From the Chancellor’s ‘give away’ budget speech on 29 October, it was evident he was trying to please everyone, with the exception perhaps of independent schools. At least the dreaded game changing issue of removing the VAT exemption on school fees has been parked (for the moment)! What the Chancellor did not talk about was the recently announced intention to increase the employers’ TPS contribution rate from 16.4% to 23.6%, with effect from September 2019. However, the rationale for this increase was buried in HM Treasury’s detailed Budget report. Following the reform of public pensions in 2015, a commitment was made to maintain their value in real terms for public servants, including teachers. Recent valuations indicate that public pensions need to be made more generous from 2019/20 in order to honour that government commitment. Further, in line with established methodology to reflect OBR forecasts for long-term GDP growth, it is necessary to reduce the discount rate for calculating employer contributions in unfunded public service pension schemes to 2.4% plus CPI, further increasing the cost to employers.

The government funds the generous state sector pension schemes through taxation which it can readily implement. However, independent schools effectively caught up in this government pensions policy, will mostly only be able to recover the extra TPS cost by significant, above inflation school fee increases, that parents will certainly notice. To mitigate that increase, the belt on costs can be tightened but this could impact the quality of the education being delivered, if it is mismanaged.

Long term, it does not appear feasible for independent schools to be able to continue to allow their staff to participate in the TPS given the fact the significant and uncontrollable cost, being set at the whim of the government. Comparison can be made to the generous defined benefit pension schemes (where the employer took the risk by guaranteeing a certain level of pension) that were once commonly offered by the private sector and the unforeseen significant, ever increasing, liabilities that consequently arose. The private sector has been busily phasing out such pension schemes over the last 20 years in favour of defined contribution schemes where the employees’ pensions are linked to investment return rather than being guaranteed, and the contributions by the employers are known and capped. At some point pensions for civil servants will need to follow suit.

Independent schools cannot afford to wait upon possible (but certainly unlikely in the near future) reform of public sector pensions that might bring down the cost of the TPS; they should therefore consider an early exit from it. Whilst teachers will be disappointed and could be more minded to jump ship to the state sector, this process can be managed using the lessons learnt from how the private sector has been exiting defined benefit pension schemes. ISBA is currently consulting with its members on setting up a national defined contribution pension scheme for use by independent schools. Such a large collective scheme, if set up, should allow pension management costs to be mitigated to the benefit of both participating schools and the investment return enjoyed by participating staff. There is no reason why an independent school cannot set up its own scheme where it considers that to be more appropriate, but it will of course need to engage a specialist pension adviser to help manage the process and identify a suitable life insurer.

MTM are not a specialist pension provider but we do have an expert business and investment team that can help with business strategy and cost review.

Please do not hesitate to contact us for a free consultation.