Why Teachers Pensions need a different approach

The Department for Education has issued a consultation on Teachers Pension Scheme and how it applies to independent schools. As a school governor (x2), a parent (x2) and a pension professional, I personally think it’s flawed.

I propose a much simpler, fairer and more effective approach, which is a 2-tier scheme where schools can opt for a lower tier accrual – like the old 80ths and 60ths options that many schemes had.

It may be that this has been considered and rejected for some reason. If so then I'd be really interested to know what that reason is.

If you’re interested, my comments on the consultation questions below.

Do you agree that the phased withdrawal proposal will help independent schools to manage the financial pressures resulting from the additional costs of TPS employer contributions?

The proposal will help independent schools manage financial pressures over medium to long term, but provides limited short term relief. At outset all existing staff will remain in TPS, and the likelihood of staff leaving (and losing their TPS accrual) will reduce. Research has shown turnover rates of up to 20% of teaching staff leaving the profession or moving school, but this is lower in independent schools, and will be lower still if TPS is only available to existing staff. At 10% turnover a year, with that somewhat biased towards staff with shorter service (which means some of year 2 turnover will be year 1 joiners), even with a substantially cheaper DC scheme for new hires is likely to be around 10 years before schools return to a similar level of total cost to that which they faced prior to the recent increase.

Do you agree that the phased withdrawal proposal will protect those teachers that are currently participating in the scheme?

The proposal will help protect the pension interests of existing teachers in the short term but will have other consequences. It will make it financially less attractive (and therefore harder) for them to move schools within the independent sector to develop their careers because of the major change to future pension benefits when they move. The loss of salary linkage on leaving TPS also means an overnight loss in accrued benefits as well as a loss of future DB accrual.

Over time it could make staff in TPS more likely to be subject to resentment by colleagues and the school, and possibly targets for redundancy exercises to remove the most expensive staff. Private sector companies have run two-tier arrangements for many years following the closure of DB schemes and the disadvantages of a “pensions apartheid” structure where the longer serving staff have a massively more generous/expensive pay structure than new staff causes other issues and is difficult to sustain long term. In a small independent school where staff all speak to one-another regularly in a staff room (most employers do not have the same sort of informal forums) a two-tier system is bound to cause issues amongst the teaching body.

Other than government funding, which the department confirmed will not be provided to independent schools at this stage, are there any alternative methods of achieving the aim of helping independent schools to manage this additional financial pressure while protecting existing TPS members?

There are much fairer methods of achieving the aim of reducing financial pressure on independent schools while not increasing government funding.

The first option is to introduce a lower tier of TPS accrual, which schools can opt in to. Many pension schemes offer such arrangements, such as a 60ths accrual and 80ths accrual tiers, where either the employer or individual can select which tier they are in.

For example, if a 60ths accrual scheme costs members 8% and employer 24% then an 80ths accrual tier could be offered for costs of 6% and 20%. Administratively this is straightforward, many schemes and administration systems do it already. Indeed the outcome of the cost cap mechanism means that there is already a concept of different accrual rates for different periods of service, so administration systems must already be set up to deal with this.

For independent schools a workable model would be that each school selects the tier that staff are in, either being the same tier for all staff or different tiers for different staff (which could be based on service, seniority or other factors at the discretion of the school). Compared to the proposal in the consultation it has a number of other advantages:

• It allows TPS members long term certainty about ongoing TPS membership, without losing membership when they move schools.
• It continues portability of staff between independent and state sector, as members would just switch between tiers if their new employer offers the higher or lower tier rather than moving in and out of TPS.
• It means members lose nothing on moving to a lower tier as their final pension is based on the various tiers they have had over their working life and the salary link remains.
•  It offers independent schools an immediate saving (25% of total costs, or 6% of salaries in this example) rather than waiting for many years, which they may not survive.
•  It keeps as many members as possible in TPS, providing greater short term and long term revenue for Treasury. In the short term it will allow schools to remain in which cannot afford to wait the 5-10 years mentioned in question 1. In the long term it will keep more staff in TPS than the alternative, which will see numbers fall steadily over time.

The second option which would work for independent schools is a section of TPS which is a Collective DC Scheme. Legislation for such schemes is due to be part of the forthcoming Pensions Bill, initially just for Royal Mail but hopefully then for associated multi-employer schemes and non-associated multi employer schemes such as Master Trusts. Such a scheme would provide cost certainty to schools, while members have something better that a simple DC scheme. The independent schools sector has the scale and workforce to make Collective DC work well, whether or not it is also adopted for the state sector.

Do you have any other comments regarding this proposal?

None other than those mentioned above and in the equality section below.

Are there any equality impacts that may result from the phased withdrawal proposal?

Age is the obvious discrimination as new hires are younger than existing staff. The recent ruling in the Supreme Court which ruled the 2015 pension reforms to be unlawful have a direct parallel here, and there is a substantial risk that at some point these changes will also be found to be unlawful due to indirect age discrimination. At that point schools face being hit by a retrospective catchup contribution request which could destroy independent schools with small reserves.

If there are potential equality impacts identified, how they might be mitigated?

Either of the proposed alternatives would mitigate these risks.