HM Treasury has published a written Ministerial Statement about the valuation of public sector pension schemes, including the Teacher Pension Scheme.
The valuations will result in much higher costs for employers, including colleges. This presentation explains why
This is a list of what we know:
- The Treasury has issued draft directions to the Government actuary, which are about six months later than expected.
- The directions are instructions to the Government actuary. The valuations are covered by law (the 2013 Public Sector Pensions Act). There is a short consultation on the directions, after which the valuations will be finalised and the contribution issued.
- The Treasury plans to reduce the discount rate in the valuations (known as the SCAPE rate) from CPI+3% used in the last valuation to CPI+2.4% from 2019 onwards. The previous plan was to use a discount rate of CPI+2.8% in this valuation.
- Officials have told the Financial Times (FT) that these changes might increase contributions by £4 billion.
- Any change (increase) to employer contribution rates will take effect from April 2019 apart from in education where the increases will be in September
- DfE officials say that the Department will provide funding to academies, maintained schools and colleges for the period covered by the current spending review period (ie up to March 2020). Future funding depends on the next spending review due in 2019.
Implications for employer contributions
Since 2015, employers have paid 16.48% towards the Teacher Pension Scheme (TPS) while employees have paid an average of 9.6% (contributions vary with pay rates so that higher paid teachers, including principals, pay more).
The recent announcements could mean an increase in the employer contributions to more than 23% - a 40% increase in costs.
Because the Government actuary's valuation is provisional, the final rate is not yet confirmed.
The three causes of the increase are:
- the Treasury decision announced in September 2018 to cut the discount rate used in the valuation from CPI+3% to CPI+2.4%. This replaces an earlier decision to cut the rate to CPI+2.8%
- the operation of the cost cap mechanism which requires DfE to improve benefits for members where the valuation shows that their overall reward from TPS has deteriorated. The actuary now forecasts that teachers will die earlier than expected and therefore receive pensions for less time. This cost cap floor breach requires improvements to the scheme (for example a faster accrual rate). The current calculation is that this will add several percentage points to costs.
- the way in which the scheme rules are written into law. The rules are inflexible and this prevents evasive action to cut scheme costs.
DfE's funding to cover the exceptional increase is likely to be time-limited and incomplete. This will leave the education system in the 2020s with a Teacher Pension Scheme which is unaffordable on current funding levels. Increasing funding would obviously be preferable but even if it happened there would be other uses for the money. A better alternative is probably a review of the scheme rules to bring the costs down
More on public sector pension schemes and the Autumn Budget
It is worth understanding that higher employer contributions help the Treasury in its budget planning because of the short-term nature of government budgeting. This is what IFS's Paul Johnson said in March 2014 in response to the last round of employer contribution increases:
"There was another kind of spending cut dressed up in very curious clothing. The government is expecting the long term costs of public service pensions to rise. This worsens the public finances. The Treasury is, probably sensibly, charging spendong departments for these increased costs. Because it is taking money from them, it is saying it has extra money to spend. Hey presto! A worsening of long run public finances gives the Treasury extra money to spend now. That is not a sensible way to think about fiscal policy."
This is why the £4 billion figure is important The extra pension contributions provide a far for the Treasury to make the books balance - a stealth tax on the public services to pay for the NHS funding deal announced in June.
TPS employer contributions add up to £4.1 billion in income out of a total of £21.1 billion from public sector employers (NHS, civil service, armed forces etc) [Table 2.23 from supplementary fiscal tables provided by Office of Budget Responsibility in March 2018 ] HM Treasury officials are already counting on an extra £2 billion in employer contributions from 2019-20 onwards (announced in the March 2016 budget).
The latest estimate to the media implies a £6 billion increase overall in 2019, amounting to an average 28% increase in employer contributions.
The TPS increase will present a £1.5 billion annual bill to all TPS employers (some of whom are private schools) and cost colleges around £140 million (in addition to the £350 million a year they already spend on TPS). This would be 2% of total income and would play havoc will financial plans drawn up this summer - unless there is full compensation for the higher costs. There is a precedent (from 2003) for DfE covering the higher costs of an interest rate change via a Teacher Pension grant
The bigger point about public sector pensions is that the reforms didn't really tackle long-term costs. The public sector pension reforms implemented in 2007 and 2015 have been undermined by low growth and low interest rates.
Any queries on this note:
Please contact Julian Gravatt, Deputy Chief Executive (Policy, Curriculum and Funding)