Pensions

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:

• Teacher Pension Scheme valuations
• Colleges and the Local Government Pension Scheme
• The basic rules on scheme membership for colleges
• College insolvency rules
• Pension tax rules
• A guide to the Teacher Pension Scheme 

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.

Teacher Pension Scheme valuations

The Teacher Pension Scheme (TPS) is run by the Department for Education (DfE) which contracts out the administration but which remains responsible for overall management. The 2013 Public Service Pensions Act sets many of the rules, including those relating to valuations. HM Treasury publishes a direction which guides valuations which are carried out by the Government Actuary Department. Valuations assess notional assets, liabilities and contribution rates necessary to secure long-term sustainability. The next valuation will assess the scheme as at 31 March 2024 , is due to completed by late summer 2026, and will set contribution rates for a four-year period from April 2027 to March 2031.

HM Treasury recently published the directions for the 2024 valuations which cover the NHS, civil service, armed forces and teacher pension scheme (TPS). The key change is an increase in the discount rate from CPI+1.7% to CPI+2.0%. This reverses a 10-year trend in which HM Treasury reduced the discount rate (known as the SCAPE rate) from CPI+3.0% to CPI+1.7%. That change was the biggest single cause in the doubling of TPS employer contributions from 14.1% before 2015 to 28.68% between 2023 and 2027. 

In the most recent TPS valuation, GAD said that a reduction in the discount rate of 0.25 points (ie to CPI+1.45%) would add seven percentage points to the employer contribution rate so a starting assumption for April 2027 is that an increase of 0.3 points in the other direction might lower contribution rates by a similar amount, ie to around 20%. This actuarial rollercoaster makes budgeting very hard but colleges, like state-funded schools, have had a DfE grant to protect them from recent increases. We have said to DfE officials that a decision to let colleges keep that grant would help tackle pay issues but the money comes from HM Treasury so we expect a £1 for £1 reduction announcement after the valuation is published.

The most recent teacher pension valuation

Department for Education published the 2020 teacher pension valuation in October 2023. Highlights:

• The report recommended a significant increase in the employer contribution rate (currently 23.68%) to 28.68% from April 2024.
• The new rates took 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%) used in the 2020 valuation. The change in the discount rate over the last three valuations (an 8 year period) 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 2022, HM Treasury "widened the cost cap corridor" from 2% to 3% to ensure that smaller changes in the value of benefits did 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 rose by 1.7% from 27% to 28.7%) while the NHS employer contribution rate rose by 3.1% from 20.4% to 23.7%.

HM Treasury has provided compensating funding to "centrally funded employers" to cover the extra costs of public sector increases since 2019 and have included colleges and schools in that category. 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 which is now worth £223 million in the 2026-7 academic year.

There is a longer note on the Teacher Pension Scheme below.

The Local Government Pension Scheme and colleges

The Local Government Pension Scheme is a defined benefit scheme with common rules and administration via 80 locally managed funds. There are more than 15,000 active employers, more than 6 million members (of whom 2 million are pensioners) and assets of around £400 billion.

The 213 colleges are required by law to participate in LGPS and to offer membership to directly employed staff who are not teachers (about 80,000 people).

LGPS valuations are carried out by actuaries commissioned by fund administrators. The latest valuations valued the scheme as at 31 March 2025 and set employer contributions for the three year period from April 2026 to March 2029.

After a number of valuation cycles in which college contributions rose as a result of assessments that funds were in deficit and that colleges needed to make repayments over shorter time periods, the latest valuations have, in general, resulted in lower payments for the next three years.  The  Local Government Chronicle reported that 79 out of 87 funds reported an increase in their valuation surplus in 2025 compared to 2022 and that the average funding level rising from 107% to 123%. However a key factor in this improvement was a reduction in inflation expectations so it is quite possible this will change in a subsequent valuation. 

Nevetheless, colleges have made a one-off gain in the last few years from the DfE LGPS guarantee issued in November 2024 which we estimated would save colleges around £30 million a year by persuading funds that the sector is as safe in terms of covenant as any other part of the public sector.

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.

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 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 but the decision by the Department for Education to issue a guarantee with effect from November 2024 resulted in many to reverse this judgement. 

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 was abolished in 2024.

These allowances have mainly affected people on higher incomes, rising pay and longer service by requiring them to pay tax if the increase in their annual 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 properly recorded and justified.

A guide to the Teacher Pension Scheme

The Teachers' Pension Scheme (TPS) has been in place for 100 years and ensures that teachers get a decent income in retirement. The Department for Education has overall responsibility for the scheme but contracts the administration out (currently Capita, moving to Tata).

There are around 2 million people who are either: 

• active members 
• receiving pensions. There are now more people receiving teacher pensions than active members 
• deferred members. People who started in teaching, have not yet retired but will get a teacher pension at pension age.

There are four main groups of organisations in TPS:

• State schools
• Private schools
• FE and sixth form colleges
• Post 1992 Universities.

It's a historical anomaly that private schools are in the scheme which dates back to the 1920s. Since 2021, they have been allowed a partial exit. They can stop new teachers joining but existing teachers can continue to build pensions. Post 1992 universities have been pushing for the same rules to apply to them.

