Pensions insight
TPS – facts, figures and funding
Ian Neale, director at Aries Insight, discusses the impending increase in contributions
M any employers in the education sector are facing huge cost increases from September this year, as a result of government plans to force a 43% increase in their pension contributions. The Teachers’ Pension Scheme (TPS) is one of the largest unfunded public sector pension schemes, alongside those relating to the National Health Service (NHS), civil servants, and the armed forces. ‘Unfunded’ means that although employers and employees pay contributions, these go directly to the government: crucially, the amount does not cover the full cost of paying pensions. Currently there is an annual shortfall of £4bn, which the government covers out of borrowing: in other words, adding to the public sector net debt (i.e. the deficit) each year. A furore was triggered last September by a Treasury announcement that to begin to plug this gap, employer contributions to the TPS would rise from the current 16.48% to 23.6% from 1 September 2019: a 43% increase, with only twelve months’ notice. The basis for this is a reduction to the superannuation contributions adjusted for past experience discount rate, from consumer price index (CPI) + 3% to CPI + 2.4%, to reflect a more realistic assessment of the future GDP (gross domestic product) growth rate. This is a case of government ‘grasping the nettle’, prompted by the Office for Budget Responsibility. Employer contributions to the NHS and civil service schemes are also going to rise by similar (but slightly lower) amounts. However, less than 75% of TPS member teachers are employed by state-funded schools and colleges and, in any case, the politically-charged academisation
programme has taken away control of budgets from local authorities, devolving budget responsibility to individual private sector employers. At a time when the austerity rules have cut school budgets to the bone, the massive hike in pension costs will be a huge challenge to TPS employers. ...the massive hike in pension costs will be a huge challenge to TPS employers To dampen down a budding revolt, in January 2019 the Department for Education launched a short four-week consultation on a contentious and divisive proposal to provide short-term funding support to cover the TPS contribution increase: but only for some state-funded schools, further education and other public- funded training organisations in England; and just for financial year 2019–20. (Academies will receive funding to August 2020, because they are funded on an academic year basis.) Any assistance for institutions in Wales, Scotland and Northern Ireland is a matter for the governments of those devolved administrations. Independent schools are not to be offered this help, nor universities and other organisations providing higher education which employ TPS members. In any case, it is a strictly temporary stop-gap proposal; without further funding assistance the TPS could be unaffordable after 2020. On 10 April 2019, the Department for Education published its response to the consultation. Unsurprisingly, 95% of state-
funded schools agreed with the proposal for £910m in funding support for one year, though many expressed concerns about funding beyond the current spending review. Universities, especially post-92 universities with fewer options to relieve cost pressures, thought they should be included in the plan: they won’t be. At a time when many are under pressure to lower tuition fees, this counter-pressure will be very unwelcome. Independent schools won’t be supported either; although in the one change to the original proposals, the Department will begin work to consider allowing independent schools to leave the scheme via phased withdrawal. A school would be enabled to retain its current teacher members in the scheme but new teachers would not be admitted; thus creating a two-tier staff pension arrangement. The upshot is that the huge contribution hike is going ahead supported by a one- year subvention from the taxpayer state schools. The publicity has at least exposed the proverbial ‘elephant in the room’ – the gargantuan estimated £1.5 trillion public sector pensions deficit – to wider scrutiny. This is about the same size as the total private sector defined benefit pension scheme deficit. In its latest forecast, the Office for Budget Responsibility expects public sector pensions spending in 2018–19 to total £13.3 billion (reflecting £43.3 billion of total payments less £29.9 billion of contributions); equivalent to £470 per household and 0.6% of national income. In cash terms, net public sector pensions spending is on a steady upward trend and is forecast to increase from £11.2 billion in 2016–17 to £16.6 billion in 2022–23. n
35
| Professional in Payroll, Pensions and Reward |
Issue 51 | June 2019
Made with FlippingBook - Online magazine maker