Pensions in independent schools: do the TPS costs add up?

Estimated reading time: 5 minutes

As we pass the anniversary of the Government’s decision to increase the required school contributions for the Teachers’ Pension Scheme (TPS), I thought it was worth looking back on the past year.

How has this influenced the actions being taken by some independent schools in relation to the benefits they offer staff?

We’ve worked with many schools on this topic and a lot has changed in the last twelve months. The impact of Covid-19 is just the latest issue to be factored into decisions, but equally many themes remain consistent. 

The TPS – what objectives do schools have?

Independent schools have been faced with an unenviable challenge. On the one hand they know how much their staff value pension benefits. These can be an excellent recruitment and retention tool. On the other hand the cost increases of the TPS means that, for some schools, it is simply not an option to do nothing.

In our experience schools are not looking to make changes to reduce expenditure below the “pre September 2019” levels. Rather, they are uncomfortable about having to meet the entirety of the large increase that was required.

Each school is in a different situation, but some schools simply cannot afford the increase whereas others could afford it but it would impact on other planned expenditure. It could also potentially be a detriment to the financial position of the school. Indeed it is common for schools to consult on paying more towards benefits than the “pre September 2019” rates under proposals to teachers.

The impact of Covid-19 on teachers' pensions and future risks

Obviously Covid-19 has generally increased affordability issues, which may cause the schools who decided to accept the increased TPS rates to reconsider their position. Whilst we do not know the lasting impact on the sector, it may well be that Covid-19 means that, for some schools, proposals agreed with teachers are no-longer affordable. This may result in some schools that have already consulted to go back to the drawing board and consult with staff again.
 
There is also the question of future risks around the TPS. There can be no guarantees as to what the cost of the TPS will be in the future, but it is perhaps unlikely to go down, especially if the McCloud case means moves to Career Average benefits need to be unpicked.

One key point on objectives is that schools have been looking to deliver the most suitable benefit structures to meet the needs of their staff. Whilst this might not be the primary driver, it is possible that a more flexible contribution and benefit structure could suit some individuals; this could challenge whether the school wanted to offer the TPS regardless of cost. Again, Covid-19 has only increased the likelihood of this issue.

Whilst it may not be a majority, some teachers will potentially value the ability to temporarily lower contributions or draw some benefits if they are the requisite age.
 
In short, if schools can get to a situation where current cost and future risk is satisfactorily controlled and the benefit is valued, it’s likely to have fulfilled its objectives. The key initial question is, however, “what is the school trying to achieve?”

Finally it is worth noting that some schools are also considering support staff pensions concurrently with the TPS. Whilst this can complicate matters considerably, it potentially allows the school to reach a position where they have one provider and structure for all staff (although there can be different contribution structures) and we have seen this consistency as a school objective.

Do teachers value the TPS?

In our experience, the simple answer is “yes.” 

There is no doubt from numerous engagement sessions with teachers that awareness of the quality of the TPS is high, and it’s perceived as a key benefit of the vocation. Behind this however, there is generally less understanding of the specifics of the scheme and the rigid nature of the contributions and benefits.

The TPS provides a very good level of benefit (hence the cost of membership) and we generally find that individuals are cautious of change and prefer to keep with what they have. The TPS is still, however, subject to limitations; membership can be viewed as expensive and the costs inflexible. Also, although the benefit is “guaranteed” it offers limited flexibility for change as an individual’s circumstances change. 

The TPS vs DC pensions

In our view, overall it is possible that some individuals could benefit from an element of defined contribution (DC) benefit alongside, or instead of the TPS, For example, perhaps they have other short term financial demands that make TPS rates prohibitive or are closer to retirement and need an element of savings that can be accessed easily, so flexibility is complimentary to an existing TPS benefit.

However, this message is easy to lose, especially where emotive issues around benefit changes come to the fore. Comparative illustrations need to be approached carefully as well.

If the question is “how well does this replicate the TPS?” then DC will generally not stack up favourably, due to annuity pricing. Whilst this question is certainly relevant, it’s also important to recognise the different factors in play and the positives of other structures in their own right.

If you would like to talk about this topic, please get in touch with your usual Barnett Waddingham contact to find out how we can support you. Alternatively, please contact the author below.

We are hosting a virtual roundtable with Harrison Clark Rickerbys to consider these topics (24 June, 14.30). Please contact me if you are interested in participating.

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