Teachers’ Pension Scheme: Are employer contribution rates set to rise?

The Government’s most recent pensions announcement provides the clearest sign yet that Teachers’ Pension Scheme (TPS) membership is likely to become more costly for independent schools.

On 30 March 2023, the Government announced that, following an extensive consultation, the SCAPE discount rate for unfunded public service pension schemes (such as the TPS) would be reduced from 2.4% a year to 1.7%  – above the annual rate of the Consumer Prices Index of inflation.

The announcement is important given that changes to the SCAPE discount rate are usually a good indicator as to whether employer pension contribution rates under such schemes are likely to rise or fall.

Unfortunately for TPS member schools, a lower SCAPE discount rate usually means higher employer contributions are on the horizon. The previous 0.6% reduction to the SCAPE discount rate was recognised as a key contributor to the significant rise in employer TPS contributions from 16.4% in 2015 to 23.6% in 2019. Four years on, and by the Government’s own admission, history appears to be on course to repeat itself.

“The Government is aware that the updated SCAPE discount rate will generally lead to higher employer contribution rates for most unfunded public service pension schemes”.

Chief Secretary to the Treasury, John Glen.

Though factors such as updated life expectancy will need to be considered before TPS employer contribution rates for 2024 can be finalised, 2021 Government analysis estimated a 0.25% movement of the SCAPE discount rate could mean employers having to increase their pension contributions by up to 11%. For the TPS, previous concerns suggesting 30% employer contribution levels were possible, could now become a reality.

The Government has indicated that support to manage the increase will be available for schools in the maintained sector.  For independent schools, however, any increase will need to be met from existing school budgets.

Impact on independent schools

Many independent schools have acted to address the rise in TPS costs since the previous increase in employer contributions was implemented in September 2019. The latest figures show that 310 independent schools have left the TPS and over 170 are in the process of a consultation over a change in pension arrangement.

Undoubtedly, the likelihood of a further increase in TPS employer pension contributions will result in more independent schools considering their options, including a possible withdrawal from the scheme.

Those schools considering any changes to pension entitlements will, in most cases, need to go through a consultation process with the affected staff. The legal process of consultation is complex and schools that are considering making changes to existing pension arrangements should seek legal advice.

It is likely that any increase in TPS employer contributions will be implemented in April 2024 – although this may be delayed to September 2024 as per the 2019 increase.

In our experience, the process of implementing a change in pension arrangement may take up to a year in total, including a period of preparation, consultation with staff and factoring in contractual notice. As such, schools may need to take immediate action to mitigate any cost increases before contribution rates change in 2024.

We would be happy to discuss the various options available to schools in the light of this development. Please do get in touch with Rachel Parkin, Oliver Daniels, or your usual contact within the team.