The employer contribution that colleges, schools and post-1992 universities pay to the Teacher Pension Scheme will rise from 16.48% to 23.68% in September 2019 - an increase of more than 40%.
Here is an explanation of what is going on and some context.
- A 23.68% employer contribution from September 2019: All TPS employers will pay the higher 23.68% contribution from September 2019. The contribution includes a 0.08% levy to pay for administration. The underlying rate rises by 43% from 16.4% to 23.6%. There is no change in the income-related contributions that teacher pay (which average 9.6% of salary).
- Increases across all public sector schemes: There are increases across all public sector schemes from April 2019. The NHS employer contribution is rising from 14.3% to 20.6%. The Civil service contribution is rising by about 6% to between 26% and 30%, Police, firefighter and other contributions also rise. The teacher increase was deferred to September 2019 to make budgeting easier.
- New actuarial valuations prompted the employer contribution increases: The increases follow valuations carried out by the government actuary. The valuations are covered by law (the 2013 Public Sector Pensions Act) and are based on Treasury directions. A key change in this round of valuations is a reduction in the discount rate (known as the SCAPE rate) from CPI+3% used in the last valuation to CPI+2.4% from 2019 onwards (see Treasury written statement from 6 September 2018).The previous plan (announced in the Spring 2016 budget) was to use a discount rate of CPI+2.8% in this valuation.
- £5.7 billion in extra employer contributions: These increases amount to an estimated £5.7 billion in extra costs for employers (see Pages 227 and 231 of the Office of Budget Responsibility October 2018 economic and fiscal outlook. The Treasury runs these schemes on a pay-as-you-go so the extra contributions are recorded as income in the national accounts and result in a reduction in net public sector pension spending from £12.6 billion in 2018-9 to £6.7 billion in 2019-20. The breakdown of public service pension scheme expenditure and receipts is in Table 4.8 of the Office of Budget Responsibility's March 2019 supplementary fiscal tables.
- £4.7 billion in funding to cover costs for one year only: HM Treasury allocated £4.7 billion in the 2019-20 budget to cover costs in schools, colleges, the NHS and elsewhere. The NHS 5-year funding settlement includes money for extra NHS pension costs for a full four years. Decisions on other services will be made in the 2019 spending review.
- Funding for schools and colleges in 2019-20: DfE plans to distribute a Teacher Pension Scheme Employer Contribution Grant (TPSECG) to schools and colleges for the 2019-20 academic year to fully fund them for the extra costs. DfE estimates the schools funding will cost £880 million and the college funding £80 million. DFE has decided not to funding the 79 post-1992 universities and higher education institutions that are in TPS.
- Cost increases disclosed in the valuation process: DfE has not yet published the final valuation. There have been several twists and turns in the valuation process. First of all, the directions from the Treasury to the government were late which meant that the valuation was late. The actuary started work in summer 2017 but did not get draft directions from the Treasury on the discount rate until September 2018. A second challenge was 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 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 TPS Scheme Advisory Board discussed and agreed ways to rectify the cost cap but these plans were suspended by the Chief Secretary to the Treasury on 30 January 2019 in a written statement
- The legal challenge to the 2015 public service pension reforms: The Court of Appeal decided in December 2018 (in the Mccloud and Sargeant appeal) that the 2015 reforms to the pension and fire fighter schemes discriminated against younger people on grounds of age because transitional protections assisted older judges and firefighters but not younger ones. The government is applying to the Supreme Court for leave to appeal the ruling but officials in several departments (including DfE) are working on proposals to act on the ruling. In theory this could result in changes to the pension arrangements for millions of public sector staff. Perhaps because of an assumption that pensions are boring, there has been very little discussion of this issue (outside briefings from law firms and the specialist finance media). Nevertheless in the January 2019 written statement, Treasury instructed all schemes to suspend cost cap rectification but to move ahead with planned employer contribution increases because the full costs of dealing with this issue might be another £4 billion a year.
- Questions about the sustainability of TPS: The increase in employer costs mean the education system will start the 2020s with a Teacher Pension Scheme which is more expensive than arrangements in the private sector but not compared to central government . The public sector pension reforms implemented in 2007 and 2015 reduced long-term costs in some ways by increasing the pension age (deferring retirement) and changing the basis on which pensions are indexed (from RPI to CPI) but long-run costs have increased. Low economic growth appears to have resulted in permanently lower interest rates. The switch to career average calculations of pensions seems to have made on a cost neutral basis. Meanwhile the cost cap mechanism put in place in the reforms protects staff but at the cost of higher contributions. Finally, a key plank of the 2015 reforms is now in doubt because of the Court of Appeal judgement. There is no reason why the education system cannot manage with a higher 23.68% employer contribution rate but only if public spending on education is set at a higher level. HM Treasury's current spending plans imply limited increases in the education budget and there are lots of other pressures so there is a risk that higher pension costs will reduce the money for other things (eg pay levels, the number of people employed).
- Alternatives to TPS: State funded schools, colleges and post-1992 universities are required by the TPS membership regulations to offer TPS to employed teaching staff. The membership rules are complicated but it is worth noting that staff employed by subsidiary companies cannot access TPS. Private schools have the ability to leave TPS entirely but have asked DfE for a mixed economy arrangement in which they existing staff can remain in membership but new staff would be offered alternatives. DfE states in the report on the funding consultation (here, page 19) that it will consult on offering more flexibility as a mitigation.
- What happens next?: DfE will issue 2019-20 grant allocations to schools and colleges soon. The Government actuary will publish the valuation shortly. Treasury will complete its spending review in autumn 2019 which will set budgets for 2020 and afterwards. The Supreme Court will decide whether to hear the government's appeal later this year. The next round of public service pension valuations will assess schemes as at March 2020 and will determine contribution rates and benefits from April 2023 onwards. In correspondence with HM Treasury, the government actuary gave several hints that contributions might rise again in 2023 - because the CPI+2.4% discount rate is both above the private sector discount rate and current official economic growth forecasts and because the cost cap mechanism might be breached again (Pages 14, 42 and 43 of this correspondence)
Any queries on this note:
Please contact Julian Gravatt, Deputy Chief Executive (Policy, Curriculum and Funding). This note does not constitute financial advice.