Independent schools to face higher pension costs following discount rate update

Independent schools that use the Teachers’ Pension Scheme (TPS) are set to see their costs increase again, with analysis from LCP revealing that this could push independent schools’ costs up significantly, potentially as far as 30 per cent of salaries.

The comments follow the Treasury’s decision to retain the current Scape discount rate methodology, with the Treasury since confirming that the Scape discount rate will reduce from inflation plus 2.4 per cent pa to inflation plus 1.7 per cent pa.

Announcing the updated rate, the Treasury also confirmed that “the updated Scape discount rate will generally lead to higher employer contribution rates for most unfunded public service pension schemes", with new contribution rates expected to apply from April 2024.

However, LCP pointed out that the 0.7 per cent per annum reduction in the Scape discount rate compares with a 0.6 per cent pa reduction for the previous TPS valuation, which increased schools’ contribution rates four years ago.

LCP also noted that this 0.6 per cent pa reduction was one of the key factors in the increase in TPS employer costs at that time equal to 7.2 per cent of salaries.

Whilst the Treasury confirmed that it will exceptionally provide funding for any increases in employer contribution rates as a consequence of changes to the Scape discount rate, this is specifically for employers whose employment costs are centrally funded by departments.

Considering this, and assuming practice follows history, LCP warned that higher costs could be passed on directly to independent schools, potentially by as much as 30 per cent of salaries.

LCP partner and independent schools advisory team head, Richard Soldan, stated: “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 per cent 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.”

Adding to this, LCP partner, Luke Hothersall, 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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