas to stay in the TPS then they are going to have think very smart,” says Cummins.
“Their biggest cost is teaching salaries, so unless a new way of working can be found it will be difficult.
“Of course, other areas such as catering, maintenance and non-teaching salaries can be looked at, but will this really be to the benefit of the school? In the long term, this may come back to bite the school. Schools may also look at sweating their assets from an all year round perspective. Schools sites are potentially available for up to 15–20 weeks a year for other income generation. But perhaps schools should be doing this anyway.”
Morris says a thorough investigation of school finances is needed. The NEU representative continues: “When people say that they can’t afford something, it often means that they can but would prefer to spend the money on something else. All expenditure should be reviewed, especially capital spend. The success of schools depends on their staff. But for more than 10 years, pay increases in the independent sector have been way behind inflation and the rise in fees.
“This extra money must exist somewhere. One option is for schools to consider raising fees to cover these increased costs and some schools have already done so. But there are other ways in which these costs can be met.
“It is logical that the schools which are weakest financially would be the first to seek to leave the scheme. With more than 90% of schools remaining in the scheme for at least a year, it gives substance to the argument that schools generally can afford the increase.
“Proposals have been made that the DfE should allow schools to refuse TPS membership to new staff or offer a cheaper version of the TPS. The NEU opposes both suggestions, which would be a first step to reducing or removing the pensions rights of teachers generally. Instead the DfE should review these contribution increases, which are due to a change in the method of calculating contributions which the NEU has consistently rejected as unnecessary.”
Pension alternatives
Barton explains: “The TPS is a defined benefit (DB) pension scheme – it provides very generous and guaranteed benefits to teaching staff when they retire. However, the onus is mainly upon the employer to meet the fluctuating (generally increasing) cost of providing these benefits.
“The employer has no control over the costs of providing such a scheme; this is ultimately decided by the government. Defined benefit schemes are becoming less and less common outside of the public sector where they have generally been replaced by defined contribution (DC) arrangements.
“DC schemes can also provide good retirement outcomes for members (including greater flexibility regarding when and how the pension is paid) but depend upon a combination of contributions made by the employee and employer plus investment returns.
“Unlike a DB scheme, however, there is no guarantee with regard to the level of pension that will be received, which is where DC schemes fundamentally differ from DB. Crucially though (subject to certain minimum automatic-enrolment criteria), the cost to the employer can be fixed and therefore accurately budgeted for over the long term without any possibility of a sudden 43% increase for the employer.
“There is a wide selection of established providers of DC schemes to choose from for independent schools, and we have assisted many of our clients to put in place high-quality arrangements to replace the TPS.”
Leaving on a jet plane
Edge Grove School, which has around 504 pupils, is one of the schools leaving the TPS in September. Headmaster Ben Evans told IE that staying in the TPS would have impacted the school’s ability to reinvest.
He says: “These increases would have cost the school an additional £160,000 a year. So, the cost could have come from reducing teaching staff, our facilities and our curriculum. We have just invested £3.8bn in a new building and we continue to invest in our curriculum. We have just introduced engineering onto the curriculum, so that requires considerable investment.
“We have also put in a new welding centre. If we were to stay in the TPS then our ability to reinvest would have been impacted.”
Neil Roskilly, chief executive of the Independent Schools Association (ISA), is behind schools’ exit, saying: “It’s absolutely right for schools to withdraw, otherwise they would have no choice but to pass the increased contribution on to parents with excessive fee increases. Smaller schools would be particularly hard hit.”
Let’s stay together
However, for some the cost increase is a shock but one they can manage. In 2018, Julian Thomas, former master of Wellington College, told Tes4: “This has come entirely out of the blue. Any school that is clearly having to pay [43%] more than it was is clearly going to have to think very carefully about how it funds this.
“Schools like Wellington are in a robust financial position and will be able to deal with this, but there will be some very serious issues. There is no doubt that this will have a significant impact on schools in both the sectors.”
I did not apply to be a teacher because of TPS, in fact I barely knew what a pension was all those years ago
For others, it is a case of staying for now but weighing up the alternatives. Tim Calvey, headmaster of Orley Farm School, spoke exclusively to IE: “Whilst we are not currently exiting the TPS scheme, we are looking at alternatives as we are finding that teachers are motivated by so many factors that government appear not to understand.
“I believe that not enough people are thinking in creative ways to work out how to attract the right people to this amazing profession. I did not apply to be a teacher because of TPS, in fact I barely knew what a pension was all those years ago. I went into this to do a job that provides more satisfaction, purpose and relevance than any other career I know.”
The future
Will schools find it difficult to attract teachers without the support of the TPS? Evans from Edge Grove says: “A lot of heads are concerned about the impact on recruitment. And that will concern me because, ultimately, I’m sure there will be an impact on recruitment to start with.
“I think those wanting to go into the independent sector may be put off if there is no TPS. In the past, we have recruited some of our best teachers from the maintained sector and, naturally, it may be that pensions become an important consideration and it might put them off knowing we are coming out. We have still been able to recruit very good teachers, though, so that’s reassuring for me. In general, it is getting harder and harder to attract teachers anyway, because so many are leaving the profession, and I worry if this will exacerbate that.”
Cummins says focus should lie with the finances for now, instead of teacher recruitment: “Does there need to be consideration over recruitment and retention of teachers in deciding whether to say in the scheme? Yes, there does, but to my mind this is only a secondary point in comparison to the financials stacking up.
“Some external factors such as VAT and rates relief may not be in the control of a school but staying in the TPS is.”
There has also been strike speculation. Roskilly of the ISA says he’d be “very surprised” to see strikes, and Morris of the NEU says it’s “always the last resort”.
Morris continues: “Strike action is always […] something that we and our members will seek to avoid if at all possible. It is extremely rare in independent schools. However, the fact that NEU members have already taken strike action in the sector, with many more taking the formal steps to do so, goes to show how important the issue is to teachers in the independent sector.”
At the time of going to press, Tes revealed two schools, The Grange and Westholme, have voted for strike action. Since then, The Grange School has dropped its TPS exit.
We’ll soon find out whether a ‘phased withdrawal’ option is feasible and Gill from Wesleyan says it’s been “welcomed across the board”, with some schools adopting a ‘wait and see’ approach.
She sums up how schools should proceed – steps which I’m sure many schools will be doing already: “Schools considering leaving the TPS should try to engage and consult staff before making a final decision. Ultimately leaving the scheme would have a direct effect on their retirement plans.”
What’s clear is that talking to your school’s staff is the most important step to take, along with making a decision based on your specific situation, which will be different for every school.
This feature was originally published in our March issue.
1 https://www.ftadviser.com/pensions/2019/08/14/private-schools-are-leaving-public-pension-scheme/
2 https://www.gov.uk/government/consultations/teachers-pension-scheme-independent-schools-proposal
3 https://www.tes.com/news/exclusive-private-school-teacher-pension-strike-threat
4 https://www.tes.com/news/exclusive-schools-hit-devastating-rise-pension-costs
