More than one in 10 private schools participating in the Teachers’ Pension Scheme are leaving the pension fund, with the majority opting for a defined contribution arrangement to avoid a massive increase in contributions.
David Woodgate, chief executive of the Independent Schools’ Bursars Association, told Pensions Expert that a total of 80 schools have already left the scheme since October 2018, with a further 105 schools in discussion with Aviva to join its Aviva Pension Trust for Independent Schools, a DC master trust for teachers.
At the start of 2019, there were around 1,170 private schools in the TPS. Experts say the number of institutions leaving the public sector pension scheme is expected to increase even further.
We expect there will be more exits around August 2020, as other schools complete their decision-making and run their consultations with teachers
Alistair Russell-Smith, Hymans Robertson
Alistair Russell-Smith, partner and head of corporate defined benefit at Hymans Robertson, said: “A lot of independent schools are considering their TPS options right now. Many of the early movers that exited in August had to leave because paying the contribution hike in September 2019 was not financially viable for them.
“Others were able to absorb the cost increases in the short term, but are now looking to make a decision, with the landscape clearer and more visibility on what other schools are doing. We expect there will be more exits around August 2020, as other schools complete their decision-making and run their consultations with teachers.”
Government denied funding for private schools
The retreat has been triggered by a rise in employer contributions in September, to 23.6 per cent of salary from 16.48 per cent.
A year ago, the government announced plans to change the rate used to calculate the liabilities of public sector schemes to reflect the Office for Budget Responsibility’s long-term growth forecasts, which led to these increases.
In April, the Department for Education announced that it would support state schools and further education colleges with extra funding, while higher-education institutions such as universities and private schools would have to find their own funds to cover the hike in employer contribution rates.
Some teachers have been in uproar over the changes, with around 50 professionals taking strike action at St Edward’s School in Oxford last summer, according to media reports.*
Neil Barton, business development manager at Broadstone, said: “There are some robust debates going on between the schools, management teams, the governors and the teaching staff. One of the complications is that the head teachers are members of the schemes themselves, so they are affected but are also acting as a conduit.”
Richard Soldan, partner at LCP, noted that from a school’s perspective, “the best way to avoid threats of industrial action is to ensure that any proposals to move away from the TPS are fully supported by a clear business case and rationale for change, and to explain the proposals clearly to the teachers”.
Mr Russell-Smith explained that some strikes occurred because employers pushed ahead with withdrawal without properly consulting members.
“It is important to initially educate teachers on the benefits they currently have in TPS, and then explain why you are considering a change. It needs to be a genuine consultation, with a final decision only taken after that initial consultation has taken place.”
As of March 2018, the TPS had 674,000 active members, 629,000 deferred pensioners, and more than 717,000 pensioners or dependants in payment.
The most recent valuation of the TPS, concluded in 2016 by the Government Actuary’s Department, showed a deficit of £22bn, an increase of £7bn from the previous 2012 analysis.
More changes on the horizon
Under current scheme rules, an independent school electing to opt out of the TPS results in all members becoming deferred.
A recent consultation from DfE, which closed on November 3, proposed to allow independent schools electing to opt out of the scheme for future teaching staff to allow existing staff to remain as active members. However, decisions on this matter have been postponed due to the upcoming general election.
Martin Willis, principal at Barnett Waddingham, explained that this proposal seeks to “offer schools a compromise option that allows them to retain TPS for existing staff, and in this respect it makes sense and is likely to proceed”.
However, he questioned whether it would make much difference, as schools with very high staff turnover would not see significant savings.
“On top of this, it will create a two-tier benefit offering for staff in identical roles, which is unlikely to be conducive to a positive environment,” he said.
What next for schools that opt out?
Charles Cowling, chief actuary at Mercer, noted that schools that are opting out are providing a DC pension and/or giving their staff a compensatory pay rise. Some institutions may use the DC provider they already have in place for support staff, he added.
Mr Soldan explained that the schools LCP is working with are considering several options, such as moving to a DC scheme – generally with the school paying at least the 16.48 per cent of salaries that used to be payable to the TPS.
Public sector schemes facing £102bn gap in next 10 years
The sustainability of unfunded public sector pension schemes has been called into question by actuaries, with calculations pointing to a shortfall of £102bn in the next 10 years.
These institutions are also looking at “moving to a DC scheme with some flexibility – around employee or employer contribution rates, potentially with a salary top up where a teacher selects a lower school contribution rate”, Mr Soldan noted.
There are also schools thinking about offering a DC scheme and TPS in parallel, potentially with a reduction in salary for teachers who wish to remain in the public sector scheme.
Finally, other institutions are taking this opportunity to look “more broadly at pensions as part of wider teacher remuneration, and reviewing the whole benefits package”, Mr Soldan added.
Schools that are considering leaving the public scheme should be seeking legal advice, Mr Barton warned.
“[They] need to examine existing contracts of employment to check whether membership of the TPS has been specified contractually for their teachers,” he said.
*This article has been updated to correct an inaccuracy in the number of teachers taking strike action at St Edward’s School in Oxford.
