14th Mar 2019

Teachers’ Pension Scheme – to leave or not to leave?

Share this blog post

We have recently had a number of interesting conversations with independent schools in light of the forthcoming (September 2019) 40% increase to employer contributions for the Teachers’ Pension Scheme (TPS).

Many schools are at present actively discussing their position, taking professional advice and fully considering the available alternatives to the TPS. Others have acted quickly and have already made the decision to either stay or seek an alternative.

For some schools, current and future financial constraints dictate that 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. Others are being more circumspect, examining their finances closely to ascertain whether the proposed increase can, at least in the short to medium-term, be absorbed within their annual budget. Although the employer contribution increase takes effect from September, we suspect that many schools will still be considering their preferred course of action long into the second half of 2019, and some into 2020 and even 2021.

We are minded to leave the TPS – what do we need to be aware of?

Schools that are minded to leave the TPS need to be aware that their only option is full exit. It isn’t possible, for example, for schools to simply close the TPS to new entrants which has traditionally been the first course of action for organisations that are planning to replace their existing defined benefit pension scheme. So, leaving the TPS means pulling all existing teaching staff out of the TPS.

Defined Benefit or Defined Contribution?

Should schools consider an alternative defined benefit (DB) scheme or a defined contribution (DC) replacement? We believe that many schools will opt for the latter, as from a future risk perspective, opting for another DB arrangement is potentially exposing the school to the same or greater level of risk than that posed by the TPS. By contrast, a DC scheme will help a school manage its cost base much more effectively because (subject to automatic enrolment minimum contribution requirements) the cost of DC provision is more or less fixed and can be accurately budgeted for.

But is it not the case that DC schemes are nowhere near as good for the member as a DB alternative? Yes and no, depending on your viewpoint and often on the circumstances of the individual concerned. DB schemes provide what is effectively a guaranteed benefit to the individual, whereas the level of pension provided by a DC arrangement is dictated purely by the contributions made (employee + employer) 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.

For the individual there can also be significant advantages to a DC arrangement. Since the introduction of legislative changes (Pensions Freedoms) in 2015, the requirement to purchase an annuity at retirement has been relaxed and only 1 in 4 people now do so. Alternatives such as flexible income drawdown are proving very popular. Income drawdown allows the individual to vary the amount of money taken annually from their pension pot to suit their requirements, and can be tax-efficient if managed carefully.

So, we have decided to leave, what do we need to be thinking about?

If a school is planning to exit from September 2019 then they will need to start taking action very soon.

Closing an existing scheme and opening another is a 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.

From a legal perspective the school will need to examine existing contracts of employment to check whether membership of the TPS has been specified contractually for their teachers. If it has then a consultation period (minimum of 30 days) may need to be undertaken.

Regardless of the employee contractual situation, schools should also be mindful that The Pensions Regulator requires employers with more than 50 employees to consult upon proposed changes to occupational pension arrangements. The consultation process is a minimum of 60 days.

What is clear is that many schools will require professional advice, both from a practical and legal perspective. Here at Broadstone we have a track record of working with independent schools to help them manage their pension arrangements and we can provide advice and guidance with regard to project planning and management, new scheme selection, communication exercises (etc.) amongst other areas.