Rules around the Teachers’ Pension Scheme (TPS) have recently changed, with further developments expected to come in the new year. It’s important that teachers, whether currently enrolled or not, are aware of what these mean for their personal finances.
In September, employer contributions for the TPS rose from 16.5 per cent to 23.7 per cent. Although the rise doesn’t affect the contribution rates paid by teachers and will result in an overall boost to their pension contributions, the change may have implications for those who work in independent schools across England and Wales.
While state schools will receive extra funding to cover the cost of the rise in employer contributions, independent schools will need to pay for the difference out of their own budgets.
Many independent schools are exploring alternative options, and research conducted recently found that many have already chosen to leave the TPS altogether. According to the results of a Freedom of Information request, 62 independent schools had notified the government of their decision to depart as of July this year.
In the current climate, teachers should consider what the implications of their school opting to leave the TPS may have on their personal finances and ensure they’re prepared to make any required changes in line with their own financial goals.
What would leaving the TPS mean for teachers?
In short, a teacher working at a school that chooses to leave the TPS will stop accruing their public sector pension.
Although the law requires that all employees are provided with a workplace pension, the alternatives that a school puts in place may not be as generous.
The TPS is a defined benefit scheme, which means that retirement income is based on a percentage of your annual pensionable earnings. Alternative private schemes are known as defined contribution schemes, where the income depends on how much contributions are paid in and the growth of the investment fund itself. An option that could, comparatively, increase the exposure of a pension pot to fluctuations in financial markets.
If your school is leaving the TPS, it’s advisable that you seek expert advice to help determine how an alternative scheme may affect your retirement plans.
Once you know what your alternative option is, you should be certain you fully understand its features, as well as factors such as where your money is invested, to ensure that it aligns with your own retirement plans.
‘Phased withdrawal’: A waiting game
With the increase in employer contributions now firmly in place, schools and TPS members face the possibility of further changes to the rules around the TPS, and its benefits.
After recognising the financial impact that the rise in employer contributions could have on independent schools, the government launched a new consultation in early September on the option of a ‘phased withdrawal’ from the TPS.
Under the current rules, all teachers working at an independent school that chooses to leave the TPS are automatically unenrolled from the scheme. However, under the proposed alternative, existing staff at institutions that choose to leave the TPS could still choose to remain in the scheme. This option would only be open to those who had previously been a scheme member before their school chose to leave. New staff starting at a school that had already left the TPS would not be able to join.
These proposals aim to give teachers already enrolled in the TPS flexibility over their pension options, while intending to help schools mitigate the financial impact of the rise in employer contributions over time. As teachers move on or retire, the number of staff who remain members of the TPS will naturally fall, reducing the number of teachers that schools must pay the TPS contribution for.
The outcome of the consultation remains to be seen, but its presence has meant that some schools have suspended making the choice to remain in the scheme or leave, instead adopting a ‘wait and see’ approach, which could impact teachers’ short-term decision making on their financial future.
‘The McCloud Judgement’: A discrimination in public sector pensions
Meanwhile, some members of the TPS could see a change to their benefits as the result of a recent Supreme Court ruling.
In June, the Supreme Court upheld a decision by the Court of Appeal, commonly referred to as the ‘McCloud Judgement’, that determined that changes made to certain public sector pension schemes in 2015 had unlawfully discriminated on the grounds of age.
As part of a change to new public sector schemes in April 2015, some members of public sector pension schemes were offered ‘transitional protection’, a measure designed to ensure a fair outcome for those that were close to retirement.
Those within 10 years of their ‘Normal Pension Age’ (NPA) as of 1 April 2012 could remain in their current scheme until they retired. Members who were between 10 and 13 years five months away from their NPA could remain in their existing scheme for a prolonged period of time before changing schemes.
The significance of this arises from differences between the new scheme and previous iterations.
The new 2015 pension scheme calculated the value of a pension based on teachers’ average salaries across their careers, a system viewed as less generous than previous schemes, which determined benefits on the value of a final salary or the average of the best three consecutive years of a teachers’ earnings in the 10 years before a teachers’ retirement, whichever was greater.
Consequently, it was held to be unfair that older members could remain on pre-2015 schemes, while younger members were moved to the new.
An Employment Tribunal is now determining compensation for the plaintiffs in the original case, members of the Firefighters and Judges Pension Schemes, and the government has recognised that the ruling has implications for members across public sector schemes, including the TPS.
Questions remain, however, over how pension benefits might change as a result of the ruling, who will be affected, and how any redress will affect pension accrual, as well as lifetime and annual allowances.
It is likely that those who were deemed ineligible for transitional protection in 2015 will see a change to their benefits. On the other hand, those who joined the scheme as new employees in 2015, or those who benefitted from the transitional protection rules, are unlikely to see a change.
Make the most of support
The rise in TPS employer contributions, or future developments regarding the government’s TPS consultation and the McCloud Judgement, could all have an impact on teachers’ finances.
It’s therefore important that teachers carefully consider how they could be affected and seek expert advice from someone who understands their specific needs where necessary.
For more information, please visit Wesleyan’s webpages on Retirement Income Planning for Teachers or the Teachers’ Pension Scheme.
This information is based on our current understanding of legislation. The information contained in this article does not constitute financial advice
Parminder Gill is Advice Policy Consultant at Wesleyan.