The UK Teachers' Pension Scheme – is it time to move on?

Article 22 February 2022 Experience: Education

My mother is a teacher, my younger sister is a teacher, my grandmother was a teacher, three of my aunts are teachers, three of my cousins are teachers, and I am a pensions lawyer. When I compare my career choice to theirs, what are the two things that make me wonder if I chose correctly? Holidays and pensions.

The defined benefit pension benefits (whether traditional final salary, or more recently career average) provided through the Teachers’ Pension Scheme (‘TPS’) are generous. And the availability of the scheme to independent school teachers (who are private sector employees) means those teachers have gold-plated retirement provision when compared with the average private sector employee. (Diamond-plated, if there is such a thing, if you make the comparison with private sector employees below the age of 50!)

Are defined benefits really a thing of the past?

The past 15 years has seen many UK businesses in the private sector conclude that defined benefit pension schemes are too expensive to offer. They have had to deal with the challenges of closing those schemes, putting replacement arrangements in place, and finding alternative ways of attracting and retaining talented staff.

This is a realisation that many independent schools have also been faced with since employer contributions to TPS increased so significantly in 2019. Many schools have been battling to manage increasing operational costs alongside a need to stay competitive on fees, and most are now also facing increased financial strain due to the pandemic. Few schools have been able to avoid the challenges of rising costs from covering staff shortages and providing increased cleaning services at a time when fee income may be reduced due to fee discounts, fee freezes, and fewer overseas students. The icing on the cake is the expectation that the TPS contribution rate will increase again in 2024, possibly even taking employer contributions as high as 30%.

The generous benefits offered by TPS membership are becoming harder and harder to justify for more and more schools. Is it time for TPS members to appreciate how fortunate they are that the education sector has held out for so long against the trend of stopping defined benefit accrual, and accept that such generous retirement benefits are, sadly, a thing of the past (and the preserve, primarily, of the baby boomers, teachers or otherwise)?

Whether or not you agree, you may well find yourself forced to consider if continued participation in TPS, or indeed any other defined benefit arrangement, for all teaching staff is financially viable for your school.

So what can be done?

If you are considering moving away from the provision of defined benefit pensions to all teaching staff there are a number of options available.

The most recent, and probably most interesting of these, is the option to commence “phased withdrawal” from TPS. Phased withdrawal allows schools in TPS to close to new members only, meaning that staff currently accruing benefits in TPS can stay in the scheme, but new members of staff can be provided with alternative (much cheaper) pension benefits. Phased withdrawal has only been possible since 1 August 2021, so there is not much data available, but we understand that as at the end of 2021 19 schools had initiated withdrawal from TPS on this basis.

Phased withdrawal could prove useful for some schools as a way to reduce their exposure and financial obligations over time. Although unless staff turnover is relatively high, a school’s liabilities to TPS may take a significant period of time to reduce substantially, and not all schools have the luxury of being able to maintain the current rate of contributions. Schools will of course be mindful too of employee relations and the impact of creating a two tier system under which established staff have a very generous benefits package that is not available to newer (probably younger) teachers. (Again, these are all issues that other private sector areas have already grappled with, and a lot can be learned from their experiences.)

Alternative options include keeping TPS membership open for all teaching staff but requiring members to accept a lower take-home salary in order to supplement the school’s employer contributions; continuing accrual in TPS but with lower pensionable pay figures; or ceasing TPS accrual for all employees.

Key to considering any change is to understand all of the options, and the potential financial implications as well as employee-relations considerations. Only when all of these factors are fully mapped out can a balanced and robust decision be taken. You should be prepared that any change to your pension arrangements will likely require a review of all current contractual arrangements, and an effective consultation with affected staff that meets the legal requirements, but more importantly that successfully gains your teachers’ understanding and support.

We have experience of assisting with all of these matters and the potential issues. We understand the importance of making the right decision for your school and teachers, and we are committed to advising sensitively yet robustly. With specialists in pensions, employment and education, our Education team is ideally placed to provide the support that you need.

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