Pensions are an important element of the employment contract between the 224 colleges in England and their 150,000 people (97,000 full-time equivalent staff).
Colleges participate in two very large public sector schemes: the Teachers' Pension Scheme (TPS) and the Local Government Pension Scheme (LGPS). Their participation is governed by law and policy. Staff clearly value their membership because opt-out rates are low. Colleges spend a total of £360 million on employer contributions to the Teacher Pension Scheme (TPS) and £240 million on the Local Government Pension Scheme (LGPS), which is about 9% of income. Colleges have no choice about whether to use these schemes, have limited influence on scheme rules and have had to manage big increases in contributions in recent years.
The rest of this page provides information on:
- The recently published Teacher Pension Scheme valuation
- The latest news on the Local Government Pension Scheme as this affects colleges
- The basic rules on scheme membership for colleges
- College insolvency rules
- The transitional protection changes following the McCloud judgement
- Pension tax rules
Any queries (or corrections) to Julian Gravatt who wrote these pages and who is not qualified to provide personal financial advice. Contact a financial advisor is that is what you need.
The recently published Teacher Pension Scheme valuation
The Department for Education published the 2020 teacher pension valuation on Friday 27th October. Highlights:
- The report recommends a significant increase in the employer contribution rate (currently 23.68%) to 28.68% from April 2024.
- The new rates takes effect from April 2024 and last three years until March 2027.
- The main cause of the increase is the lower discount rate (reduced from CPI+2.4% to CPI+1.7%, ie a long-term rate of 3.7%) used in the 2020 valuation. The change in the discount rate over the last three valuations (an 8 year period) has made the employer contribution rate 15.6% higher than it would have been if there had been no change (see diagram on Page 8 of the government actuary report)
- There are lots of moving numbers in what is a complicated process. In 2022, HM Treasury "widened the cost cap corridor" from 2% to 3% to ensure that smaller changes in the value of benefits do not result in swings in the contribution rates every time there is a valuation.
- The Government Actuary Department (GAD) carries out all unfunded public sector pension scheme simultaneously. Civil service employer contribution rates will be rising by 1.7% from 27% to 28.7%) while the NHS employer contribution rate will be rising 3.1% from 20.4% to 23.7%.
Ministers have already confirmed that HM Treasury will be providing compensating funding to "centrally funded employers" to cover the extra costs of these increases and have also confirmed that colleges, like schools, will be covered by an increase in existing funding. DfE consolidated teacher pension funding for schools into the national funding formula a few years ago but has continued to pay a separate Teacher Pension Employer Contribution Grant to colleges. Officials say this will continue. The amount will need to increase from £148 million to nearer £250 million a year and the formula used may mean that some colleges do better and others worse.
As with all budgets, Ministers have made no promise of funding beyond March 2025 because the current spending review period ends then. It feels unlikely that government would create a cliff-edge by cancelling the budget at that point but this remains a financial risk.
There are four main groups of TPS employers:
- state funded schools
- private schools who now have the ability to opt out of TPS for new staff while preserving membership for existing staff
- post-1992 universities who are currently stuck in that they don't have an opt-out (unless they employ staff via a subsidiary company) but don't have any funding promise.
The Coalition government overhauled public sector pension rules about ten years ago and included a twenty five year lock in the 2013 legislation which introduced consultation rules up until 2040. This is believed to limit the ability of any current or future government to make changes to the core rules and, having had a Court of Appeal defeat on discrimination (the McCloud judgement), it would take a determined set of ministers to want to make changes. There are, nevertheless, several reasons why it would be sensible for all involved in teacher pensions to think about reforms:
- the valuation rules have resulted in large contribution increases for employers that were not predictable ten years ago. The reduction in the discount rate from CPI+3% used in the 2012 valuation to CPI+1.7% used for 2020 has resulted in the contribution rate being 15.6% higher than it would have been with no change. One way that government could smooth these changes is to allow deficit recoveries over a longer period.
