Teachers’ Pension Scheme – employer pension contribution increase
The Department for Education has published the outcome of the 2020 scheme valuation. It has announced that the employer contribution will increase by 5% from 1 April 2024 for schools providing the Teachers’ Pension Scheme (TPS) to its teaching staff. This means the new employer contribution rate will be 28.68%.
Your school may have already reviewed its pension provision for teaching staff following the last increase in the employer TPS contribution back in 2019, or this increase may lead to the school reviewing its pension provision.
If you are looking to review the school’s pension options, Moore Kingston Smith Financial Advisers (MKSFA) can support you. There are several options for the school to consider, such as:
- Remain in the TPS
- Withdraw from the TPS
- Implement a parallel defined contribution (DC) scheme on a voluntary basis for teaching staff
- Hybrid (total benefit) model
- Implement phased withdrawal (can be used in conjunction with options 1, 3 and 4).
Each school’s circumstances and objectives are unique, and we have worked with schools that have implemented all of the above options.
Should the school decide that it needs to review its pension options for teaching staff, there are certain areas that the school should consider, which are outlined below.
- Consultation preparation
- DC scheme design
- Financial guidance and information for teaching staff
- DC pension scheme selection
- Pension salary sacrifice
- Replacement death in service benefits
Consultation preparation
In preparation for a collective consultation on changes to teachers’ pension and employee benefits provision, the first step is for the school to prepare a business case. This is a key document that outlines the rationale for any proposed change to teachers’ pension arrangements.
The school should engage an employment lawyer to provide legal support regarding any changes to the pension provision. MKSFA can provide a business case template and a frequently asked questions document, which provides information on the pension options being proposed by the school. MKSFA can also provide a bespoke calculator to the school, which enables teachers to fully appreciate one of the key advantages of an alternative pension scheme – pay flexibility.
DC scheme design
The school needs to design the contribution structure for the alternative DC pension scheme. The school’s budget may be the existing TPS employer contribution level of 23.68%, or a lower or higher amount. The school will also need to consider the minimum employee contribution into the DC pension scheme and the cost of other benefits, such as replacement group life assurance and ill-health benefits.
The school can provide flexibility to teaching staff regarding choosing a lower employer contribution in exchange for additional salary. The school needs to ensure that the contributions paid into the DC pension scheme are in line with the minimums required under automatic enrolment legislation.
MKSFA can help the school implement an attractive DC pension scheme for teaching staff.
Financial guidance and information for teaching staff
During the consultation, MKSFA can provide a presentation to teaching staff covering the school’s proposals and guidance to employees on the implications of the proposed change. MKSFA can also provide workshops and/or one-to-one meetings with teachers. During the one-to-one meetings, we can provide bespoke pension projections for teachers, comparing the TPS benefits with any alternative DC pension scheme.
DC pension scheme selection
There is a range of DC pension scheme providers that offer workplace pension schemes for independent schools. The school may want to consider using its existing DC pension scheme for non-teaching staff, or it may consider using the Aviva Pension Trust for Independent Schools (APTIS). Alternatively, the school may wish to carry out an open market review of the available DC pension scheme providers.
When reviewing the DC pension scheme providers, the annual management charge applied by the scheme provider is a key consideration, but assessments should also compare other, non-price related factors, including:
- Brand, reputation and financial strength
- Scheme structure and method of tax relief
- Default investment fund and other investment options
- Options at retirement (following introduction of pension freedoms)
- Options available to members’ beneficiaries on death
- Service and support.
MKSFA can help the school ensure that it provides a high-quality DC pension scheme to its teaching staff.
Pension salary sacrifice
The rules of the TPS do not permit employee contributions to be paid via salary sacrifice but the DC employee contributions can be paid via salary sacrifice.
Pension salary sacrifice has financial benefits for both the employee and the school. Employees save national insurance on the amount they choose to contribute into a DC pension scheme, which increases their take-home pay, compared to the alternative method of contributing into a DC pension scheme.
The school will also save national insurance on the amount the employee chooses to contribute into the DC pension scheme via pension salary sacrifice. The school can choose to retain these national insurance savings, or pass some or all of these savings back to staff as an additional employer pension contribution. The school’s employer national insurance savings can also be used to help fund or enhance other employee benefits, such as group life and group income protection arrangements.
If the school is not currently operating pension salary sacrifice for contributions into its existing DC pension scheme, MKSFA can help implement a compliant pension salary sacrifice arrangement.
Replacement death in service benefits
In addition to the annual pension, the TPS also provides additional benefits for staff enrolled in the scheme. The benefits provided by the TPS are as follows:
Lump sum death grant
The TPS provides a death-in-service lump sum payment (death grant) of three times full-time equivalent salary for active members of the scheme. The death grant can be paid to any individual(s) of the teacher’s choosing.
Short-term pension
A payment will be made to a qualifying adult beneficiary that is equivalent to three months’ salary. If a teacher has dependent children, three months’ salary will also be paid for their benefit. If there’s no surviving adult, six months’ salary will be paid for the children. This will be back-dated to the date of the teacher’s death. This payment is called a short-term pension. After the short-term pension ends, a long-term pension will be paid.
Long-term pension
The adult dependant’s pension ranges from 37.5% to 50% of the teacher’s pension, depending on the section of the scheme. There is also an uplift for teachers in active service. Additionally, there is a dependent children’s pension payable of up to 50% of the adult dependant’s pension.
The school may want to provide replacement group life assurance for teaching staff enrolled in the DC pension scheme. Most insurers will only insure a teacher’s actual salary, rather than the full-time equivalent salaries.
Most schools have not implemented a death-in-service pension to replace the long-term pension provided by the TPS due to the costs. A more cost-effective option for the school could be to insure a higher multiple of salary to compensate for the loss of the long-term pension, as group life assurance is a relatively low cost benefit.
The school could use its existing group life arrangement for support staff for teachers enrolled in a DC pension scheme if the school has an existing group life arrangement in place. Alternatively, the school can carry out a market review of the available group life insurers to select the most suitable insurer.
MKSFA can help the school design the replacement group life assurance arrangement, recommend the most suitable insurer and implement the new arrangement.
Replacement ill-health benefits
The TPS provides two tiers of ill-health benefits for active members of the scheme. These are a lower-tier and an upper-tier.
The lower-tier benefit is where a member of teaching staff is permanently unable to teach but can work in another capacity. Here, the accrued pension is payable immediately with no early retirement adjustments.
The upper-tier benefit is where a member of teaching staff is permanently unable to work in any capacity. Here, the accrued pension is payable immediately with no early retirement adjustments, plus 50% of prospective pension to normal pension age.
Independent schools that have either already withdrawn from the TPS, or introduced a DC pension scheme alongside the TPS, have generally introduced group income protection to replace the ill-health benefits currently provided by the TPS.
Group income protection is not a direct replacement for the TPS ill-health benefits, as group income protection pays a proportion of the teacher’s salary if they are unable to work due to long-term illness or injury. In the event of a claim, the benefit is paid to the school, who then passes it on to the employee through payroll. There are several features that a school needs to consider when implementing a new group income protection arrangement, such as:
- Percentage of salary insured
- Whether the benefit is offset against the employment support allowance
- Deferred period (number of weeks a teacher has to be absent for before a claim starts to be paid)
- Payment term
- Minimum and maximum ages for cover
- Definition of incapacity
- Insurance for pension contributions
- Insurance for employer national insurance costs.
MKSFA can help the school design a high-quality group income protection arrangement and carry out a market review to recommend the most suitable insurer.
Our experts are always available to discuss any of the options outlined above with you and you can contact us here.