The Teachers’ Pension Scheme (TPS) is an unfunded defined benefit pension scheme, backed by the Government, that provides benefits for over 700,000 teaching staff throughout England and Wales. Its Scottish equivalent is the Scottish Teachers' Pension Scheme (STPS). Put simply, today’s pension contributions paid into the scheme go straight back out the door to pay for pensions and other benefits in payment. In other words, outgoings (the level of benefits being paid and the number of members in retirement at any given time) versus incomings (the number of teachers and their employers contributing, and how much) is a bit of a balancing act.
In practice, it’s far from that simple and there are issues with such an approach. One issue is the balancing act itself, the number of people in retirement and length of retirement is generally growing faster than the number of teachers working, meaning contribution rates have had to increase to keep up and expectations are that further rate increases are inevitable.
In addition, the TPS and STPS changed the benefits they offered in 2015 and put in transitional measures for staff nearer retirement. Similar transitional pension arrangements under the Firefighters' pension scheme have since been ruled as unlawful age discrimination (the 2018 McCloud judgement) and further changes have been proposed to address this, including changes to the TPS and STPS. Full details of how and when these changes will be implemented have still to be confirmed for teachers’ pension schemes, but we do know the level of benefits will be higher than under the transitional arrangements and there will be an associated cost which we expect to be passed on to schools in the form of higher employer pension contributions. The resultant contribution rate was due to be confirmed as part of the 2023 scheme valuation and contribution rate review. However, delays associated with the McCloud judgement has deferred the review to 2024 for the TPS. That delay itself will likely further increase costs with pension contributions expected to be higher than they would otherwise would have been, i.e. the rate review is still effective from 2023, it’s just the implementation that’s being delayed and therefore any 2024 increase will need to cover backdated scheme costs including 2023.
About the Teachers’ Pension Scheme:
- Based on career average revalued earnings which provides benefits based on earnings each year which are revalued annually to keep pace with inflation
- Mandatory employer and employee contributions
- Employer contribution rate is 23.68% from 1 September 2019 to 31 March 2023
- Employee contribution rates are between 7.4% and 11.7%, based on an earnings related scale
- Salary sacrifice is not available for employee pension contributions
- Current accrual rate of 1/57th of pensionable earnings in each year
- Revaluation for current members is linked to Consumer Price Index plus 1.6%
- Revaluation for deferred members is linked to Consumer Price Index only
- Option to choose to pay a higher contribution rate in return for a higher accrual rate
- Normal pension age is State Pension age (SPa), currently up to age 68
- Option for those with a normal pension age of over 65 to pay additional contributions to reduce or remove any early retirement reduction that would apply, if they retire before SPa
- Limited access to full retirement freedoms
- Tax-free lump sum option at retirement – £12 of lump sum for every £1 of annual pension given up with a current maximum of 25% of the employee's pension fund
- Actuarially fair early/late retirement factors on a cost-neutral basis except for those with a normal pension age above age 65 who’ll have early retirement factors of 3% per year for a maximum of 3 years in respect of the period from age 65 to their normal pension age.
- Phased retirement arrangements with the additional option of a third drawdown of benefits after 60th birthday
- Death benefits for dependants
- Ill health early retirement options
Source: Teachers' Pensions - relates to post-2015 section of scheme