Decisions on the horizon for teachers and further costs for independent schools?

The government has been grappling with a multi-billion pound pensions issue: how to fix the problem created when the Supreme Court ruled (in the McCloud case) that the controversial changes made to public service pensions in 2014/15 were age discriminatory.

The government has now announced that in order to address this issue it will consult on giving members of public sector pension schemes a choice as to what pension benefits they have earned since 2014/15 – the choice is expected to be between a pension calculated in line with what they were earning before the changes or one calculated in line with the updated formula. The court case didn’t apply directly to the Teachers’ Pension Scheme (TPS), but the government has stated that it intends to treat all of the public service schemes in the same manner.

Decisions to be made

This raises a number of issues for teachers. First, how will teachers decide and when? For some the decision will be complex, especially if they are asked to make decisions now when benefits are linked to unknown salaries and inflation in the future. Perhaps they could be given the option to make a final decision at retirement, when such factors are known – but this is an administrative nightmare. Secondly, it may cause tax issues for some teachers, with the possibility of needing to revisit their figures for Annual Allowance purposes going back to 2015/16. Finally, teachers may well feel they need financial advice to make such a decision, especially one with such long-lasting impact, which raises the question of who would pay for such advice given the number of teachers involved.

Impact on schools

As well as a key decision for teachers, schools may also be impacted. For instance, does this mean a further rise in TPS contribution rates in the future? Based on the figures and assumptions in the 2018/19 accounts for the TPS this could be of the order of 2-3% of salaries. Whether (and when) the government imposes such an increase, based on the cost of more valuable past benefits, is uncertain. For one, there are many factors that influence the calculation.

Further increases to contributions?

On the topic of potentially increasing contributions, one of the main factors that influences the contribution rate is the future expectations of long-term economic growth of the UK, which is informed by the Office for Budget Responsibility’s forecasts. The relationship is inverse: if future UK economic growth is expected to be lower at the valuation date, the amount schools need to pay goes up following the valuation. Given the downward pressures on the economy of Brexit and more latterly COVID-19, there may be further, and potentially significant, upward pressure on the contribution rate for independent schools.

Taking all these factors into account, it is difficult to see how the next TPS valuation, (which we expect to result in a new contribution rate from September 2023,) could result in anything other than an increase in contribution rates unless the government decides to reduce the generosity of the benefits being built up. That certainly isn’t off the table but, as for the previous reforms, would likely take some time to agree with the various stakeholders, including the public sector trade unions.

What this all means for independent schools in the TPS

Any further increase in contribution rates, coming on top of the 40% increase in 2019, would undoubtedly be unwelcome news for many independent schools. We already expect to see many more schools considering consulting with their teachers on their membership of the TPS due to the significant pressure on income as a result of the Covid-19 pandemic. We expect a further increase in contributions would only exacerbate this and result in more schools following suit.

There is a lot of uncertainty for independent schools at the moment; help and guidance in tackling the pensions aspects of this could prove vital in ensuring their long-term sustainability.

Information on how LCP are helping independent schools can be found here