- there are now almost as many teacher pensioners (665,000, up 6.5% in 4 years) as active Teacher Pension Scheme members (721,000, down 0.7% in 4 years). There has been a large growth in deferred members (ie teachers who've left before retirement age, up 23% to 645,000). The costs of the scheme are falling on an active workforce that may diminish in future. Recent DfE statistics predict a 9% reduction in primary school pupil numbers.
- the TPS rules require teachers either to take full membership or opt-out. There is no equivalent to the 50/50 option available to Local Government Pension Scheme members.
- TPS guarantees benefits to all members including highest paid staff which creates costs. Higher paid teachers pay larger contributions but, given that the purpose of schemes like TPS is partly to provide security in retirement, a salary cap for defined benefits (like the Universities Superannuation Scheme) might be worth considering.
- TPS covers almost three-quarters of million teachers but there are a similar number of education staff in LGPS which has different rules and which is defined for slightly different purposes. TPS covers some staff in universities but the main scheme in that sector is the Universities Superannuation Scheme. There is nothing inherently wrong in having several different schemes and rules for education but it might be better if this resulted from conscious choices rather than historical accidents. The recent contribution rise is particularly difficult for post-1992 universities who have no choice about scheme membership and little influence on costs.
The Local Government Pension Scheme and colleges
The Local Government Pension Scheme has national rules and is organised through 80 locally managed funds. Each fund commissions an actuary to assess its assets and liabilities every three years and these valuations result in changes to employer contributions in line with the fund's strategy statement. The most recent valuation took place as at 31 March 2022 with contribution changes taking effect for a 3-year period from April 2023 to March 2026. The LGPS Scheme Advisory Board published an report on the 2022 valuation. Highlights:
- number of scheme members rose by 6% to 6.6 million.
- total fund assets were £361 billion compared to liabilities on local funding assumptions of £339 billion. Fund assets are 24% higher than reported three years ago in the 2019 valuation.
- the cumulative scheme deficit was £37 billion in 2019 and £6 billion in 2019 but there is now scheme surplus of £22.1 billion.
- The average funding level has moved from 90% in 2016 and 98% in 2019 to 107% in 2022.
- average employee contributions have risen from 6.2% to 6.6%, a reflection of pay rises
- the average primary employer contribution has risen from 18.6% to 19.8% but the average overall contribution has fallen from 22.9% to 21.1% and with the majority of funds applying employer covenant tests, averages mask big variations
Some colleges nevertheless experienced a rise in employer contributions in 2023 for one or more of the following reasons:
- the circumstances of their fund were less positive than the national average
- contributions rose to cover increased estimates of future service
- their fund decided to reduce the deficit recovery period
College staff membership of TPS and LGPS
Staff who are employed by colleges are entitled in law to join either the Teacher Pension Scheme (if they have a teaching role) of the Local Government Pension Scheme (in any other role). Membership is not compulsory - individuals can opt out of membership - but auto enrolment rules require all employers above a certain size (including all colleges) to enrol staff in pension schemes unless they opt-out. This chart summarises the key points about membership.
The LGPS scheme following the 2014 reforms
The LGPS scheme was reformed between 2011 and 2014. Information on the current scheme is available here or on the websites of the individual funds.
The TPS scheme following the 2015 reforms
The TPS scheme was reformed between 2011 and 2015. Information on the current scheme is available here.
College insolvency rules and pensions
Colleges are subject to normal insolvency rules plus specific education administration arrangements which were set out in the 2017 Technical and Further Education Act. DfE’s guide for governors on the college insolvency regime provides full details of the new arrangements.
