Government announcement could reduce employer pension contributions by over £2bn a year for education institutions, easing cost pressures

Contributions to the Teachers’ Pension Scheme (TPS) by independent schools, universities and colleges are set to ease following an announcement from the Government that is expected to affect TPS contribution rates from next year.

LCP welcomes this given continued wider budgetary pressures for many education institutions and believes that this change in isolation could reduce employer contributions by over £2bn a year.

Yesterday, the Government announced that the SCAPE discount rate, which is a key driver of TPS contribution rates, will be increased from inflation plus 1.7% a year to inflation plus 2.0% a year.

The SCAPE discount rate is just one of a number of assumptions used to determine the contribution rates, and the contribution rate is not yet known.  However, based on information provided by the Government Actuary in relation to the last valuation, increasing the SCAPE discount rate to inflation plus 2% a year at the time might have led to a reduction in employer contributions of around 7% of salaries. This equates to over £2bn across all employers.

A reduction in TPS contribution rates would be welcomed by many education establishments who have seen their contribution rates more than double from under 14% of salaries to almost 29% of salaries over the past decade.

New TPS contribution rates are due to be implemented from April 2027, and we expect them to be announced later this year.

Richard Soldan, LCP Partner and Head of LCP’s charity and not-for-profit advisory team, said “It may come as a surprise to some that the OBR’s estimate of long-term economic growth, on which the SCAPE discount rate is currently based, has increased since 2023. What is even more surprising is the scale of the potential change in contributions, possibly knocking £2bn off employers’ bills each year, and showing just how exposed institutions are to the prevailing economic mood and projections, even in pensions.  What remains to be seen is whether and by how much the other assumptions that feed into the valuation might limit (or indeed increase) the scope of the contribution rate reduction.”

Andy Thompson, LCP Partner, said “Independent schools have struggled with successive increases to TPS contribution rates in recent years and many have already made the tough decision to leave the TPS due to affordability constraints.

“A reduction in contribution rates would be welcomed by those schools who remain in the TPS. However, having been burnt by TPS cost rises over many years this is unlikely to reverse the trend of independent schools choosing to leave the TPS over the coming years as broader cost pressures remain.

“For many universities and colleges looking at the TPS and considering their options, a significant reduction in costs could see many step back from the edge.”