A new option for Independent Schools

Back in October last year I wrote about the options available for independent schools in my blog. Since I wrote that the government has published their consultation response on phased withdrawal (or the introduction of the “mixed economy”) and this is something that independent schools may wish to consider when looking at their options for pensions.

What is phased withdrawal?

Phased withdrawal aims to allow independent schools additional options in how they participate in the Teachers’ Pension Scheme (TPS) by allowing them to close off access to the TPS for new hires. In the corporate sector this sort of approach is often called “closing to new members”, although in practice many schemes then go on to close to build up of new pensions as well (sometimes many years later).

Under current regulations if an independent school participates in the TPS they must enrol all eligible teachers in the TPS with schools therefore exposed to the costs and risks for both current teachers and any future hires. The introduction of phased withdrawal enables schools to remove this for future hires whilst retaining a valuable benefit for current teachers.

When will phased withdrawal be possible?

If all goes to plan, the start of the next academic year. Phased withdrawal isn’t available just yet – last month the Department for Education launched a consultation on the draft regulations to introduce the option – the consultation is open until 1 June 2021 and we’re expecting a response in Summer 2021.

We’ll be keeping an eye out for any update on this front as well as monitoring what happens in practice once the option is available.

One important observation is that we currently don’t anticipate that schools would need to consult with teachers in order to introduce phased withdrawal so once available it will be possible to implement quickly subject to appropriate legal advice.

Pros and cons

There are pros and cons associated with phased withdrawal. I’ve set out some of them below.

Possible pros:

• enables a school to reduce exposure, risk (and, potentially, cost) over time
• current teachers retain their TPS benefit (which they generally value highly)
• easier to introduce than other cost/risk mitigation options

Possible cons:

• creates a two-tier common room with different groups of teachers having different benefits
• schools are still exposed to TPS risks for their current teachers
• it takes a long time for any cost reduction to materialise based on current turnover in schools LCP has worked with
• may impact turnover of longer serving teachers – especially if a lot of independent schools do implement phased withdrawal as teachers will be concerned about not getting the TPS elsewhere

Can phased withdrawal be combined with other approaches such as parallel schemes?

Whilst in theory it might be possible to introduce phased withdrawal alongside a parallel schemes option (where existing teachers are given a choice between remaining in the TPS (potentially with a pay cut) or a defined contribution pension), in practice we expect there to be some challenges. In particular, if an existing teacher opts to join the DC scheme after the school introduces phased withdrawal they then wouldn’t be able to go back into the TPS at a later date under the current draft regulations, making “parallel schemes” more like a “one way street”. This makes an already difficult decision even harder.

Deciding what to do about TPS participation

Our view is that phased withdrawal should be on the radar when looking at options around the TPS. We expect teachers to be interested in whether a school has considered it as an option (and we’re often seeing schools needing to provide evidence about how they have assessed whether phased withdrawal would meet their objectives). In practice a lot of schools don’t feel comfortable with the two-tier nature of phased withdrawal and see that their TPS risk exposure would be maintained many years into the future and so have decided not to wait for the regulations and continued with other options. My personal view is that phased withdrawal is unlikely to meet the objectives of most schools and they will therefore need to explore alternatives.

Each school should consider its own circumstances carefully and understand the full range of alternatives to the TPS before looking to embark on a consultation with teachers about any one of those alternatives. We’ve got a number of resources available to help schools do just that on our teachers pension scheme page.