Schools staring into a pension “abyss”

abyss

 

Contrary to indications that the Teachers’ Pension Scheme (TPS) employer contributions for 2019-20 would be set at 19.1%, schools have now been told  that the figure from September 2019 will be 23.6%.

The Teachers Pension Scheme, along with all other unfunded public sector schemes, is required to complete a valuation every four years. The valuation has two main purposes: to assess the scheme’s assets and liabilities – the cost of providing scheme benefits in the long-term; and to recalculate the employer cost cap to determine whether it remains within the parameters set out in 2015. The outcome of this valuation is the need to increase employer contribution rates by 4.5%. This figure is well ahead of any formal or informal prediction heard in the last 6 months.

This increase could  have a profound and damaging effect on the finances of schools and will threaten the viability of some as the cost of the increased contributions will have to be absorbed within the school’s financial plan. Schools were given no indication of the magnitude of the new contribution rates which came “out of the blue”.

Further details are outlined below. You will see that maintained schools will receive funding support in 2019-20; independent schools will not.

I’m indebted to the local government association for this information

Teacher Pension Employer Contribution Increase

 HM Treasury recently published draft directions to be used in the valuation of public service pension schemes. The Government Actuary’s Department has now completed their calculations to provide indicative results of the 2016 valuation of the Teachers’ Pension Scheme (TPS) to the Department for Education (DfE), the key results are as follows:

  • Implementation of the change to the employer contribution rate will be 1 September 2019 (rather than 1 April 2019) due to the delay in this announcement.

  • The estimated employer contribution rate will be 23.6 per cent, for the period 1 September 2019 until 31 March 2023.

  • The biggest impact on the employer contribution rate has been the change to the SCAPE discount rate that is used to assess the current cost of future benefit payments; the SCAPE rate will change from CPI + 2.8 per cent to CPI + 2.4 per cent from April 2019.

  • There will be funding from the DfE for the financial year 2019/20 to help maintained schools and academies meet the additional costs resulting from the scheme valuation, a consultation process will take place to determine final funding arrangements. Funding for 2020/21 onwards will be discussed as part of the next Spending Review round.

  • The SCAPE discount rate sits outside the employer cost cap process that was introduced for the 2015 career average TPS as this is a financial assumption. The indicative result also shows that the cost cap has been breached due to the value of member benefits having fallen. This is due to assumptions about earnings (pay increases lower than expected) and reduction in life expectancy. Discussion will take place with the TPS Scheme Advisory Board to recommend changes to the scheme design for career average section members of the TPS to align member costs to the cost cap.


Does anyone know what this will really mean?

The Financial times reports that the Treasury said the increase to 23 per cent was in the right ballpark, but not yet a final figure, and that it reflected lower long-term forecasts for the economy, which will weaken the finances of unfunded pensions in future.

The Treasury has pledged to provide the Department for Education with sufficient compensation for 2019-20 for state schools, further education colleges and independent special schools, but only to “take the change into account” in its 2019 spending review for later years.

Unions are worried, however, that the change in the contribution rate will act as a disguised spending cut after 2020.

Speaking to the Financial Times,  Kate Atkinson, a specialist adviser on pensions to the National Association of Head Teachers, said the union was “extremely concerned” about the long-term impact of the changes on school budgets.

Ms Atkinson said it was “all well and good” that the DfE had promised the anticipated increase in contributions would be “funded” for the 2019-20 financial year, although she pointed out it was unclear what the department meant by the terminology.

“It’s not entirely clear how they’ll provide the funding- . Will it be on the exact cost that each school is facing, or will it be on a pro-rata basis that will end up with some winners and some losers?”

The association was still more concerned about the position after the first year of the increases. “After that,” Ms Atkinson said, “it’s staring into the abyss.”


An unwinding of a hidden cross subsidy- or something else?

What is most worrying about GAD’s valuation is that it implies that the economy is unlikely in future to be able to support current spending plans. The NHS is absorbing its imputed increase in pension costs under the new NHS spending plans, but the relief for teachers is non-existent (private sector) and looks very temporary for the state sector.

With increases in life expectancy falling and public sector wages pretty well static since the start of austerity, we would have expected unfunded pensions to have become more rather than less affordable.

Has the true cost of our public sector pensions been disguised all these years, with the public picking up the balance of costs not collected from schools and teachers?

Or is this nothing more than a stealth tax, where the Government are over-charging for pensions to replenish its depleted coffers.

