I ought to declare an interest. I am a beneficiary of the Teachers’ Pension Scheme (TPS) and it is an excellent, generous defined benefit scheme. However, for many independent schools it is becoming unaffordable. In 2019, the employer’s contribution rose from 16.48 per cent to 23.68 per cent, an increase of more than 40 per cent in one go, and it may well go up again following the next actuarial revaluation in 2024.
For this reason, around 200 independent schools have now consulted staff and withdrawn from the scheme and about the same number again, having at first decided to “wait and see”, are seriously considering their options or embarking on a consultation process. For school governors, the pandemic has thrown the issue of cost control into much sharper relief and this has accelerated what was already a growing trend.
The choices facing governors
The provision of pensions for employees is a matter for each governing body to consider individually, and the choices can appear uncomfortable. Many boards would prefer to remain in the Teachers’ Pension Scheme if it is financially viable for them to do so. This position is likely to be particularly driven by concern about future recruitment and retention of teachers. To deal with the increase in contribution costs, which will have added approximately 7 per cent to the teaching cost base in one fell swoop, a school may decide to increase fees to parents beyond what was already planned (perhaps difficult post-Covid), and/or to reduce teaching and administrative costs in other ways.
“Many boards would prefer to remain in the TPS; this position is likely to be driven by concern about future recruitment and retention of teachers.”
Seeking “efficiencies” is the usual code for this approach, which may involve a salary freeze or redundancies. Alternatively, governors may decide to live with a lower level of surplus if they can, accepting that there will then be less to plough back and reinvest into the school. There may also be other cost-saving or income-generation actions that individual boards can take to be financially fit for the future, bearing in mind that other significant cost pressures are also rapidly approaching.
If a combination of the above actions still leaves governors nervous about the medium – to long –term financial future of the school, then they should certainly consider the pros and cons of moving to consultation with staff about withdrawing from Teachers’ Pension Scheme and enrolling members in an alternative, more affordable, Defined Contribution (DC) scheme. This could be, for example, APTIS – a scheme designed by Aviva in consultation with the ISBA on behalf of the ISC Associations.
One recently announced development is the option of “phased withdrawal” from TPS, sometimes known as the “mixed economy” option. This mirrors what has happened with many “final salary” schemes in the private sector of the economy, where the scheme can be closed to new joiners but existing members remain in. At first glance, “phased withdrawal” appears to offer an attractive third way. However, it is very unlikely to solve the affordability problem in the near term, because of the pace of staff turnover, and it may well carry other complications, including divisions in the common room and challenges recruiting new senior staff if they are moving from a school that is still in the TPS to one which isn’t.
If boards need to grasp the nettle of significant cost savings soon, “phased withdrawal” may not be the way to do it. It is possible to consider the scope for running two schemes in parallel and giving staff the option whether to remain in TPS or voluntarily to consider an alternative DC scheme. Care needs to be taken over this (inducements cannot be given) and of course with a voluntary scheme there is no way to guarantee that staff won’t change their mind in future. Having opted out for a period, they might choose to re-enter the scheme later and so, again, any cost savings may be neither substantial nor certain to last.
“Boards might wish to consider a ‘total pay and benefits’ model, under which schools operate two pension schemes for teaching staff.”
Boards might wish to consider a “total pay and benefits” model, under which schools operate two pension schemes for teaching staff: TPS and an alternative DC scheme. Teachers would be required to choose the scheme in which they wished to participate. The overall total “pay and benefits package” under each would be the same, but with the balance between pension contributions and salary varying depending upon the choice made. If this option is being considered, it is essential that schools take appropriate professional advice.
As to which route to take, that will vary according to the context and profile of each school. Decisions will differ according to the specific circumstances; it is for each board to weigh up the risks and consider the pros and cons of each option.
Other cost pressures?
Looking at the bigger financial picture, there is no current proposal from government to abolish mandatory business rate relief (MBRR) in England, introduce VAT or a “levy” on school fees, impose exit penalties on TPS or increase employer pension contributions to TPS.
However, it is likely that at least some of these things will become a reality in the near future; when considering their pension provision, schools must therefore weigh up the chances of such financial shocks occurring in the medium term and consider what to do by way of mitigation. The two risks most likely to become a reality within three to five years are the loss of MBRR in England and further increases to TPS employer contributions.
Then there is one material cost increase already on the horizon: the proposed increase in the national level of starting salaries for teachers from September 2022 to £30,000. This will push up wage costs in schools significantly, not least through the impact on wage differentials and salary scales and thus, again, increased pension contributions for those schools remaining in TPS.
