The third solution we’ve encountered allows teachers to stay in TPS on the condition they agree to a pay reduction equal to the difference between the “old”, pre-increase employer contribution rate and the “new”, post-increase rate.
Alternatively, the teacher can choose to opt out of TPS and receive employer contributions at the “old” TPS rate to a DC arrangement instead. Under scheme regulations, teachers must retain the right to opt in or out of TPS at any time.
There are a number of advantages over the all or nothing solution outlined under option 2:
a) Although this solution creates a mixed economy, with some teachers in TPS and some in a DC alternative, it’s much less likely to be considered an unfair, two tier structure as the employer contribution remains the same across both schemes.
b) It allows members (if they can afford it) a mechanism of staying in TPS albeit at a cost and this may land better than proposals to close TPS to future accrual altogether.
c) If structured appropriately, individual members rather than the employer takes the risk of any future TPS employer contribution increases.
d) If teachers’ opt into the DC alternative, operating optionally on a salary sacrifice basis, they will normally benefit from NI savings.
But there are also disadvantages to this hybrid solution and you may wish to include the following in your discussions with schools considering this option:
a) The school will need to have the resources to run a minimum of two separate pension schemes for teachers, with possibly a third for non-teaching staff.
b) Impacted staff will need to understand what benefits they’d be likely to get if they stayed in TPS compared to what they might get in the proposed DC alternative. Does the school have the resources to afford guidance or financial advice for individual members to maximise the possibility of good outcomes and minimise the possibility of complaints?
c) Perhaps most importantly, this solution needs to be structured with extreme care in order to avoid inadvertently creating tax, equality or employment law issues. For example, the pay reduction for teachers staying in TPS could be structured either as a deduction from net pay or as a contractual reduction to their pay (in our opinion salary sacrifice wouldn’t work because of the requirement to allow teachers to opt in/out of TPS at any time).
- The former would be horribly tax inefficient as there would be no tax relief.
- The latter would result in the teacher having lower pensionable pay, with consequential negative impact on the value of any final salary benefits which retain an ongoing link to it, and on benefit accrual going forward. Teachers may struggle to understand why accrual is lower even though they’ve stayed in TPS. Moreover, contractual pay reductions for some could result in equality issues being inadvertently created.
In short this type of hybrid option is not straightforward and you should think carefully about working with any school towards this solution unless it’s willing and able to obtain legal advice.