Will this precipitate calls to scrap defined benefit pensions for the public sector, as called for recently by Michael Johnson?

Those familiar with the USS JEP report – will know all about that trick.


Addendum

Since this article was published, the Government has published this useful guide to SCAPE and why they feel benefits will have to rise ( justifying increased employer charges). I am unconvinced that this isn’t a civil servants way of giving him/herself a rise in reward at the tax-payer’s expense.

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in accountants, pensions and tagged , , , , , , , , , . Bookmark the permalink.

8 Responses to Schools staring into a pension “abyss”

  1. Adrian Boulding says:

    Henry, am I reading you right here? I think you are telling us that because Government Actuarys Department was so late in doing the figures the increase has been postponed by six months. Based on the current scheme contributions of £6.5bn pa, that’s a loss of contributions of one quarter of a billion pounds!! What an outrageous waste!!

    Why on earth didnt GAD pay their number crunchers a little overtime and get the figures out on time? Is this the hidden cost of austerity that has slimmed Government departments down so far they run so late on many projects (like Dashboard feasibility study) that they make even Southern Rail look paragons of punctuality

    Adrian

    Liked by 1 person

    • Neil Walsh says:

      (1) The delay was not down to GAD.

      (2) These are unfunded pension schemes so the employer contributions do not represent net new money and there is no actual loss of funds.

      Like

  2. George Kirrin says:

    Even real discount rates of 2.4 relative to CPI (less than 2.4 if relative to RPI) seem high by private sector DB standards, Henry.

    The SCAPE discount rate has been higher in the past, so maybe the emerging employer contribution rate is also intended to correct earlier “underfunding”?

    Our MPs and teachers’ unions need to ask better questions of GAD and HMT.

    Liked by 1 person

  3. Bryn Davies says:

    In defence of GAD it was the Treasury that sat on the figures. It’s also worth pointing out that “lower long-term forecasts for the economy” mean that funded pensions will be more expensive as well.

    Liked by 1 person

  4. Derek Benstead says:

    HM Treasury’s Green Book – Appraisal and Evaluation in Central Government specifies a Social Time Preference Rate of CPI + 3.5% for years 1 to 30, CPI + 3.0% for years 31 to 75, CPI + 2.5% for years 76 to 125. The Green Book is guidance issued by HM Treasury on how to appraise policies, programmes and projects. Green Book guidance applies to all proposals that concern public spending, taxation, changes to regulations, and changes to the use of existing public assets and resources. It’s not obvious to me that the evaluation of public service pensions should be done on a different basis to the evaluation of any other Government project. What is special about public service pensions that they need exceptional treatment? The reduction in the discount rate for evaluating public service pensions seems arbitrary. It appears to be a stealth tax, the arbitrary increase in pension contributions is, in effect, a spending cut on public services.

    Liked by 1 person

  5. DC says:

    Was it not obvious that an unfunded pension arrangement ultimately paid for by taxes levied from the private sector would struggle to maintain promises when the private sector is forecasting lower-than-hoped-for long-term growth?

    All public sector pensions are inherently unfair because the set-up has always been deferred compensation for time served, not compensation for productivity.

    The first political party that promises to end public sector DB and the triple-lock will be the first that are truly considering the long-term needs of the British people.

    At the moment all they need to do is curry enough favour with the gilded generations with proposals that only favour them.

    Unfortunately this would be too brave a move for all the major parties, and obviously Labour are diametrically opposed to economic prudence.

    Liked by 1 person

  6. Derek Benstead says:

    Not at all, the needs of the British people include being provided with pensions, irrespective of whether they work in the public or private sectors. The failure in the past 20 years or so is in the private sector, which has failed to innovate in order to continue to provide pensions in a sustainable manner. Those of us supporting Collective DC for the private sector are seeking a new, sustainable way to provide private sector pensions.

    Liked by 1 person

  7. Neil Walsh says:

    Henry – the useful guide to the implications of the cost cap / SCAPE valuation was written by Parliament (the House of Commons library) and not the Government (an important distinction because the House of Commons library has a well-earned reputation for excellence and impartiality).

    Civil servants are not having to justify improvements in benefits at taxpayers’ expense because the improvements in benefits are simply bringing the cost of the schemes back to the level agreed when they were reformed. The cost had fallen (because of pay restraint and lower mortality improvements than anticipated) so these benefit improvements simply offset those factors that were driving the costs down. There is no additional cost to taxpayers arising from these valuations at all.

    Liked by 1 person

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