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Independent schools to be hit by TPS cost increases, with schools’ contribution rates potentially rising as far as 30% of salaries - LCP

Pensions & benefits Teachers’ Pension Scheme Policy & regulation

Independent schools that use the Teachers’ Pension Scheme (TPS) are set to see their costs increase again, with new contribution rates expected to apply from April 2024. This follows today’s announcement and consultation response from the Treasury in relation to public service pensions. LCP predicts that this could push independent schools’ costs up significantly, potentially as far as 30% of salaries.

  • The Treasury ran a consultation on the “SCAPE discount rate methodology” to be used for the valuations of the public service pension schemes that are currently underway, including for the TPS. The SCAPE discount rate is a key determinant of pension scheme contributions as it converts future pension promises into “present day” terms.
  • The Chief Secretary to the Treasury, John Glen, has confirmed that the SCAPE discount rate will reduce from inflation plus 2.4% pa to inflation plus 1.7% pa, and that “the updated SCAPE discount rate will generally lead to higher employer contribution rates for most unfunded public service pension schemes.”
  • This 0.7% pa reduction in the SCAPE discount rate compares with a 0.6% pa reduction for the previous TPS valuation, which increased schools’ contribution rates four years ago – that 0.6% pa reduction was one of the key factors in the increase in TPS employer costs at that time equal to 7.2% of salaries.

The Treasury has asserted that “For employers whose employment costs are centrally funded by departments, HM Treasury will exceptionally provide funding for any increases in employer contribution rates […] as a consequence of changes to the SCAPE discount rate.” This means that, amongst others, maintained schools are likely to receive some level of funding for any increase.

Assuming practice follows history, higher costs will be passed on directly to independent schools.

Richard Soldan, LCP Partner and Head of LCP’s independent schools advisory team, said “If the last valuation is anything to go by, and short of some heroic assumptions being made elsewhere, this will push independent schools’ costs up significantly, potentially as far as 30% of salaries.

“Given the likely impact, independent schools that still use TPS will need to consider their options. Whilst many have acted already, those that have taken a “wait and see” approach will now need to tackle the challenges that TPS changes can pose. As ever, it is vital for schools to consider their own objectives and circumstances – in our experience, that is the best way to reach a robust conclusion that fits with a school’s financial position and is acceptable to its teachers.”

Luke Hothersall, LCP Partner, said, “Following the last increase in employer costs from 2019, we estimate that around a third of all independent schools have either left or are in the process of leaving the TPS. At this stage, it seems almost inevitable that this trend will continue, if not accelerate materially.

“Schools that decide to propose changes to their pension arrangements will normally need to go through a consultation with teachers, which in practice will take at least a term. Schools, therefore, need to act quickly to completely mitigate any cost increases before contribution rates change from April 2024 or September 2024 if the TPS decides to align implementation with academic years.”

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