The insolvency arrangements have been used on three occasions between 2019 and 2022. In each case (Hadlow College, West Kent College and St Mary's College Blackburn), DfE appointed an education administrator to oversee and wind up the affairs of the college. The administrator is an insolvency practitioner with a duty to both protect creditors (maximising the value of assets so they can be paid) and students (ensuring continuity for the education). In the two Kent insolvencies, the administrator transferred buildings, courses, staff contracts and pension liabilities to three different colleges. This avoided a loss for the LGPS funds. In the St Mary's Blackburn case, there seem to be more debts than assets but the insolvency has not finished yet.
The introduction of the college insolvency law has dented confidence among scheme administrators and prompted some to increase rates by up to five percentage points in the contribution period starting in April 2023.
Reclassification of colleges to the public sector makes it much less likely DfE will use the insolvency rules and walk away from debts. A government guarantee letter similar to the one issued for academies in July 2013 would make a meaningful difference. DfE issued that guarantee to ensure that LGPS funds would not treat academies as high-risk employers.
The transitional protection changes following the McCloud judgement
Following the high court judgement that the transitional provisions of the government's public sector pension reforms resulted in age discrimination, government departments have made changes to the rules to rectify the problem. DfE published new regulations and has a public facing explanation of new processes on its website.
The new transitional protection rules result from the McCloud judgement which bring significant changes to public sector pension schemes in 2022. Back in 2018, the Court of Appeal ruled that that transitional protection given to pension scheme members who were ten years or less from retirement represented age discrimination because it gave advantages to older members over younger members. The judgement related to the judges (McCloud) and firefighters (Sargeant) schemes. The government decided it would not win an appeal and, instead, is reforming all public sector schemes (including TPS and LGPS) to extend the transitional protection arrangements to all pension scheme members for a 7 year period. There are several aspects to the reforms but the key points are:
- TPS members who were in the scheme in 2012 have the option to have pension service between 2015 and 2022 calculated on a final salary basis. Some members will have benefitted more from the career average calculations used since 2015 so the rules give pension members the choice between two methods which they can exercise when they take their pension. This has been described as the Deferred Choice option and came into effect from 1 October 2023.
- People who were in TPS in 2012 but who left the scheme have an option to rejoin for service between 2015 and 2022 in certain circumstances but need to apply before 30 September 2024. Applications need to be made directly to the DfE.
- transitional protection works differently in LGPS so the McCloud-related adjustments affect a smaller number of members and will take effect in April 2023.
These changes make the rules more complicated and create a need both for more information for members and changes to administration.
Pension tax rules
In the last fifteen years, government has restricted the pension tax relief by introducing restrictions on he pension entitlement that individuals can build up. There have been two main restrictions:
- an annual allowance (AA)
- a lifetime allowance (LTA), which will be abolished from March 2024 following a decision in the March 2023 budget.
These allowances have mainly affected people on higher incomes, rising pay and longer service by requiring them to pay tax if their annual or lifetime pension entitlement exceed these thresholds. . For defined benefit schemes like TPS and LGPS, the pension administrator notifies individuals each autumn of the value of their entitlement and their pension input amount (PIA). If the PIA exceeds the annual allowance then an individual may have a tax liability but there is an option to carry forward unused allowances from two previous years. It is the individual’s responsibility to settle any tax due via their income tax self-assessment. There is a “scheme pays” option in both TPS and LGPS which defers the tax payment until the pension is drawn.
Individuals should take financial advice before making major decisions affecting their own finances.
Some principals and chief executives of colleges have either decided voluntarily to withdraw from membership of the relevant scheme or have agreed different employment arrangements with their governing bodies which change their pay arrangements, perhaps by reducing their hours. The cost of the additional taxation has prompted some individuals to retire earlier than they might otherwise have done. A governing body may decide that it wishes to take action to retain and motivate individuals.
Governing bodies need to follow proper processes in deciding senior pay and operate in an environment requiring more transparency. It is reasonable to consider an alternative pay and pension arrangements to ensure they retain a senior postholder. Any decision should be taken – and recorded – in a way that addresses ESFA and OfS requirements.