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