The employer contribution rate for the Teachers’ Pension Scheme (TPS), a defined benefit scheme, has increased by 5% this month.
The rate increase from 23.68% to 28.68% is based on the outcome of the 2020 valuation of the scheme. The Department for Education is providing additional funding to directly funded scheme employers, such as state schools, to cover the increase in the employer contribution rate, but higher education providers and independent schools are not eligible for this and are facing additional costs.
Stuart Price, Partner and Actuary at Quantum Advisory, says:
“With no funding assistance from the government, independent schools face an exponential rise in employment costs. Coupled with Labour’s plans to add VAT to independent school fees if they win the upcoming general election, independent schools are having to make difficult financial decisions to ensure that their future is sustainable.
“This latest employer TPS contribution rate rise could be the turning point for even more independent schools to review their pension provision for teaching staff. A freedom of information request by the Independent Schools’ Bursars Association has revealed that 460 independent schools have left or announced plans to leave the TPS in some form as of September 2023.
“There are numerous alternative pension options for schools such as phased withdrawal that allows independent schools to opt out of the TPS for new teaching staff, while existing teaching staff remain members of the TPS. This option has limited impact on immediate cost savings and mitigating financial risk for independent schools. More common options include a total exit from the TPS for all teaching staff in respect of future service or a ‘shared cost/risk’ basis where teaching staff pick up some or all of the additional costs to remain in the TPS for future service. Combinations of the alternatives are also available.
“Whatever a school does needs to be carefully planned for; that includes putting in place a robust business case for any changes. But by far the biggest challenge is the HR issues changes can bring. These can be mitigated by providing generous flexible alternatives in place of the TPS, carrying out a well-planned communication exercise with teaching staff that includes being receptive to their views and providing lots of support so teaching staff can see how the changes would impact them at a personal level. This allows teaching staff to fully understand the changes so they can make a well informed decision in relation to their future benefit provision.
“Making changes to the TPS is not a straightforward exercise however once done it provides independent schools with more long-term funding stability, which is so important given the current financial climate.”
Stuart Price is a Partner at Quantum Advisory, which has offices in London, Amersham, Cardiff and Birmingham.