Pensions

Independent Schools – serious issues to contend with, including staff pension costs

Is it 2021 yet?

Without question, this year has so far exhibited all the signs of being the toughest ‘annus horribilis’ for generations – and with 8 full months remaining it is very hard to imagine that people will look back on 2020 with any fondness whatsoever. The world is already hoping for a happier and much healthier 2021.

These are worrying, difficult and very challenging times for everybody, and especially so the independent education sector where many schools were already actively facing a number of potentially serious current and future challenges.

Challenges faced

The Conservative Party victory in the December 2019 General Election was welcome news to the sector and had removed the immediate threat from the Labour Party who had promised to abolish private schools if they won power. Jeremy Corbyn had previously stated that the “ongoing existence of private schools is incompatible with Labour’s pledge to promote social justice”. The charitable status, public subsidies and other tax advantages currently available to independent schools would have ceased – and land, property and other assets would be seized and utilised in the state sector instead.

It will, of course, be very interesting to see if the Labour Party retains this stance at the next general election under the new leadership of the privately educated Sir Keir Starmer.

School fees are currently VAT exempt – Labour had planned to change this immediately if they gained power, but the current Conservative government has also raised the subject in the past. Whilst he was Chancellor of the Exchequer, Philip Hammond planned to overhaul this in his 2018 Autumn Budget but backed down under pressure from his backbench MPs. At some point, the current Chancellor, Rishi Sunak, will need to raise additional funds to recoup the billions currently being paid out in coronavirus related ‘bailout schemes’ by the government, and VAT will, of course, be an area of focus. It is therefore highly unlikely to be the last that schools hear of this – watch this space.

The coronavirus (COVID-19) pandemic

And now, as hinted at above, the whole independent education sector is having to react and adjust to the additional challenges created by the global coronavirus pandemic. All schools have had to remain closed since 20 March, and currently, they have no idea when the UK government will allow them to reopen. The Financial Times reported on 7th April that schools were becoming increasingly concerned with regard to their immediate financial stability, despite many continuing to offer education via virtual means.

To date, some schools have offered reductions in fees of up to 30% for the next term, and boarding schools have been hit especially hard as many pupils come from overseas and travel restrictions may not allow them to return immediately when schools in the UK are allowed to reopen. Schools also have concerns that some parents may be forced to send their children to state schools in future if their personal financial circumstances have significantly worsened as a result of recent events.

The overheads associated with running an independent school are huge – with around 80% alone attributed to staffing costs, rents and property maintenance. These overheads can be managed, but it is difficult to achieve a meaningful reduction whilst still providing a high-quality service to the pupils, both at the current time and also in anticipation of the schools reopening in due course. Many schools are struggling, some will sadly close for good, and others are actively looking at ways to help them reduce their ongoing cost base in order to remain solvent in both the short and long-term.

As part of their financial considerations, many private schools were already considering how to deal with a 40% plus increase from September 2019 in the contributions they pay for their teaching staff that belong to the Teachers’ Pension Scheme – current circumstances will likely result in schools having to consider this more immediately than was first anticipated.

The Teachers’ Pension Scheme

Along with almost every school in the State-sponsored ‘maintained’ sector, many independent schools also offer teaching staff membership of the Teachers’ Pension Scheme (TPS). The TPS is a government created ‘defined benefit’ pension scheme run by delegated parties on behalf of the Department for Education (DfE).

Every four years an actuarial valuation of the TPS takes place. This process is designed to ensure that ongoing contributions from members and their employers are sufficient to meet both the current and future obligations of the Scheme – the obligations being the pensions that will be paid to the Scheme members upon their retirement.

The most recent valuation of the TPS (2016) by the Government Actuary’s Department has necessitated a significant increase to the rate of contributions paid by participating employers as the results showed that the Scheme was in deficit to the tune of £22bn, an increase of £7bn from the previous valuation undertaken in 2012.

The previous employer contribution rate of 16.48% rose to 23.68% from September 2019. A substantial increase of just over 43%. Put into context, for a teacher earning a relatively common (benchmark) salary of £40k, this means an additional contribution of nearly £2,900 per annum has had to be found by the employer. A typical independent educational establishment of average size will employ between 50 and 100 academic staff – so the increase in cost could be anywhere between £150k and £300k per annum, and most likely could be considerably more.

The next TPS actuarial valuation is due to take place in 2020 – and many schools are justifiably concerned that further employer contribution rate increases could be on the horizon in the next few years.

What is the preferred direction of travel?

For many schools, current and future financial constraints dictate that TPS exit is the only option – the increased cost of employer contributions is totally unaffordable and has proven to be the straw that finally broke the camel’s back. Over 100 schools have exited the TPS in the past 12 months, with another 100 currently planning to do so in the next year.

The additional financial strain posed by the coronavirus pandemic will likely force schools to make decisions regarding the TPS sooner than were originally planned. We have seen an increase in enquiries from schools in the past month, many of whom are looking to accelerate their proposed exit from the TPS.

