Withdrawing from the Teachers’ Pension Scheme: Financial and reputational considerations

For many independent schools, participation in the Teachers’ Pension Scheme (TPS) has been one of the most significant staffing cost pressures of recent years.

The increase in employer contributions to 28.68% in April 2024 intensified an already difficult financial environment. Faced with rising costs, pressure on fee income and increasing competition for pupils, many schools were forced to consider whether continued participation in the scheme was sustainable.

Some withdrew entirely. Others introduced phased withdrawal arrangements or alternative pension schemes for new staff.

Now, the financial landscape is changing again.

From April 2027, the TPS employer contribution rate is set to fall from 28.68% to 17.6%. For independent schools that have remained in the scheme, this represents a significant reduction in employment costs. For those that have already withdrawn – or are currently considering doing so – it raises an important question.

Does the reduction fundamentally change the case for withdrawing from the Teachers’ Pension Scheme?

The answer will be different for every school.

Because while pension costs are an important part of the equation, the decision is rarely just about the contribution rate.

Why did independent schools consider leaving TPS?

For many years, membership of the TPS was regarded as an important part of the employment proposition offered by independent schools.

It helped schools attract and retain high-quality teachers and provided staff with access to a defined benefit pension scheme that was often viewed as a significant employment benefit.

However, rising employer contribution costs changed the financial calculation.

The employer contribution rate increased to 23.68% in 2019 before rising again to 28.68% in April 2024. For independent schools, unlike many state-funded settings, the additional cost was not generally offset through direct government funding.

For schools already facing significant financial pressures, the impact could be substantial.

The decision to consider withdrawal was therefore often driven by a combination of factors:

• Rising pension costs
• Pressure on operating margins
• Increasing employment costs
• Concerns about future fee affordability
• VAT and wider changes affecting the independent sector
• Falling or uncertain pupil numbers
• The need to protect investment in teaching and facilities
• Long-term concerns about the sustainability of the school’s cost base

For some schools, withdrawal from TPS became one of the few significant cost-saving measures available.

What will the reduction to 17.6% mean?

From April 2027, TPS employer contributions are scheduled to reduce to 17.6%, a substantial decrease from the current 28.68% rate. The government has confirmed that the revised rate will apply until March 2031.

For an independent school remaining in TPS, this will reduce the direct employment cost associated with pension provision.

The headline saving is significant.

For every £1 million of pensionable teacher salary, the difference between an employer contribution rate of 28.68% and 17.6% is approximately £110,800 per year.

That means schools which have remained in TPS will need to revisit their financial forecasts.

But the implications are potentially more complicated for schools that have already left the scheme.

Some will have made difficult decisions to withdraw at a time when the contribution rate was close to 29%. They may have consulted extensively with staff, negotiated alternative pension arrangements and managed significant reputational challenges.

The reduction in the TPS rate could now lead staff, governors and prospective employees to ask whether those decisions would have been different had the lower rate been known at the time.

Does this make withdrawal less attractive?

Potentially – but not necessarily.

A lower TPS contribution rate narrows the financial gap between remaining in the scheme and moving to an alternative pension arrangement.

However, the decision should not be based solely on comparing today’s contribution rates.

Leadership teams and governors need to consider the wider financial picture.

The cost of remaining in TPS

The revised 17.6% contribution rate is significantly lower than the current rate, but it remains a substantial employment cost.

Schools should compare the full cost of TPS participation against their alternative options, rather than simply focusing on the reduction from 28.68%.

Questions to consider include:

• What proportion of the school’s overall staffing costs relates to TPS?
• How does the revised cost compare with the school’s alternative pension scheme?
• What savings would withdrawal still generate?
• How sustainable is the school’s wider cost base?
• What assumptions have been made about future salary increases?
• How much financial flexibility does continued TPS participation allow?

The fact that a cost has fallen does not necessarily mean it is affordable within every school’s long-term financial model.

The impact on schools that have already withdrawn

For schools that have already withdrawn from TPS, the announcement creates a different challenge.

The financial benefits of withdrawal may now appear smaller when compared with the new 17.6% rate.

But reversing a withdrawal decision is unlikely to be straightforward – either operationally or strategically.

Schools will need to consider:

• The pension arrangements now in place
• The terms offered to existing and new staff
• The financial implications of any change
• Staff expectations
• The potential impact on recruitment and retention
• Whether returning to TPS would create inequalities between different groups of employees
• The reputational implications of changing direction

Most importantly, leadership teams should avoid assessing historic decisions purely with the benefit of hindsight.

A decision that was appropriate at a contribution rate of 28.68% may have been entirely rational based on the information and financial circumstances available at the time.

The more useful question is not whether a school should have withdrawn, but whether its current pension strategy remains appropriate for the future.

Pensions are also a recruitment and retention issue

For independent schools, pensions form part of a much wider employment proposition.

A strong pension offering can be important to experienced teachers, particularly those considering a move between the state and independent sectors.

Withdrawal from TPS may therefore have implications beyond the immediate financial saving.

Schools should consider:

• How important is TPS membership to prospective employees?
• Are competitors still offering TPS?
• Does the alternative pension package remain competitive?
• Has withdrawal affected staff recruitment?
• Are existing staff more likely to leave?
• Does the school need to strengthen other elements of its employment proposition?