Other financial considerations include:
- the impact of changing market conditions, including continuing uncertainty around the longer-term impact of Brexit and the Covid-19 pandemic, on the wider economic performance of the UK;
- the impact of low interest rates and, indeed, the risk of negative interest rates with the resultant impact on the discount rate.
Schools also need to note that the quadrennial actuarial revaluation of TPS is underway. Employer contributions will rise from 2024 and there is a possibility that the compensation stemming from the McCloud and Serjeant case will, on its own, add 3 to 4 per cent to employer contributions. Against this background, one firm of actuaries has said that a rise in TPS costs “must be a strong prospect”, with the possibility of employer contributions going to 30 per cent or more. For many schools this is a daunting prospect and will drive a review of their TPS membership.
The process of consultation
Experience to date shows that when embarking upon consultation about possible withdrawal from the TPS, the process should not be rushed. The standard 45 days seems insufficient and many schools have found that they need to allow two terms in order to ensure that there is an opportunity for both collective consultation and individual meetings as appropriate. In any case, consultation should involve a careful consideration of all the options, now including phased withdrawal.
As a former teacher myself, I can confirm that many teachers have a less than optimal knowledge of the ins and outs of their pension provision and tend to take it for granted — or at least that used to be the case. For that reason, governors should ask their senior management teams what information and education should be offered to their teaching staff. Many have found it important and helpful to pay for an Independent Financial Advisor with pension specialism to visit (or attend remotely) to offer both generic and specific 1:1 advice for teachers.
“As a former teacher myself, I can confirm that many teachers have a less than optimal knowledge of the ins and outs of their pension provision.”
In addition, academic staff sometimes have a sketchy understanding of the school’s overall financial position, so again it is more important than ever to offer clear, concise explanations. The school’s business case for proposing any change is key to the consultation process. Care should be taken in advance to make sure this is robust and stands up to scrutiny. The unions are, of course, likely to present a challenge to a school’s figures. However, it should be possible to sign an NDA which allows them to see the details which can often result in a fuller understanding and then greater co-operation in the process.
In a minority of cases, schools have been subject to the threat of strike action and it is certainly true that the teaching unions are taking a more proactive (some would say aggressive) stance during the pandemic to issues ranging from health and safety to salaries and pensions. Getting the communications right from the outset with all parties, including the unions, is likely to lead to a shared understanding of what is in the long-term best interests of both the teachers and the school.
After all, teachers need to have a viable school in which to work. Remodelling pay and conditions It is quite possible to look upon the TPS issue as an opportunity to remodel a school’s pay and conditions package. This may make any change proposed more attractive to some staff, particularly those earlier in their career who might prefer more money in hand now (for mortgages etc.) than the promise of more later via a fi nal salary pension. Equally, it should be possible to reassure more senior staff that they will not lose the benefits they have already accrued under the TPS scheme and at the same time give them the flexibility to do something different with their pension pot for the final few years of their service.
“Employers need to listen, be open to proposals that may emerge and then evaluate them carefully.”
Here again, it is vitally important to get the messaging right from the word go. Above all, governors need to make sure that any consultation is a meaningful process and that there is no sense that the governors and senior leadership are merely “going through the motions” for a decision that is already made and unchangeable. Employers need to listen, be open to proposals that may emerge and then evaluate them carefully. Small details can take on great importance. For example, how life and income protection are going to be provided in future if the school withdraws from TPS will be of significant interest to some teachers. Looking at the package in the round, and encouraging teachers to do the same, will be important.
The importance of taking good advice
However the process goes, taking the right advice, both from professional advisors like IFAs, lawyers, actuaries and consultants and from the associations including AGBIS and ISBA (who have a whole library of excellent briefing papers on this topic), is likely to be beneficial. Indeed, it is a requirement for charity trustees. There is plenty of experience now building up in the sector and there is sometimes value in not being a pioneer, particularly as the landscape continues to change. In all of this, please do not forget the support staff. It may turn out to be a good thing if there is a move towards greater parity of pension provision between them and the teaching staff. Perhaps it will even help reduce the old “them and us” feeling?
One thing is certain. More than ever before, this is a time to address the overall effectiveness of your school governance. There has never been a greater need for supportive but effective, forward-looking governance. That is where AGBIS is particularly well placed to help. But there again, perhaps I should declare an interest…
This article first appeared in the Spring 2021 print edition of Independent School Management Plus magazine.