A clean break from the TPS

Unlike many similar multi-employer schemes the TPS is an ‘unfunded’ arrangement, with current pensions paid from the contributions being made by active members and their employers.

Crucially though – in an unfunded scheme, participating employers can simply withdraw all of their current employees without any penalty. This is important as in other multi-employer schemes the exit penalty would effectively be the school’s share of the substantial deficit (£22bn as noted above) in the TPS. This would likely amount to £m’s for each school.

Independent schools can, therefore, make a ‘clean break’ from the TPS if they so wish, and now could well prove to be a golden time to do so in light of the Government making some noise about possibly introducing exit penalties in future. This would be very bad news for schools.

However, schools can’t simply withdraw from the TPS and leave their employees with no ongoing pension provision. If they did then they would fall foul of their workplace pension ‘automatic enrolment’ duties as detailed in the Pensions Act of 2008. They would soon attract the attention of The Pensions Regulator who would be less than pleased with the situation and would certainly take swift action against them.

So, before a school decides to withdraw from the TPS they first need to undertake a consultation process to explain their rationale to the employees, whilst at the same time proposing an alternative pension arrangement to replace the TPS. Now could well be an opportune time to launch this process.

So what is replacing the TPS in independent schools?

Very few schools – if any – will consider replacing the TPS with another defined benefit (DB) type arrangement – the majority of the risk involved in providing a DB scheme for employees rests with the employer. No guarantees can, therefore, be given that any alternative DB scheme will not, at some point, encounter the same scenario that is now facing the TPS.

So, for most schools, a Defined Contribution (DC) scheme is the preferred option. There are very few risks associated with DC schemes for employers as no promises are made upfront with regard to the pension that will be payable at retirement. The employer contribution is agreed from the outset and is generally fixed for the duration in order that employers can accurately budget for their staff pension costs.

DC schemes work on the basis that both employee and employer contribute on a monthly basis, and the money is then invested in carefully chosen investment funds. Over time a substantial ‘pension pot’ can be built up, based upon the level of contributions paid and the returns gained on the investments selected.

The ultimate outcome provided by a DC arrangement is dictated purely by the contributions made plus the long-term performance of the underlying investments. If a school is prepared to commit the same or similar level of pre-increase employer contributions (16.48%) to a DC arrangement, then when this is combined with the employee contribution it is likely to, in the long-term, result in a better than average DC ‘pot’ being accumulated for the individual concerned.

We want to leave the TPS, how quickly can this be done?

Closing an existing scheme and opening another can be a relatively time-consuming process and there are a number of important factors to consider, including the selection of a replacement pension arrangement (as well as alternative provision of life and income protection cover) and the communications required with the employees of the school. Communication is a vital element of the process and needs to be managed very carefully.

Communications are typically provided in written form as well as via group presentations. Given that we all currently have to adhere to the social distancing and lockdown requirements, Broadstone have found ways to help our clients still launch a consultation process regarding a potential TPS exit – we are delivering services such as group presentations and 1-2-1 sessions for affected staff on a virtual basis – written communications can still be issued via post or email, with group presentations and 1-2-1 sessions provided by facilities such as GotoMeeting or Skype, etc.

In general, consultation processes must last for a minimum period of 35 days, but a 3 to 4 month overall timeline is required to allow for the selection and potential implementation of the replacement pension arrangement. We are currently preparing robust project plans for schools that wish to consult in the summer term with a view to exiting the TPS from September 2020. With a well-managed project we believe that it is still possible to do this, but schools will need to engage with us by late April / early May.

Points of note for non-teaching staff pension schemes

Many independent schools provide pension provision for their support staff via a Defined Contribution scheme. During the current coronavirus pandemic, The Pensions Regulator (TPR) has issued guidance for all employers that will be equally relevant to independent schools.

For example, TPR has confirmed that there is no general easement of auto-enrolment duties and so employers should continue to comply with the law. TPR also confirms that contributions still need to be paid and a reminder that members should not be induced to reduce their contributions.

There is a reminder about the furlough arrangements so that via the government’s Coronavirus Job Retention Scheme (CJRS) the statutory minimum employer contribution can be recovered.

For those employers unable to make their contributions they are advised to approach their provider to understand the flexibilities in the payment dates and also to explore other areas of assistance from government.

The full guidance can be found here – https://www.thepensionsregulator.gov.uk/en/covid-19-coronavirus-what-you-need-to-consider/automatic-enrolment-and-pension-contributions-covid-19-guidance-for-employers

We have also produced a briefing note that may be of interest: https://images.gv-c.com/278/Documents/1658/Briefing_note_189_-_new_easements_from_The_Pensions_Regulator.pdf

If you have any specific questions then please do not hesitate to let us know and we will do our best to assist.

Neil Barton – Neil.Barton@broadstone.co.uk