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The Government announced back in 2018 that employer contributions to the Teachers' Pension Scheme (TPS) would increase to 23.6% (a rise of 43%) from 1 September 2019. In January 2019, in response to a backlash from schools and colleges which would need to find the additional funds to support those costs from within their existing budgets, the Department for Education (DfE) consulted on how that increase should be funded.
Whilst the DfE confirmed that the majority of education institutions would be given additional funding, independent schools would not, prompting those which were not already thinking about leaving the TPS to consider doing just that.
The DfE has since launched a consultation on a proposal to amend the TPS rules to allow independent schools to exit on phased withdrawal terms. This would enable independent schools to opt out of the TPS in respect of future teaching staff whilst allowing existing staff to remain as active members, in a bid to reduce their pension costs (or at least to offset or confine them).
How do the TPS changes affect independent schools?
Unlike state funded primary and secondary schools (as well as further education colleges and other publicly funded training organisations), independent schools will not benefit from increased funding from the Government to assist with the TPS contribution increase. This leaves independent schools to foot the bill for the increase from their own funds.
Both the Independent Schools Council (ISC) and the Independent School Bursars' Association (ISBA) wrote to the DfE to express concerns raised by some of the independent schools they represent about the financial risk associated with the increased TPS costs.
In a statement made when the increase was first announced, Julie Robinson, Chief Executive of the ISC, said that "an increase on this scale would make the TPS unaffordable for many schools, colleges and universities - regardless of sector - harming already-strained budgets and ultimately diverting money away from the education of children and students across the country".
Independent schools are in a unique position in that participation in the TPS is not mandatory. Despite this, many independent schools offer membership of the TPS to their staff, as they are conscious that their employee benefits need to be comparable to those provided by the TPS in order to recruit and retain talented teaching staff.
Nevertheless, the latest contribution increase is forcing a number of independent schools to reconsider their stance as they struggle to source the additional funding required without detrimentally affecting their staff, students and parents.
Under the current rules of the TPS, independent schools are able to withdraw from participation in the Scheme. The withdrawal process is relatively straightforward and not particularly difficult to achieve (albeit that schools still need to ensure that in doing so, they are compliant with employment law).
The disadvantage of withdrawing – for the school – is that all TPS members must be removed from the Scheme, becoming deferred members; there is no option to allow existing staff to remain as active members whilst new recruits are offered an alternative pension arrangement. This 'all or nothing' approach is what deters many employers from following this path; whilst they wish to reduce their pension costs, they also want to retain their existing staff, and withdrawing membership of the TPS is not conducive to this.
The disadvantage of withdrawing – for the TPS, especially if there is a mass exodus – is that the member and employer contributions which would have been received by the Scheme and used to pay pensions due in that year to retired teaching staff, would no longer be received. That would have a financial impact on the TPS.
What is the proposal?
The proposal now being consulted upon has been developed in conjunction with the ISC and the ISBA to address the issue of having to withdraw all teaching staff from the TPS.
The DfE's intention is to amend the rules of the TPS to introduce a 'phased withdrawal' mechanism. Phased withdrawal would allow the participation of an independent school to be 'frozen', meaning that existing teachers could remain as members of the TPS whilst they are employed by that school, but teachers who are recruited by the school after it has become frozen would not join the TPS (even if they were members of the TPS immediately beforehand).
The consultation document states that the purpose of the proposed phased withdrawal is to "allow some schools to remain in the TPS with the knowledge that, over time, the costs associated with the scheme would reduce through natural staff turnover. At the same time, those schools would leave the TPS gradually thereby reducing the financial impact on the scheme."
Newly recruited teachers would of course need to be provided with a pension arrangement that complies with automatic enrolment legislation. However, independent schools would have the option to provide something that goes beyond the statutory minimum for auto-enrolment - and to compete for good teaching staff, it would likely have to be in excess of this - but which costs less than the TPS.
Phased withdrawal would also allow a teacher who was no longer in pensionable service (for example, as a result of sick leave or family leave) to resume active participation in the TPS where the period involved is covered by statutory rights or the contract of employment. In cases where the leave of absence does not attract statutory or contractual protection, the decision as to whether the teacher could re-join the TPS would be at the discretion of the school.
Frozen schools would also have the opportunity to return to the TPS at a future date but would be required to enrol all eligible teaching staff from that date.
Next steps
The DfE is seeking feedback on its proposal by 3 November 2019. Following this, it will consider all responses before making a final decision, which is expected to be published by late 2019.
In the meantime, it is reported that a total of 62 independent schools have notified the DfE of their intention to withdraw from the TPS since the contribution increase was announced. Womble Bond Dickinson partnered with First Actuarial earlier this year to host a free webinar to describe the withdrawal process from both a pensions and an employment law perspective, and also to provide an overview of the alternative pension arrangements that are available. If a school is looking to withdraw from the TPS, it is important to have modelled a good quality alternative arrangement that is appealing to staff but does not cost as much as the TPS.
If you wish to learn more about your options as the DfE's proposal continues to evolve, please get in touch.
