Significant pension contribution increase expected next year. With 12–18 month lead time to consult on and implement changes, act now to avoid the increase.
For many of us, if something does not definitely have to be done right now, then it can be pushed into a tomorrow that rarely arrives. Especially if it’s something unwelcome or uncomfortable.
There may be an understandable temptation to lapse into this kind of rationalisation when it comes to the forecast increase in the contributions independent schools will have to make into the Teachers’ Pension Scheme (TPS) and its Scottish equivalents, the Scottish Teachers’ Pension Scheme and Scottish Teachers’ Superannuation Scheme, following the outcome of the scheme valuation method consultation earlier this year.
The outcome of this valuation and the resultant employer contribution rate probably won’t be known until this autumn but government has confirmed the discount rate used when assessing the scheme’s liabilities has reduced.
This means those liabilities and the associated scheme funding - primarily employer contributions - will go up.
Indeed, the treasury has confirmed it will provide additional funding for state schools affected.
It’s worth bearing in mind that this valuation was delayed and the new employer contribution rate should have come into force from April 2023.
The previous rise came into being in September 2018 after an April valuation, five months later.
This time, the gap is expected to be between 12 and 18 months and it’s anticipated that the cost of delay alone will add at least an extra percentage point to employer contribution rates.
After salaries, a school’s pension contributions are almost always the largest staff cost. In an era of unprecedented financial pressure across nearly the entire independent school sector, it’s prudent bordering on inevitable that pension and benefit costs have to be put under the spotlight.
However, that’s not necessarily a bad thing.
Whilst the TPS has been in steady decline (final salary now closed to future accrual for everyone, reduced benefits for most, later retirement dates, plus increased teacher and school contributions), the alternatives offered in the highly competitive private sector continue to be improved to the point where it’s now possible to design a replacement defined contribution scheme that compares very well to the old state scheme.
In short, it is an opportunity to both reduce and control cost yet offer a highly competitive alternative.
This assertion needs revisiting on the basis that independent schools typically contribute at two or even three times the average combined DC contribution rate of nine per cent, offering demonstrable value for both schools and teaching staff.
As bursars and management teams know, soaring costs, like energy bills and pay rises (i.e. 100% pensionable pay awards), have increased the burden on budgets and with VAT on fees a looming certainty in the event of a Labour government, the pension cost risk is one red light on the dashboard you can address now.
More than 400 independent schools have already left the TPS, with many more in the pipeline.
Many have done so having achieved a key priority – to control pension costs for a tomorrow that, as most of us know, comes all too quickly.
If you would like to explore any of the above further, or want to discuss your school’s particular circumstances, just get in touch.