Paying more or less into the Teachers’ Pension Scheme may miss the point

The technical aspects of how the Teachers’ Pension Scheme (TPS) works can be a challenge to translate even for a readership which is knowledgeable, rather than expert.

So when we see a possibility that independent schools may have to pay less into the scheme, it seems that it’s straightforward “good news” to share.

After all, with employer contribution rates soaring 75 per cent since 2015, the direction of travel for schools and their finance teams has been one way.

With the outcome of the next valuation of the TPS due later this year, those in the know are saying that because of the way schemes are valued, it may result in lower costs for the independent sector.

And that’s a clear message to send to schools, many of which, have been struggling with rising costs, pensions being one of the largest.

Except, the outcome is not entirely clear-cut.

A higher ‘SCAPE’ discount rate (one of the main factors for valuing public sector pension defined benefit schemes) would, in isolation, mean lower contributions. A reduced rate would mean higher contributions.

The government has announced it is to raise this rate, based on global economic forecasts, from 1.7 to 2 per cent.

The upshot is that, all things being equal, contributions for school may be reduced by as much as seven per cent.

Whatever the result, the contributions independent schools pay into the TPS have been relentlessly higher while the retirement outcome for most is now reduced via career average, rather than a final salary basis.

So while contributions may come down from currently 28.68 per cent in England and 26 per cent in Scotland, it’s still a high starting point and a cost over which you have no say or control whilst tied to the TPS.

And if the pension income they lead to has been diminished by moving away from final salary, what implications does this have for your school considering the TPS challenge, and for teachers and their retirement income?

We won’t know until the valuation is published later this year. As it stands, it’s looking less likely to be bad news for your school. This is a positive news story during a time when bills only seem to have only been going one way.

However, this lack of financial control, together with eye-watering contribution rates for a benefit that now looks to provide less than it used to, is still worth a closer review.

Thanks to Eversheds for their very good, more technical article, which we have drawn on, here.