Schools and colleges warn of ruinous £1.1bn pension hike as DfE consults

Clamours of concern from the sector are reaching fever point. They were triggered last September by the announcement that employer contributions would rise from 16.48 per cent of pensionable salary to 23.6 per cent; a 43 per cent rise with only 12 months’ notice.

To alleviate the impending crisis, the government launched a consultation last week, which provides temporary comfort for state schools and colleges in England with the promise of £910m to cover the increase in their employer contributions in 2019-20.

If you tried to balance your costs by reducing teacher resources, you would have to take out one in 14 of all your teachers

Charles Cowling, JLT Employee Benefits

However, many educational institutions will be left to foot the bill. None of the 1,477 private schools or the 65 higher-education establishments in the TPS will benefit, and future funding is uncertain – from 2020-21 onwards it will be part of the government’s next spending review.

The Department for Education estimates the total cost of increased employer contributions to the TPS will be £1.1bn in 2019-20, including: £830m for state schools; £110m for Independent schools; £80m for the further-education sector; and £80m for affected universities and other higher-education institutes.

Annual £4bn shortfall drives reforms

The unfunded TPS (with 667,809 active members, 607,100 deferred members and 717,037 pensioners and dependants at March 31 2017) has seen modest reforms: pre-2015 members have a final salary pension. After this date, it is career average.

Decisions to increase the normal pension age for younger staff and to change indexing from the retail price index to the consumer price index have also helped to contain costs.

Employer and employee contributions go directly to the government but, crucially, they do not cover the full cost of paying pensions. Ian Neale, director at Aries Insight, explains: “There is an annual shortfall of £4bn, which the government covers out of borrowing, adding to the public sector net debt each year.”

According to Neale, the basis for the rise in employer contribution is “a reduction to the Superannuation Contributions Adjusted for Past Experience discount rate, from CPI+3 per cent to CPI+2.4 per cent, to reflect a more realistic assessment of the future growth of GDP”. He adds: “This is a case of government ‘grasping the nettle’, prompted by the Office for Budget Responsibility.”

The contribution hikes have caught the whole education sector off-guard. Mike Harrison, head of Mercer’s higher education group, explains: “Schools, colleges, academies and universities will have to find an additional 7.2 per cent of academic staff payroll to balance the books, an estimated additional £130m a year for universities alone.”

Some education providers will receive additional funding from the DfE for this, but possibly only for two years and subject to the 2019 spending review, while universities and private schools will have to bear the full increase with no help.

Harrison declares: “This is a big blow for private schools and the post-‘92 universities, as these are the bulk of the universities with staff in the TPS, whereas pre-1992s tend to use the national [Universities Superannuation Scheme] for academic staff.”

The 262 further and sixth-form colleges in England will also be impacted. Julian Gravatt, deputy chief executive at the Association of Colleges, says: “Colleges employ around 60,000 TPS members (8-9 per cent of all TPS members) and spend an estimated £350m on employer contributions (about 8 per cent of the £4bn DfE collects).”

Gravatt emphasises: “Employer contributions to TPS were 8 per cent at the start of the century (2000) and will be almost three times as much at the start of the third decade (2020).”

Schools out in force against hikes

Gerry McDonald is group principal and CEO at New City College, one of the largest groups of colleges in the country. Based mainly in East London, the college has 12,000 full and part-time students following A Level and BTEC courses with 1,100 staff, including 500 teachers, nearly all of whom are in the TPS.

He says: “The increase is unprecedented, adding about 40 per cent additional increase in the cost of us providing the employer contribution to the TPS. It is absolutely massive. Altogether, it is going to cost us an additional £1.5m a year.”

Cuts to the further education sector mean the NCC is “absolutely reliant” on the contributions shortfall being funded by government, according to McDonald, who expected the funding period to be relatively long.

“If it is only funded up until March 2020, then the additional annual cost is £1.5m, which we don’t have and a cost we can’t control,” he says. “For an average teacher on a salary of £36,000, we currently spend a bit under £6,000 as our contribution to their pension. That would go up to £8,500 as an increase in our contribution rate as an employer.”

He adds: “We always look for big deals on utilities, broadband etc. but that is getting harder and harder to do. If staff leave, we would be less likely to replace them. We are being squeezed very hard.”

He says the government has to “fund this separately. It is not something the sector can bear. It is contractual. We can’t take teachers out of the scheme”.

Charles Cowling is not only chief actuary at JLT Employee Benefits but also a governor of nine schools.

He explains: “Typically, teachers’ pay is the biggest outgoing, accounting for 60 to 70 per cent of schools’ running costs. An increase of 7 per cent of teachers’ payroll from 16.5 to 23.6 per cent is a big hike. If you tried to balance your costs by reducing teacher resources, you would have to take out one in 14 of all your teachers. A school of 50 teachers could lose 3.5 teachers and a school of 100 teachers could lose seven teachers.”

“State and independent schools alike are already pushed to the limits of what they can afford,” he stresses, saying that difficult decisions ensuing would include cutting back on non-core subjects or withdrawing from the TPS altogether.

For independent schools, which may be pushed “over the edge” by the hikes, quitting the TPS would “undermine their ability to recruit and retain teachers”.

Julie Robinson, general secretary of the Independent Schools Council, endorses this view: “An increase on this scale would make the TPS unaffordable for many schools, colleges and universities – regardless of sector – harming already-strained budgets and ultimately diverting money away from the education of children and students across the country.”

Christopher King, chief executive, the Independent Association of Prep Schools, says he agrees: “The proposed 43 per cent increase is punitive.”

More pain to come

Cowling warns that things are likely to get worse for the scheme and its employers, just as it has for private sector DB.

“Given what has happened to interest rates and life expectancy, we knew the TPS was going to cost more. Even now, the 23 per cent proposal is based on a March 2016 valuation that is already out of date. Costs have probably gone up since March 2016.”

He adds: “An employer contribution rate of 23.6 per cent – although a massive 43 per cent hike in pound note terms – still underestimates the cost of providing teachers’ pensions.”

Neale concludes: “If the current proposal to hike TPS contributions serves any benefit, it has exposed the proverbial ‘elephant in the room’ – the gargantuan estimated £1.5tn public sector pensions deficit – to wider scrutiny.”

He warns: “The TPS is not the only unfunded public sector pension scheme affected: employer contributions to the NHS and Civil Service schemes are also going to rise by similar (but slightly lower) amounts.”

The consultation closes on February 12.