TPS tests independent schools

With employers’ contributions to the Teachers’ Pension Scheme set to increase by over 40%, what are the implications for Britain’s private schools?

Last updated: 19 Feb 2020 8 min read

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Higher fees, bigger class sizes, and the hiring out of school facilities. Parents with children in private education are noticing measures to cut costs and raise income at their schools. The reason? In an uncertain financial climate, most private schools are facing a large and unexpected increase in their staffing bills from this September. Employers’ contributions to the Teachers’ Pension Scheme (TPS) will rise from 16.4% to 23.6% – a huge hike of 43%.

Nick Kirby, lead officer for pensions at the National Education Union (NEU), the UK’s largest teaching union, explains: “The government introduced a new ‘cost-sharing mechanism’ into the Teachers’ Pension Scheme in 2015, so that if costs rose or fell by more than 2% the benefits would be adjusted accordingly. The aim was to protect the state from having to fund unforeseen increases.

“The irony is that costs fell, due in part to government policy decisions. Teachers in state schools had their pay frozen for years, life expectancy didn’t go up as expected, and workload pressures prompted thousands to leave the profession. This breached the cost-sharing mechanism on the low side, so to keep things at the 2015-relative level, future pension buildup has to be improved.”

Now the sector needs to find £1.1bn to maintain teachers’ pensions at agreed rates. The government has pledged to cover the £830m cost of increased employers’ contributions for teachers in state schools in 2019/20, as well as £80m for staff in further education colleges. Private schools, however, must self-fund their £110m increase (as must post-’92 universities facing a £142m increase).

What does this mean for independent schools?

For a teacher earning £35,000 a year, their school is being asked to find around £2,500 extra in pension contributions. For headteachers and other senior leaders the sums are far higher. An independent school with 50 teaching staff could face increased costs of £125,000 – 150,000 for the 2019/20 academic year alone.

“Schools have to consider how they afford the increase, which may mean they need to look at cutting costs elsewhere,” says David Woodgate, chief executive of the Independent Schools’ Bursars Association (ISBA), which represents over 1,000 schools. “They may have to accept a lower operating margin, review the curriculum or staffing, or look at alternative pension provision.”

Woodgate’s message to ISBA members is clear: “Our position is unequivocally that the Teachers’ Pension Scheme is a first-class defined benefit pension scheme. In an ideal world you wouldn’t think of pulling out of it.”

But the current situation is far from ideal. “It wouldn’t be easy for any business to afford this kind of cost increase,” he cautions. “What schools do about it has to be a decision for each individual board of governors.”

It’s not an easy choice. Most independent schools are registered charities, meaning their governors – as trustees and company directors – have a duty to act in the school’s best financial interests. Catherine Watmore, senior employment law and HR consultant at the bank, says governing boards are asking themselves some difficult questions, such as:

  • Is it right to raise fees to cover pension contributions, rather than to invest in the school?
  • How will parents react to this cost being passed on to them, particularly as their own pension contributions are likely to be much lower?
  • Can we afford the increased contributions?

How does the TPS work?

Like most other public sector pension schemes, the TPS is a defined benefit (DB) scheme. It promises a specific income in retirement, in contrast to defined contribution (DC) schemes, where the amount paid out depends on the pension fund’s investment performance.

“Schools need to look at strategies to make sure they’re still here in five, 10 or 15 years, as any business would if faced with a change in their operating environment”David Woodgate, chief executive, ISBA

In fact, there is no investment fund for these ‘unfunded’ schemes. Instead, current members’ contributions cover pension payments to retired members. According to the NEU, since the TPS was set up in 1923 over £56bn more in contributions has been paid into the scheme than has been paid out in pensions.

What alternatives are there?

Woodgate highlights three alternatives for schools struggling with the imminent increase in TPS contributions. The first is a new DC scheme for independent school staff, developed by Aviva in association with the ISBA. The Aviva Pension Trust for Independent Schools (APTIS) opens this September. Ten schools have signed up, while others are consulting staff about joining.

The second option involves moving teachers to their existing DC pension scheme for support staff.

The third possibility might be phased withdrawal from the Teachers’ Pension Scheme. Currently, schools can’t have some teachers in the TPS and some in other pension schemes. The government says it will consult on whether to allow schools to close the TPS to new staff while keeping existing employees within it. But with politicians focused on other issues, and age-discrimination claims over changes to firefighters’ and judges’ pensions heading to the Supreme Court, such a change could be a long way off – if it happens.

All these options would involve moving from the current DB pension scheme to a DC plan. Woodgate acknowledges a DC scheme would never be as good as a DB one, but believes the flexibility of DC pensions may appeal to some. “Some schools are looking at wider remuneration packages, saying if we have to move to a DC scheme there are other things we can offer you. For younger staff looking to get a mortgage or start a family, being able to take more of their remuneration as salary can be attractive.”

What are the implications of leaving the TPS?

So what if governing bodies decide the best option for their school is to withdraw from the TPS?

On the face of it, the process is simple. The school writes to the Secretary of State for Education explaining it wants to leave. Unusually, there are no financial penalties for pulling out (although this could change in future).

In reality, there are potential pitfalls in leaving, as Watmore explains. “Detailed employment law and HR advice would be required to ensure the school follows the correct legal process, as falling foul of this carries risks of breach of contract, unfair dismissal claims and financial penalties.”

Schools would need to follow ‘collective consultation’ rules, work closely with unions, and factor in time needed to change the employment terms of existing staff and new recruits.

Teaching unions argue schools should at least maintain their current 16.4% employers’ contributions in any new pension scheme, and employees should continue paying at the current 9.6% average. For the ISBA, best practice is having an independent financial adviser explain the pension options to staff, followed by individual consultations to look at each teacher’s financial situation.

The biggest barrier to changing pension arrangements is likely to be private schools’ desire to attract and keep the best teaching staff. “Independent schools recognise that recruitment, retention, morale and movement between sectors are going to be affected if teachers are moved out of the TPS,” says Nick Kirby. To his knowledge, only 41 of 1,171 private schools in the TPS in England and Wales have applied to leave the scheme from September 2019.

What might happen in the future?

There could be more financial storms ahead for Britain’s fee-paying schools. In Scotland, those that are registered charities will lose business rates relief from 2020, costing the sector £7m a year. The Welsh government is consulting on similar proposals. Will England be next?

Labour Party policy is to introduce VAT on private school fees. The Conservatives have rejected the idea, and independent school groups warn it could cost the Treasury more than it saves. Schools need to be mindful that a change of government could add 20% to parents’ bills.

There are other financial uncertainties too. Might a new prime minister adjust income-tax thresholds? What impact will the Brexit outcome have on the economy and international interest in UK schools? What about the impact of the next Teachers’ Pension Scheme valuation in 2023?

“Schools need to look at strategies to make sure they’re still here in five, 10 or 15 years, as any business would if faced with a change in their operating environment. We’re seeing schools consolidating through merger, school groups buying and selling schools, international investors coming into the market,” Woodgate says.

Headlines in the education press warn higher pension costs could force hundreds of private schools out of business, thrusting thousands of pupils into over-stretched state schools. Yet the 2019 Independent Schools Council census suggests the sector is thriving. Despite rises in school fees outstripping inflation and wage growth every year this century, the number of pupils in private schools is the highest since records began. “These are testing times, but the sector will evolve and face up to the challenges,” assures Woodgate.

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