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Schools warned to budget for increased pension contributions

Schools, colleges and universities have been warned to budget for an increase in the employer contributions they must pay into the Teachers' Pension Scheme (TPS) on behalf of their staff.05 Oct 2018

Headteachers received an email telling them to budget for an increase from about 17% to 23%, although this figure is yet to be confirmed by the UK Treasury, according to the Financial Times (registration required).

The increase in the contribution rate was prompted by the latest valuation of the public service pension schemes by the government actuary. State schools, further education colleges and independent special schools will receive compensation through the Department for Education (DfE) to account for the increase over the 2019-20 financial year, according to the Financial Times. However, private schools with employees in the TPS will not be compensated.

Public sector pension scheme expert Nick Stones of Pinsent Masons, the law firm behind Out-Law.com, said that the increase would come as a "nasty surprise" for employers, who may have thought that they would be insulated from the effect of the increase by the operation of the statutory cost cap.

"When the TPS was last valued in 2014, the employer contribution rate was set at 16.4% with the employer costs cap at 10.9%, with a margin of plus or minus 2%," he said. "But the cap only applies to limited parts of the ingredients that go into the scheme valuation, and the reality is that the elements covered by the employer costs cap have not contributed to the costs increase."

"What has caused the increase is a change to the discount rate – which is set by the government, so arguably shooting itself in the foot – and the drop in life expectancy. Whilst people not living as long brings costs down, the deal done with the unions when the public sector schemes were re-designed in 2015 was to introduce a 'value for money' assessment on employee contributions. The reduction in life expectancy means members are theoretically paying more, or the same, for less, in that they will not live as long; and therefore the legislation requires an adjustment to recalibrate, or improve the benefits," he said.

"It is questionable whether this is something that was considered at the time, and is an unwelcome jolt to the budgets of schools, colleges and universities. For the larger institutions, it is likely to lead to more interest in setting up complex corporate structures for different operational elements in order to escape the compulsory nature of the TPS, and instead offering a pension alternative whose costs are more predictable," he said.