Teachers’ Pension Scheme – every McCloud has a silver lining

A recent court case and subsequent Government consultation is expected to push costs for independent schools participating in the Teachers’ Pension Scheme (TPS) up further, but there could be a silver lining in all of this that could help mitigate the extra costs.

In our work supporting schools with the TPS issue, one of the key themes many schools have wanted our help with is exploring whether contributions could increase further in the future. It’s been particularly complicated in the case of the TPS because of the legal case commonly referred to as “McCloud”.

To cut a long story short, the 2015 changes made to the various public service pension schemes (including the TPS) meant different things for different people based on their age, with those close to retirement protected against the full impact of the changes. The McCloud case confirmed the age-related nature of this approach amounted to unlawful age discrimination and so some kind of remedy was required.

On 16 July, the Government published a consultation on its proposed approach to fix the issue. The two key features of the proposal are:

1. From April 2022 all members will move to the post-2015 benefit scale for future service;
2. Every affected member of the TPS will be offered a choice between benefits earned on the new or old benefit scales in respect of service between 2015 and 2022.

The main outstanding question the Government wants answering is whether members should be asked to make that choice in 2022 or at retirement.

This will push TPS costs up – across all public service schemes the Government estimates that the cost of remedying the issue will be a staggering £20bn. Our own high-level analysis suggests that McCloud might be expected to result in an increase in TPS contributions of 2-3% of salaries or more.

This all sounds terrible for independent schools in the TPS, but it’s potentially not all bad news.

One of the features of the reforms was the introduction of the so called “cost control mechanism”. This horribly complicated agreement resulted in a pretty perverse outcome at the last valuation of the TPS – at a time when employer costs would have increased anyway, the cost control mechanism meant that member benefits should also be improved with employers picking up the tab.

At the time the valuation was completed the McCloud case was ongoing and so there was uncertainty around the benefits as a whole. Given the lack of certainty the Government paused implementing the benefit improvements implied by the cost control mechanism. However, the TPS still demanded contributions allowing for the anticipated cost control benefit improvements – in other words, the 23.68% schools are currently paying includes over 3% of salaries in respect of benefit improvements that haven’t as yet been implemented.

Alongside the consultation on the McCloud issue, the Government has confirmed that it intends to “un-pause” the cost control mechanism. However, and in a potentially clever move, the Government has proposed to allow for the extra McCloud benefit costs in the new cost control calculations. If the Government has got its numbers right, this is likely to mean that the cost control mechanism should never have bitten, and further benefit improvements aren’t now required.

At a very high-level, this might mean that the “overpayments” schools have been making (and continue to make) in respect of the cost control mechanism can be used to effectively offset the extra McCloud costs, meaning the remaining cost drivers will be the key focus going forwards.

There’s still a lot of uncertainty around future TPS costs – but there’s good reason to believe that the cost control mechanism could, surprisingly, be McCloud’s silver lining.