Nearly 200 independent schools, about one-fifth of all private schools that participate in the Teachers' Pension Scheme (TPS), have withdrawn from the scheme since contribution rates under the TPS shot up by 43% in September 2019.
Two-thirds of those withdrawals took place before the first wave of the Covid-19 pandemic arrived in the UK and piled further pressure on independent schools' finances, thanks to the closure of schools from 23 March 2020 until the end of the last academic year.
Employer contribution rates under the TPS increased from 16.48% of salary to 23.68% as a result of the 2016 TPS actuarial valuation. The 2020 valuation is currently in progress, with the results expected in 2022/3.
Many schools are worried that employer contribution rates will be significantly increased again.
Whereas the government has provided funding to state schools and further education colleges to meet this increase, the independent sector has been required to meet the cost itself.
Employers that participate in the TPS have no control over contribution rates, while the benefits are relatively generous inflation-proofed defined benefit in character. The Government Actuary's Department sets the actuarial assumptions that determine the pace at which scheme benefits are funded.
As an unfunded, pay-as-you-go scheme, there is no investment growth to offset against the employers' obligation to meet the balance of the cost of the scheme benefits.
Meeting teachers' expectations
From a financial point of view, it is relatively easy for employers to leave the TPS. There is no termination debt that falls on the employer on withdrawing and there is no obligation on independent schools to match the benefits of the TPS through other pension arrangements.
The main constraint on leaving the TPS is employee relations. Independent schools are torn between the need to stay competitive in terms of fees and attracting and retaining high-quality staff.
Fee-paying schools that withdraw from the TPS generally provide defined contribution (DC) pension arrangements in its place.
There would be little point establishing a new defined benefit pension scheme that would allow the school to set the pace of funding but still expose it to open-ended pension contribution obligations and costs arising from increasing life expectancy and low interest rates.
There is a risk that DC pension schemes will be regarded as less generous by staff, though the extent to which that is the case will depend on contribution rates. In some circumstances, strike action by disaffected staff may result from withdrawing or preparing to withdraw from the TPS.
On the other hand, providing DC pension benefits may be seen as achieving greater parity of pension terms between teaching and support staff, who are generally already in DC pension arrangements.
A potential half-way house that some schools have considered is to seek to remain in the TPS on the basis that teaching staff meet part of the required increase in contributions and/or that the TPS continues to apply, but on the basis of reduced pensionable pay (through a contractual agreement) or in return for agreed pay cuts.
Where an independent school withdraws from the TPS and offers a new DC pension arrangement instead, the increasing governance costs surrounding DC occupational pension schemes (arising from legislation and stringent Pensions Regulator guidance on matters such as DC trustee chairs' governance statements) means the choice for schools is effectively between a contract-based group personal pension scheme, and a DC master trust.
Such arrangements will save costs in terms of management time and administration expenses, as compared with a stand-alone DC occupational scheme.
The latest Pensions Regulator guidance on DC pension schemes directs smaller stand-alone DC schemes towards winding up and transferring to larger, well-run schemes.
The automatic enrolment legislation, and the time limits for employers' compliance with it, mean schools should line up new DC pension arrangements well before withdrawing from the TPS. This includes selecting the pension provider, designing the new contribution structure and arranging life cover and income protection cover for teaching staff.
Practical considerations and the employer's implied duty of good faith mean schools proposing to withdraw from the TPS should first consult teaching staff and their representatives (if any) before proceeding.
Schools should establish at the outset, before any consultation, whether they have flexibility in their employment contracts to impose such a change on their teaching staff without their agreement.
This may affect how the proposed change is presented to staff and how it is eventually implemented.
This article was authored by Jeremy Harris, pensions partner at Fieldfisher.
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