What next for independent schools pension provision?

   5 min read

Many independent schools participate in the Teachers’ Pension Scheme (TPS) meaning their teaching staff retain access to the same public sector pension benefits as their colleagues in state schools.

Public sector pensions, with the exception of the Local Government Pension scheme, are all unfunded schemes. That means there isn’t a pot of money earmarked to pay public sector pensions. Instead, today’s tax and national insurance payments are used to pay today’s public sector pensions. However, the premise is that the pension contributions paid by employers and employees today, should be based on the cost of paying these pensions as they fall due in the future.  
As a result, the government sets the contribution rates for employers of these schemes at regular intervals. They do this by applying the Superannuation Adjusted for Past Experience (SCAPE) rate which is based on long term growth expectations, and is effectively the discount rate for public sector pensions. When the SCAPE rate goes down, broadly speaking, employer contributions increase. The most recent change in the SCAPE rate, from CPI + 2.8% to CPI + 2.4%, which was implemented in 2019, saw employer contribution rates in the Teachers’ Pension scheme (TPS) increase from 16.4% to 23.6% of salary. The government agreed to cover these costs for centrally funded schools, but independent schools had to cover this increase themselves. As a result, between 2019 and 2022, a significant number of independent schools chose to leave TPS due to financial pressure. 
In March 2023, the treasury announced a further reduction to the SCAPE rate from CPI + 2.4% to CPI + 1.7%, with some commentators suggesting this could push the employer contribution rate up by a similar margin to the 2019 increase. There’s currently no definitive implementation date, but it’s expected to be April 2024. Increased employer contributions, combined with inflationary pressure on salaries and the threat of a new government removing the business rate relief from independent schools, could see a renewed interest from independent schools considering exiting TPS to control costs. 
When independent schools exit TPS they usually look to implement a DC workplace pension to replace it. However, many independent schools will be ill equipped to make an effective choice of a new DC workplace pension scheme without the aid of a financial adviser familiar with the workplace pension market. Advisers familiar with this market will be in a position to help schools explain the changes and the impact they’ll have, to the scheme members. Advisers may also be asked by schools to help structure the new pension scheme and to propose ways of replacing some of the ancillary benefits members may lose when exiting TPS. Similarly, schools may seek adviser input on contribution rates, implementing salary exchange and bespoke branding for the new scheme. 
This isn’t about advisers suggesting schools exit TPS. To date, schools have generally identified the need to exit TPS for cost reasons before the adviser is involved. However, once exiting TPS is being considered, advisers have a huge role to play in ensuring the new arrangement provides the best possible outcome for scheme members.