Leaving The Teachers’ Pension Scheme
Specialist advice for Independent Schools
Thinking of leaving the Teachers' Pension Scheme (TPS)?
Like pretty much everything else in the economy right now, the cost of pension provision continues to rise. In 2019, the government announced a 43% increase in employer pension contributions for the Teachers’ Pension Scheme (TPS). Importantly, although the cost of TPS membership for state schools is underwritten by the government, the cost of participation for schools in the independent sector is not. As a result, since 2019 over a quarter of all independent schools who participated in the scheme have left. For independent schools who remain in the TPS, it’s a cost that they are not willing to or cannot absorb in the medium to long term, especially given the significant financial pressures created by the Covid-19 pandemic. As a result, many schools feel they have no option left but to slowly withdraw from or to leave the TPS altogether. As an independent school, you have the right to leave the TPS. However, you must carefully consider the benefits that your members will be missing out on if you do decide to leave. You will also need to think about how to manage the process from an employment law perspective in order to minimise the risk of any legal challenges. You should also bear in mind the potential for long term damage to relations with your teaching staff as a result of a TPS exit.
If your school is considering leaving the TPS, then please contact our friendly team of experts. We have a team of experienced education, employment and pensions specialists who can advise you throughout the whole process.
Leaving the TPS – employer’s obligations
If you decide to leave the Teachers’ Pension Scheme, you will have to consult with your staff and trade unions where appropriate and you may need to make changes to employees’ contracts of employment.
You should look to get staff agreement to a TPS exit, and you will also need to provide an alternative pension scheme that meets the minimum quality standards under the UK pensions auto-enrolment rules.
Two ways to leave the TPS
- Phased withdrawal (available since 1 Aug 21) - the employer freezes membership of the scheme, allow existing staff to remain but no new employees will be allowed to join. New joiners will be offered a Defined Contribution scheme instead. Andy Campbell article here or somewhere else on this page. This model has the benefit of softening the TPS exit for existing staff. However, in the long run it may create a two-tier workforce within the school between TPS and non- TPS members, as well as impacting your ability to attract and retain new teaching talent who see good quality pension provision as an important part of their benefits package. Read a recent article written by Andy Campbell - Teachers’ Pension Scheme – option for “Phased Withdrawal” for Independent Schools.
- Scheme withdrawal - the school leaves the Scheme completely and offers staff an alternative pension scheme.
Leaving the TPS - How can we help you?
With almost a quarter of independent schools having left the TPS since 2019, you may be considering your situation and, in particular, whether continuing to offer the TPS is still a sound business decision. Perhaps TPS provision is creating unreasonable pressure on your cashflow and you want to explore all your options? Depending on the age profile of your staff, it may also generally be a good time to review your pension structure to ensure that it still meets your school’s needs? Our specialist team can help you navigate the process effectively.
- Assessing your existing scheme - Are you making the right choice for the school and its employees? We can work with you to help you assess your existing scheme.
- Choosing a new pension structure - If you decide to leave the TPS, we can advise you on the right decision for you, whether it is a phased withdrawal or a full withdrawal. We can also help you to review the alternatives to the TPS and identify which members of staff may be negatively/positively affected by the proposed changes.
- Support with the consultation process - Transparent and open communication with all staff and the wider school team including governors and the senior leadership team is vital. We can support you with written communications and group and face-to-face sessions (with pension, education and employment specialists) to help everyone to understand the school’s proposed changes.
- Changes to contracts if required – Our employment and education team have vast experience in assisting schools with agreeing and documenting the change to their pension arrangements via employee terms and conditions.
- Ongoing support – We can provide ongoing support as the business and staff members are transitioning to the changes. We will be available to help you with any challenges that you face going forwards.
Leaving the TPS - FAQs
Why have pensions contributions increased and by how much?
Every four years an actuarial valuation of the TPS takes place. This is to ensure that there is enough money in the pension pot to give to members once they retire. The most recent valuation was carried out in 2016 by the Government Actuary’s Department. The Scheme was found to be £22bn in deficit, which is an increase of £7bn from the previous valuation carried out in 2012. This resulted in a decision to increase the employer pension contributions that schools need to pay to the TPS from 16.48% to 23.68% of staff salaries from September 2019.
How long will it take to move to a different pension scheme?
You must give written notice to the Secretary of State for Education if you want to opt out of the TPS. The process of moving from one pension scheme to another can be time-consuming as it is affected by a number of factors e.g. choosing a replacement pension arrangement and communications with employees of the school. The pension consultation process alone must last for a minimum period of 60 days and the whole process can take 6 months or more – in some cases, up to a full academic year.
What’s the difference between a Defined Benefit Scheme and Defined Contribution Scheme?
A Defined Benefit (DB) scheme (often called a ‘final salary pension’) offers a guaranteed pension income when staff retire. It is based on salary and how long the employee has worked for their employer rather than the amount of money contributed to the pension. The TPS is a Defined Benefit Scheme and is straightforward and offers certainty. If the school leaves the TPS, it will offer a Defined Contribution (DC) pension arrangement in its place.
A Defined Contribution (DC) scheme (sometimes called ‘money purchase’). Both the employer and employee contribute every month and this amount is invested in a carefully chosen investment fund on behalf of each scheme member. The final amount in the pension pot will depend on investment performance, as well as how much is paid in and the choices the employee makes on how to use the final amount. This may be seen as more risky and less generous by staff. Investments could go up or down.
Does a school need to issue new contracts of employment if changing pension schemes?
We would always recommend getting your staff’s written agreement to the change by altering their terms of employment to reflect the withdrawal from TPS membership. Importantly, some staff (especially those on older contracts) may also have a clear contractual right to TPS membership as part of their employment terms, and this will need to be altered with their agreement as well.
Can schools operate two or more pension schemes for teachers?
In theory, there is no issue with schools offering different pension arrangements for different groups of staff. However from a HR perspective, some schools have felt that it is preferable to have all staff in a single arrangement. This avoids the risk of a two-tier workforce emerging between TPS members and non-TPS members and avoids issues around recruitment and retention of talent for younger staff who may feel they are being treated less generously as regards their employment benefits package.
Our team - a range of expertise
Simon Henthorn leads the education team. He is one of the UK's outstanding education lawyers. He is listed a Leading Individual for his work advising schools, colleges, universities and other education sector organisations by the The UK Legal 500.
He is joined by his colleague Liz Timmins who specialises in the education sector, supporting schools, colleges, universities and associations on the full range of legal issues they face, from employment issues such as dismissals, grievances and restructures to safeguarding issues and parent complaints.
Andrew Campbell leads Doyle Clayton's pensions practice and advises UK businesses and trustee boards on the full spectrum of pensions issues. He helps organisations find increasingly innovative ways of changing their pension arrangements to protect their cashflow and profitability as well as providing an acceptable return for shareholders.
‘I mostly work with Simon Henthorn, who is extremely good to work with. He responds extremely promptly, accepts when he needs to look something up, and is available for conversations whenever I need him, often at very short notice.’ The Legal 500