Teachers’ Pension Scheme – Do we stay or do we go?

To those involved in the education sector, it goes without saying that the rising costs of teachers’ pensions has become one of the biggest challenges faced by schools over recent years.

A recent freedom of information request has shown that one in four independent schools in the UK has now either left, or is set to leave, the Teachers’ Pension Scheme (the “TPS”). For the 284 schools (out of 1,222) that had already left the scheme at the time of the FOI request, the excessive cost associated with the rising employer contribution rates was cited by the majority as the main reason for their exit. That, coupled with the rising cost to schools of inflation and energy price rises, has meant that schools continue to feel the pinch.

In September 2019, following the most recent actuarial review, the employer’s contribution rates for the TPS were increased by circa 43% – from 16.4% to 23.68% – a cost which many independent schools at that time could not afford, and, following the impact of COVID-19 on the economy, even more schools are now feeling the pressure.

It is widely expected that a further rise in contribution rates for the TPS will be announced in the findings of the 2020 actuarial review (which is currently underway). The TPS is currently in significant deficit and another significant rise is expected to be necessary to cover the cost of maintaining pensions for retired teachers, and to lessen the impact of the recent McCloud judgment. It is widely predicted that a further increase in employer contributions will be announced, from 23.68% to 30% of pensionable salary, with effect from April 2024, a cost that is likely to be unsustainable for many schools.

With the ongoing challenge of ensuring school fees are affordable for parents in the current economy, an increase in school fees to cover the additional pension costs may not be a viable option. For schools that are operating as charities, they must also be particularly mindful of whether remaining in the TPS and incurring the additional costs will be considered the best use of charitable funds.

What can schools do about the costs?

If the rising costs of pensions are causing strain on the school finances, it is recommended that schools take advice on the options available to them with regard to pension provision. There are a number of options available, ranging from a full withdrawal from the TPS, the introduction of a second scheme to run parallel to the TPS, or introducing cost/benefit models as an incentive for teaching staff. What will be the most appropriate solution will depend on the particular school’s circumstances, its workforce, and what it is trying to achieve.

What is the process for implementing a change in pension provision?

A change in pension provision will be a change to the terms and conditions of employment for affected staff, and where more than 20 staff are affected by the proposed change, the collective consultation process set out in the Trade Union and Labour Relations (Consolidation) Act 1992 must be followed. This is a prescribed statutory process which carries risk of liability for non-compliance. Schools should take legal advice before commencing the process to ensure that they do not fall foul of the legislation. A failure to comply with the statutory process may, for example, result in staff bringing claims for a protective award, which is a discretionary amount up to a maximum of 90 days’ actual pay. Any such award would be in addition to the usual compensation for unfair dismissal.

What are the time frames schools need to be aware of?

1. Minimum consultation period

Under the legislation, schools must begin consultation with affected staff at least 30/45 days (depending on the size of the affected workforce) before dismissals take effect. While this is very much a minimum, in reality, for consultations to be meaningful, they will need to take much longer than this.

Schools should also be mindful of any minimum consultation periods that may have been introduced in an internal policy or procedure, or recognition agreement.

2. Notice periods

Before commencing a consultation process, it is advised that schools audit the contracts of the affected staff to determine the notice periods for affected staff. If affected staff do not agree to the proposed change to their pension provision, notice of dismissal (and an offer of immediate re-engagement) will need to be given by the school in accordance with the contractual notice period set out in that employee’s contract.

It is best to be aware, at the outset, what the longest notice period is and work to that when determining the earliest date that the change in pension could be implemented if staff do not agree to the change voluntarily.

3. School holidays

While the legislation does not preclude weekends and school holidays from the minimum consultation period, within the sector it is generally accepted that school holidays will be excluded when calculating the minimum consultation period, as most teachers will not be expected to be available for work during school holidays. To do so would be impractical but also detrimental to staff morale.

That being said, as dismissals “take effect” on the date when the employment contract comes to an end, rather than the date notice is given, it is likely that the consultation period (even with school holidays excluded) will far exceed the minimum consultation period of 30 (or 45) days, because teachers’ notice periods are usually at least one full term.

4. The next TPS review

The government undertakes an actuarial review of the TPS every four years, which includes a valuation of the scheme. The most recent review was March 2016, which led to the increase in employers’ contributions with effect from 1 September 2019.

The 2020 actuarial review is currently underway. It is no surprise however that this review is taking longer than expected to complete because of the impact of the pandemic. In light of these delays, it is now anticipated that the outcome of the 2020 review will be announced in the latter half of 2022 with any changes to contribution rates coming into effect from April 2024 (delayed a year from April 2023). It is widely predicted that given the significant deficit of the scheme, contribution rates will increase once more, with an anticipated rise in employer contribution rates from 23.68% to 30%.

Schools should undertake a stress test of their finances now to consider the impact of the predicted rise in contributions, and take advice from their professional advisors at an early stage to understand their options.

Schools should also keep in mind that there is significant work to be front loaded before the formal consultation process can commence, not least including the preparation of a comprehensive business case for the proposal. Schools are advised to consider their position early in academic year 2022/23 so there is sufficient time to undertake necessary processes in good time.

What challenges are schools facing during consultation?

The general view of the TPS is that it is a generous and beneficial scheme that all teachers should be part of, and this seems to be the stance that the unions are taking; however, the reality is that the TPS may not be the best scheme for all teachers. Therefore, education and communication with teachers about their options is key. Common challenges that schools are facing during consultation are:

• Industrial action and union involvement
• Objecting to the proposals resulting in the need to consider dismissal and re-engagement
• Non-support of senior leadership team, for example, where the head or deputy head are members of the TPS themselves
• Employee relations issues, staffroom issues and perception of a two tier workforce

Communication and engagement with affected staff is necessary for an effective consultation. The purpose of consultation is, after all, to engage with employees and to consider alternatives put forward to avoid or reduce the number of dismissals. Employees that feel like they are not being listened to, or that the decision is already made, are less likely to agree to engage with the process and ultimately agree to the proposed change.

For schools that formally recognise a union, it is recommended they seek advice at an early stage as there are specific formalities that will need to be complied with under the legislation, as well as possible additional requirements within the recognition agreement. Having a plan of action for keeping unions updated and informed can go some way to avoid industrial action.

If there is a head that is a member of the TPS, there are additional steps to take, at an early stage, to ensure the process of consultation can run smoothly and within a reasonable timeframe.

Next steps

If the rising cost of teachers’ pensions is impacting on a school’s ability to plan for its future, or is already having an impact on its ongoing viability, it is likely time to reach out and take some advice regarding the options available with respect to pension provision. The team would be happy to assist with discussing the various options available and the process for consulting with affected staff, so please do get in touch.