The Department for Education has now announced the outcome of the 2020 valuation of the Teachers’ Pension Scheme (TPS). As anticipated, the costs for employers to remain in the Scheme will increase with effect from April 2024 to 28.6% – a relative increase of 21% from the current rate of 23.6%.
Martin Willis, Partner at Barnett Waddingham, comments: “While this isn’t as large an increase as some commentators had initially suggested was possible, it is in line with the most recent expectations and the level that many independent schools had been considering in their strategic discussions. It’s fair to say this increase will be an unwelcome further cost for independent schools to weather in a challenging economic background -including inflation, energy costs and potential VAT changes - and will mean many schools, which had been considering their pension and benefit options, will now need to take action to manage their costs.”
The key driver for the increase in costs is the reduction in the Office for Budget Responsibility’s (OBR) expectations for GDP growth, which has led to an increase in the amount of money that would need to be set aside today to meet the expected costs of pensions paid in the future.
Upward pressure on the school contribution rate has been expected since the Government announced the outcome of the 2021 'Superannuation Contributions Adjusted for Past Experience' (SCAPE) discount rate consultation (Teachers’ Pension Scheme: SCAPE discount rate consultation).
Martin adds: “There are many options open to schools to mitigate this cost increase, from cost sharing and phased withdrawal to the use of parallel options – it isn’t just TPS exit. The right option for any given school is very much dependent on its unique circumstances and we encourage schools to consider their overall total reward package of pension, pay and benefits.
“It is also critical that schools understand the impact that this change will have on their finances, both now and in the future. This will enable schools to make the right decisions at this challenging time and then engage with staff in relation to any proposals. Failure to do either successfully, may pose a significant threat to a school’s long-term future.”
What could this mean in the long-run?
Barnett Waddingham collects and analyses data on school finances with its Data Navigator tool, in conjunction with the Independent Schools’ Bursars Association. When faced with both VAT becoming payable (an understood Labour Party policy) and expenditure increase by a measure of 5% of salary, over half of schools could find themselves with an operating loss*. This is a dramatic increase from the number of schools currently in that position.
Barnett Waddingham has been working with the higher education sector for over 20 years and has advised around 70 schools on TPS (and the Scottish equivalent) and other areas such as sustainability analytics. We have extensive expertise in this area and our expert team can support schools with pensions and benefits strategy, design and implementation and staff engagement. Barnett Waddingham has also recently co-launched the Data Navigator tool with the Independent Schools’ Bursars Association to help schools make decisions using informed analytics.
Full details can be found on our website – Teachers’ Pension Scheme | Barnett Waddingham
*Figures based on a sample size of around 50 independent schools from our Data Navigator survey, and information on total income, total expenditure and teacher salaries for the 2021/2022 academic year. VAT is assumed to be payable on fees at 20% (i.e. before any potential offset) and pension costs at an additional 5% of teacher salaries.
Neil Barton, Head of Business Development at Broadstone, said: “The rate rise will come as a shock to the diminishing number of independent schools that remain in the TPS. It comes at a time when many schools in the sector are battling financial challenges. In September, Labour announced that it will add VAT to private school fees within its first year of government if it wins the next general election.
“We know from recent conversations with our independent school clients that they fear this will affect pupil numbers, so the additional 5% needed for the TPS is a crushing blow and is likely to force even more schools to review their position regarding the TPS.
“We expect significant numbers of independent school operators and governing bodies will consider whether changes should be made. Many schools that have fully exited the TPS have introduced defined contribution schemes with a higher-than-average employer contribution, but other alternatives like phased withdrawal, cost sharing and parallel schemes are worth exploring.
“Broadstone has significant experience in this sector and stands ready to support schools that may want to consider their options.”
Nigel Jones, Head of Consulting & Actuarial at Broadstone, added: “This announcement looks to be the death knell for the participation of many independent schools in the TPS.
“The seemingly ever-increasing contribution burden coupled with the debate around whether the extra outlay actually derives any additional value will see many either fully exit or consider alternative approaches. We expect a busy market helping independent schools consider their options throughout the next few years.”
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