TPS is a defined benefit pension which means that a teacher pensioner gets a guaranteed amount decided by the scheme rules rather than something that depends on their individual pension pot. For most of the last century, teacher pensions were based on final salaries. A teacher who had worked 40 years would get a final salary pension worth 1/2th of their final pay (40/80) plus a lump sum worth 3 times their final pay. Or, in a slightly later version of the rules, the pension was worth 2/3rds (40/60) of final pay with no automatic lump sum but with an option to turn some pension into a lump sum ("commutation"). The dividing number ("1/60th" or "1/80th") is known as the accrual rate. Annual pensions are protected by indexing them to inflation rate. This jargon (commutation, accrual rates, indexation) can be important to know in understanding schemes.

Between 2005 and 2015, there were some major reforms to all public sector pension schemes including TPS. These included:

• raising the pension age above 60 and linking it to the state pension age (which, itself, has risen from 65 for men and 60 for women to 68 from 2028). Although the pension age for younger teachers has now risen, many of the older ones have protected rights (eg those in the scheme before 2007 get a full pension at 60) or take a reduction on their entitlement and go early
• changing the basis on which annual pensions are indexed. Used to be linked to the Retail Price Index (RPI). Now linked to the Consumer Price Index (CPI) which is generally lower
• moving the basis on which final entitlements are calculated from final salary to average salary. This has been considered more appropriate for a workforce who may not necessarily work continuously for 40 years and also avoids incentives for people to push for promotions or pay rises just before they retire
• making employee contributions to TPS income related. Teachers pay one of 6 contribution rates, ranging from 7.4% (if their annual pay is less than £34,000) to 11.7% (if it is above £89,000). There is a target average contribution rate of 9%
• standardising the rules for the valuations of the scheme. These are overseen by HM Treasury, carried out by the Government Actuary and adjust the amount that employers pay (the employer contribution rate). There are also cost control arrangements which say that if pensions become a bigger cost overall for certain reasons (for example teachers living longer on average) then employee contributions might have to rise
• setting up governance arrangements for schemes, including a Pension Board. The separate TPS Scheme Advisory Board involving employers (such as AoC) and unions helps DfE officials with scheme rules, policy and valuations

The Coalition Government pushed through big reforms to public sector pensions between 2011 and 2015. They negotiated a deal with the TUC (and other unions) in 2011 which included:

• clear protection for existing rights at the point where changes took effect (scheduled for 2015). New rules applied after that
• writing into law a commitment that there would be no changes to three key protected elements for 25 years (in practice until 2040) without formal agreement of staff representatives. The three protected elements are (a) the fact that schemes are based on career average (b) member contribution rates (c) benefit accrual rates
• transitional protections, which ended up protecting the rights of those who were 10 years from pension age as at 2012. They'd continue to get pensions under the old rules

The legislation putting the Coalition government changes into effect is the 2013 Public Service Pensions Act. Changes to the Local government pension scheme took effect in 2014. Changes to TPS and other schemes like it happened in 2015.

Some unions were also involved in legal action challenging the pension changes. Mccloud (a judge) and Sargeant (a firefighter) won court judgements that the transitional protections breached age discrimination rules because they benefitted older workers without clear justification.  There were several stages to the action but, in 2018, government conceded it couldn't win and took steps to introduce some complicated and expensive changes in which:

• anyone who'd been in the scheme in 2012 would, on taking their pension, get a choice between an entitlement based on the new rules or could get a recalculation assuming the old rules continued. This "deferred choice" will continue to be offered until the 2050s (when the last 2012 person retires) and only covers the period from 2015 to 2022
• transferred everyone (no matter how close to retirement) to the new system from April 2022

Teacher pension valuations assess the long-term costs of the paying pensions (the liabilities). This involves calculations on a wide range of factors over decades ("how long will they live" "how long with their surviving partner, if they have one, live" "how much will current teachers, if they stay in the scheme, earn" "how much will pensions increase as a result of inflation" how much pension will be converted/commuted into lump sums" etc etc)

Normal pension valuations also work out the value of the assets in the pension fund to ensure these liabilities can be covered. Public sector schemes like TPS don't have any assets so there's a calculation about future contributions

Future costs and future contributions are valued at a discounted rate in the future, in that £100 in Year 2 is valued at "£100 less x" in Year 1. The discount rate is very important because it makes a big difference to the net present value (NPV) of all the future costs and future income

All of the calculations about TPS are affected by the changing characteristics (demographics of the scheme). The UK used to have the youngest teaching workforce in Europe but they're getting older and, with falling pupil numbers, the total workforce is no longer growing. Meanwhile all those teachers retiring at 60 (or a bit older) are predicted (in the main) to live to 90. This is a big reason why there are more pensioners than teachers and also means that small increases in the estimated cost of the scheme result in big increases in employer contributions

The employer contribution rate to TPS has risen steadily in each valuation from less than 10% of salary in 2010 to the current level at 28.68%. The increases from 16.48% before 2019 to 28.68% after 2023 was almost solely explained by the reduction in the discount rate used to value the scheme (from CPI + 3% to CPI + 1.7%).  

Government acted to protect important parts of the public sector (NHS, Police, schools) from the post-2019 increases. Colleges have been included in this scheme (a political decision in 2019, public sector status in 2023) but private schools and post-1992 universities weren't

The current valuation of TPS started in 2025 with lots of work by DfE and the government actuary to look at the membership data and work out scheme assumptions. In April 2026, there was official confirmation of the discount rate (CPI+2%) and other key assumptions (set out in a Treasury direction).