The answer may vary considerably depending on the school’s location, reputation and recruitment challenges.

In some markets, the absence of TPS membership may have little impact on recruitment. In others, it could be a significant disadvantage.

A robust assessment should therefore look at both the financial savings and the potential people implications.

The reputational challenge

Withdrawing from TPS can be a sensitive decision.

Teachers may see pension provision as a fundamental part of their employment package, particularly where they have spent much of their career contributing to a defined benefit scheme.

Even where a school has strong financial reasons for withdrawing, the way the decision is communicated can have a significant impact on staff morale and trust.

Schools considering withdrawal should therefore think carefully about:

• How the rationale will be explained
• How and when staff are consulted
• Whether alternative options are genuinely understood
• How different groups of employees may be affected
• What support is available during the transition
• How the school will communicate its wider commitment to staff

The same considerations apply to schools that have already withdrawn.

The reduction in employer contribution rates may reopen conversations among staff, particularly if teachers feel the school is now benefiting from lower costs elsewhere while they remain outside the TPS.

Clear and transparent communication will be essential, but schools should also understand how changes to pension arrangements are perceived by their staff.

Governance: moving beyond the headline percentage

For governing bodies and trustees, the announcement should prompt a broader review of pension strategy.

The temptation will be to focus on one question: how much will the school save?

But effective governance requires a more strategic assessment.

Boards should consider different scenarios, including:

• Remaining in TPS at the new contribution rate
• Continuing with an existing alternative pension arrangement
• Different arrangements for existing and future staff
• The long-term impact on recruitment and retention
• Potential changes to the school’s financial position
• The impact of pension decisions on staff relations
• The reputational implications for the school
• The interaction between pension strategy and wider workforce planning

This should form part of a wider discussion about the school’s long-term operating model.

Pension costs do not exist in isolation. They sit alongside decisions about fee levels, staffing structures, pupil numbers, curriculum provision and investment priorities.

Avoid making a decision based on a single financial year

One of the key risks is treating the reduction in TPS contributions as a simple short-term saving.

The new rate is currently expected to apply from April 2027 to March 2031, but pension contribution rates are determined through periodic valuations and can change over time.

Schools should therefore avoid building a long-term strategy around the assumption that the 17.6% rate will remain indefinitely.

Scenario planning should consider:

• Different future contribution rates
• Salary inflation
• Changes in teacher recruitment
• Pupil number projections
• Fee affordability
• The cost of alternative benefits
• Wider economic uncertainty

The strongest decisions will be those that remain sustainable across a range of possible scenarios.

Could the lower contribution rate change the competitive landscape?

Potentially.

Schools that remained in TPS during the period of higher contribution costs may now have greater flexibility to maintain a pension benefit that some competitors no longer offer.

This could become a point of differentiation in recruitment.

Equally, schools that withdrew may need to review whether their overall employment proposition remains competitive.

That does not necessarily mean returning to TPS.

Alternative pension arrangements may still offer financial advantages and can form part of a competitive reward package. But schools should understand how their proposition compares with competitors and what prospective employees value most.

This is where market intelligence can become particularly valuable.

Understanding local recruitment conditions and competitor employment practices can help schools move beyond assumptions and make decisions based on the reality of their own market.

Withdrawal from TPS is a strategic decision, not simply a cost-saving exercise

The forthcoming reduction in employer contributions changes the financial calculation.

But it should also encourage schools to revisit the broader strategic questions.

For leadership teams and governors, these include:

• Is our current pension strategy financially sustainable?
• How does it affect our ability to recruit and retain staff?
• How does our employment proposition compare with competitors?
• What assumptions are we making about future costs?
• Are our current arrangements equitable and understood by staff?
• What would be the financial and reputational consequences of changing direction?
• Does our pension strategy support our wider long-term plan?

There is no universal answer.

For some schools, the lower contribution rate may strengthen the case for remaining in – or potentially reconsidering – TPS participation.

For others, withdrawal may remain an essential part of creating a sustainable financial model.

The important point is that decisions should be revisited in light of the changing environment.

A strategy developed when employer contributions stood at almost 29% should not simply be left untouched when the financial landscape changes significantly.

How MTM Consulting can help

MTM Consulting supports independent school leadership teams and governing bodies facing complex strategic decisions.

We help schools move beyond headline figures and assess decisions in the context of their wider financial position, competitive environment and long-term strategy.

Our support can include:

• Financial scenario planning
• Strategic reviews
• Workforce and staffing analysis
• Market and competitor intelligence
• Recruitment and retention research
• Stakeholder research
• Reputation and perception analysis
• Strategic communications support
• Governance and leadership consultancy

For schools considering whether to remain in or withdraw from the Teachers’ Pension Scheme, the financial calculation is only part of the story.

Understanding the TPS withdrawal financial impact is essential. But so too is understanding what the decision means for staff, recruitment, reputation and the long-term sustainability of the school.

With employer contributions set to fall significantly in 2027, now is an appropriate time for leadership and governance teams to revisit the assumptions underpinning their pension strategy.

Because the right question is no longer simply:

Can we afford to stay in TPS?

It is:

Given the changing financial landscape, what pension strategy best supports the long-term future of our school?