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    STPS exit penalties: don't be caught unawares

    26 October 2021

    Graeme Bell

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    2 minute read

    What potential exit penalties could mean for independent Scottish schools

    As you may be aware, when and if the teachers’ pension schemes will introduce exit penalties, also known as section 75 debts, is one of the key considerations and risks for independent schools reviewing their future pension strategy.  

    For schemes that do trigger section 75 debts for withdrawing employers, the level of employer debt can be prohibitive at levels that can usually be measured in multiples of an employer’s annual pension contributions. This leaves some employers between the proverbial rock and a hard place, struggling to afford ongoing participation in a scheme because of rising contribution costs, but unable to afford the exit costs. 

    Fortunately, exit penalties don’t exist under the rules of the current teachers’ schemes [the ‘legacy’ Scottish Teachers’ Superannuation Scheme (STSS) and the soon to be reformed*1 Scottish Teachers’ Pension Scheme 2015 (STPS)], meaning schools can currently withdraw with no liability for their deferred members. The following response from the Department of Education to the Independent Schools’ Bursars Association (ISBA) suggests that position is unlikely to change soon or quickly: 

    “On exit penalties, I can confirm that such provisions do not exist in the existing scheme rules and the department has not considered introducing such a policy. It is worth reminding schools that any such change would require legislation which, under the Public Services Pension Act, requires consultation, so all employers would have ample notice of any consideration to impose an exit penalty (or any other scheme changes). In addition, it takes on average 12 months to make changes to the scheme rules, so schools should not feel pressurised … to leave the scheme to possibly avoid something that may or may not happen.”

    However, whilst this statement may provide some reassurance, I don’t think it materially changes anything and suggest schools keep potential exit penalties high on their agenda and risk register [risk: probably will materialise as an issue and would have a very high impact].

    With scheme costs, primarily employer contribution rates, already at record highs and expected to continue rising, it’s almost inevitable that these schemes will have to explore other options for managing costs in a way that is fair to all participating employers and members.

    Asking exiting employers to pay a share for their employees (i.e. deferred members) is one of the most obvious options and is hard to argue against from a fairness perspective. Indeed, most defined benefit schemes already operate with section 75 debt rules, with the teachers’ schemes being fairly rare exceptions.

    I’m not at all reassured by the suggested 12 months average lead time. It might very well take that long to implement such a change, but I’d be very surprised if the legislators left the door wide open for a stampede of hurried withdrawals over that period. As Steven Dunn, Head of Pensions at solicitors Anderson Strathern, has noted it is more likely, as has happened with other legislative changes that have a future negative financial impact on a target audience, that there would be a cut-off date when or very soon after the change is announced which would severely limit, if not remove, any last minute opportunity to avoid the change.

    Bear in mind also that the typical end to end project time for a school to exit one of the teachers’ defined benefits schemes is well in excess of 12 months, in our experience.

    Barry Nichol, an employment partner with Anderson Strathern, has also highlighted the importance of information and consultation with staff and staff representatives. Where there are no recognised trade unions, it might be necessary for a school to conduct an election process in order that schools can consult with staff representatives.

    For certain purposes, it is not sufficient to consult directly with employees and, when it comes to consulting with representatives, it might be necessary to treat changes in terms and conditions in a similar way as a school would treat a collective redundancy process. Failing to conduct the process in the way that is required can involve large punitive awards and even (rarely) criminal prosecution.

    Notes

    *1 The government’s final approach to the McCloud Judgement (unlawful age discrimination judgement) has been confirmed and includes reforms to the STPS, amongst other actions necessary to ensure all impacted members are remediated.

    If you would like to find out more about any of the above, please don't hesitate to get in touch.

    It’s almost inevitable that these schemes will have to explore other options for managing costs in a way that is fair to all participating employers and members.

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