The Department for Education (DfE) has published a response to its recent consultation, confirming that it will fund the 43% increase in employer contributions to the Teachers' Pension Scheme (TPS) for certain education institutions. 

The decision to raise employer contributions to the TPS was taken by the Treasury last September, following rising actuarial estimates of pension obligations, and will come into force on 1 September 2019.

What has the Government said?

The Government confirmed that it will provide £830m to fund the increase to employer contributions to the TPS for state funded primary and secondary schools in 2019 and 2020, with an additional £80m being set aside to cover further education colleges and other publicly funded training organisations.

Education Secretary Damian Hinds commented: "The TPS is, quite rightly, one of the most generous pension schemes in the country. It’s one of only eight guaranteed by the Government because we believe it is important that we continue to offer excellent benefits to attract talented teachers.”

The DfE ruled out extra support for independent schools or higher education institutions covered by the TPS, including universities established after 1992 which are not part of the Universities Superannuation Scheme.

The likely impact on the education sector

Alistair Jarvis, Chief Executive of Universities UK, revealed his disappointment that "the Government has decided not to provide any additional funding to universities in England to offset the costs of unplanned increases in employer contributions to the TPS". He has accused the Government of effectively levying a "stealth tax to boost the Treasury's coffers", commenting that "it represents annual costs increases of an estimated £142m for around 70 post-92 universities across the UK from this September."

For these universities, the contributions increase is a large, unexpected cost. Coming on top of squeezed budgets, already under pressure due to factors such as demographic changes and the tuition fee cap, the long-term viability of the contributions increase has been called into question, as has the short period between the announcement of the increase and its implementation in just over four months' time. 

The University Alliance has said that "many institutions in the higher education sector had been planning their 2019/20 budget to include a two percentage point rise in employer contributions to the TPS in England and Wales, previously announced in Budget 2016." 

They argue that their members have limited resources at their disposal for meeting new costs aside from cutting existing services and diverting funds. University Alliance has therefore suggested that remedial funding should, at least on a transitional basis, be provided to universities on the same basis as for schools and colleges.

Independent schools have similarly highlighted their financial concerns, citing the serious cost pressures that will now be placed on them. Mike Buchanan, executive director of the Headmasters' and Headmistresses' Conference said that while "generally, schools would not want to move away from the TPS, the imminent hike in contributions and the fear of future increases were unsustainable for many." 

It is telling that at least one private sector organisation has chosen to launch a pension scheme for the education sector which offers schools both defined contribution and defined benefit pension provision. However, whether to leave the TPS is a complex decision with any resulting gains needing to be balanced against potential risks, such as appearing significantly less attractive to high quality teachers. 

Next Steps

The DfE will now determine the appropriate allocation mechanism for distributing funding to state funded schools and further education colleges and announce this in due course. It will consider funding beyond 2019-20 at the forthcoming Spending Review.

The DfE has said that it will engage with sector bodies, including the Independent Schools Council and other government departments, on the possibility of giving independent schools the option to leave the TPS by way of a phased withdrawal. This would enable schools to retain current members in the TPS but would close the Scheme to new entrants. 

Independent schools trying to navigate these developments and to decide which pension benefits to offer to their teaching staff are invited to join our webinar on Tuesday 7 May 2019. With our co-host, First Actuarial, we will be discussing the issues that schools need to consider when assessing and implementing their TPS strategy.

If you would like to discuss the implications of the Government's proposals, please get in touch with your usual pensions team contact.

This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.