To stay or leave the Teachers’ Pension Scheme

To stay or leave the Teachers’ Pension Scheme as employer contribution rate rise to 28.6%

Recently, the Government announced a Teachers’ Pension Scheme update and confirmed that the employer contribution rate to the Teachers’ Pension Scheme will rise by a further 5% to 28.68% with effect from April 2024. This represents a further 21% increase in the employer contribution rate (on top of the prior 43% increase in September 2019) and confirms the previous steer given earlier in the year by HM Treasury which had indicated the “direction of travel” was towards a 5% increase.  

As a result of this significant additional cost for independent schools, it is widely expected that there will be a further wave of consultations on the Teachers’ Pension Scheme (TPS) across the sector in the coming months. 

Adam McRae-Taylor, Legal Director at Moore Barlow, explains the options available to independent schools and highlights the risk in delaying consultation. 

How many schools have left TPS now?

Figures from the Independent Schools Bursars’ Association indicate that over 338 independent schools have fully exited the TPS, and a further 122 independent schools have implemented phased withdrawal (see below). Around 150-170 independent schools are understood to be currently in consultation.  This means approximately one third of the sector has taken some form of action with the remainder adopting a watching brief until now.

Are many schools starting consultation in January 2024?

We have seen significant interest in recent weeks from schools looking to start consultation in the New Year.  This planning is on the basis of a target exit date of 31 August 2024, which is now the earliest realistic date by which to implement changes, meaning those schools still in the TPS will have to bear at least five months of the higher contributions from April 2024.  

What are the risks in delaying consultation?

The most immediate risk is having to absorb the higher contribution rate for a longer period of time.  Experience from the last valuation in September 2019 also suggests that there is a limited window in which schools can argue that the increased contributions are ‘new’ and ‘unaffordable’.  Once the higher rate has been paid for a while, it becomes harder for schools to argue that it is unsustainable and thus becomes the new reality.

Does the likely prospect of a Labour Government affect the situation at all?

Current polling indicates that it is very likely that Labour will form the next Government at some point in the next 12 months.  Labour’s policy of imposing VAT on independent school fees will place further fiscal pressure on independent schools, many of which are already operating on tight budgets in an environment of high inflation, rising interest rates and a general cost of living crisis.  In this context, taking action regarding the TPS is one of the relatively few financial levers available to independent schools seeking greater financial stability.

It is also worth noting that the employment law environment is likely to tilt more in favour of employees under Labour.  At its recent party conference, Labour again pledged to end the practice of so-called ‘fire and re-hire’, also known as ‘dismissal and re-engagement’. This is currently the only means by which schools can push through changes to the TPS if, after extensive consultation, teachers still do not agree.  If Labour legislates in this area, then altering pension arrangements will become considerably more challenging.

Are most schools fully exiting or using alternative models such as the ‘hybrid’ or ‘phased withdrawal’?

In the first wave of TPS consultations, the focus was very much on securing a full exit from the scheme.  More recently, schools have been keener to offer staff a choice under the so-called ‘hybrid’ model.  This is where teachers can choose to stay in the TPS but have to bear the costs of increased employer contributions themselves alongside the alternative option of a defined contribution scheme.

In the past year, we have also seen a notable increase in schools considering the ‘phased withdrawal’ model.  Phased withdrawal allows schools to close access to the TPS to new starters whilst keeping current teachers in the scheme. It depends on staff turnover to reduce the burden of staying in the TPS, which means that any financial savings would only be gradual.  For this reason, it is now common practice for schools to use phased withdrawal in combination with another option, such as the hybrid model, in order to control costs. 

Are strikes likely if we consult about leaving the TPS?

The past 12 months have seen industrial unrest across many sectors, and schools have been no exception.  Strike ballots (and often requests for union recognition as well) have been a tactic in the armoury of unions fighting changes to the TPS for some time.  However, there does now appear to be an increased willingness not just to ballot for strike action, but actually carry it out as well.  Detailed scenario planning in this area is, therefore vital.

How Moore Barlow can help

Our Independent schools team has extensive experience in guiding schools through consultations on the TPS and further details, together with our range of fixed fee TPS support packages, are available.