19: Teachers’ Pension Scheme and Independent Schools – phased withdrawal proposals given the go-ahead

On 11 November 2020, the government published its response to its 2019 consultation on proposals to allow independent schools in England and Wales to make phased withdrawal from the Teachers’ Pension Scheme (TPS). The move followed a dramatic increase (from 16.48% to 23.6%) in employer contributions to the TPS with effect from 1 September 2019. The government decided not to fund the additional cost to independent schools, but offered the proposal for phased withdrawal as some mitigation. Following the 2019 consultation, the government has now decided to proceed with the proposal to make phased withdrawal available to independent schools.

The 2019 consultation and responses

The proposal for phased withdrawal came about because of the concern that the significant increased cost of the TPS would cause many independent schools to leave the TPS entirely. That would affect all staff members of the TPS in those schools and have a financial impact on the scheme itself.

The proposal was to change the current regulations so that independent schools could opt to freeze participation in the TPS from a certain date so that, broadly, staff already in the TPS on that date would remain in the scheme, but staff joining subsequently would not be enrolled in the TPS, but would be offered alternative provision (giving rise to the ‘mixed economy’ option). The aim would be to enable some independent schools which would otherwise have left the scheme entirely an option to remain, albeit on a limited basis, which would reduce over time with natural staff turnover (unless the school decided at a later date to re-join the scheme).

The consultation asked whether respondents agreed that the proposal would achieve the twin aims of helping independent schools manage the financial pressures resulting from the additional TPS employer contribution costs and protecting those teachers currently participating in the scheme. It also asked for suggestions for alternative means of helping independent schools manage the additional financial cost and asked for input on potential equality impacts arising from the proposal and how these might be mitigated.

645 responses were made to the consultation (including a response from us). The response document notes that the responses were mixed, but that 52% of responses were fully supportive of the proposal, a further 30% were supportive but expressed views on alternative approaches, while 18% opposed the proposal.

Of those in favour, it was noted that some schools would not need to make use of phased withdrawal, being in the fortunate position of being able to absorb the cost one way or another, while others would not be able to afford the increase whether phased withdrawal was available or not. However, for some schools, it was felt that the proposal could offer sufficient mitigation in respect of staffing costs of incoming teachers to allow the continuing participation of current staff. Those who disagreed noted that the proposal would not have a significant financial impact because savings would not be realised immediately, but would only arise in the medium to long term, depending upon staff turnover.

Views were also mixed on the extent to which the proposal would protect teachers currently participating in the TPS, but the significant majority (69.4%) agreed it would offer protection. However, concerns were expressed that the availability of the option may encourage leaving the TPS and ultimately lead to more independent schools doing so. It was also noted that the protection afforded current members would only apply so long as they stayed in their current role.

The government response

The government acknowledged that the proposal would have limited financial impact for independent schools in the first year of introduction, but reasoned that it would have increasing impact with each subsequent year. The limited protection afforded current TPS members was also acknowledged, but it was considered that, overall, the proposal would likely result in more teachers at independent schools retaining TPS membership than if the proposal was not implemented. A proposal that a teacher be allowed to remain enrolled in the TPS if moving from one phased withdrawal school to another was rejected (as the teacher would be moving to new employment).

To address the equality concerns, the government proposes some protections, namely to allow a teacher who had opted out the option to re-join if the opt-out took place before their school adopted phased withdrawal and to give a teacher returning from non-pensionable sick leave or non-pensionable family leave the right to re-join the TPS for up to 5 years from their last day of pensionable service. Otherwise, the government considers the proposal is justifiable on the basis that it is intended to reduce the number of independent schools leaving the TPS entirely. However, the response indicates that the government will give further consideration to the circumstances in which current teachers at a school that opted for phased withdrawal could re-join.

The response document also notes that the government considered the further impact of COVID-19, and the resulting financial uncertainty around fee levels and numbers of pupils. Having taken all these considerations into account, the government’s conclusion overall was that the proposal would assist with the twin aims of helping independent schools manage the financial impact of the increased employer contribution rate and protecting current staff members of the TPS and that it would proceed with the proposal.

What does this mean for independent schools?

As we noted in our blog on the 2019 consultation, the availability of phased withdrawal does not necessarily make it easier for independent schools to decide what to do about the increased TPS cost. While it might on the face of it appear obvious that having another option available must be a good thing, the reality is not so straightforward.

There is a risk that the phased withdrawal option may appear to be the easier ‘default’ option, especially to staff understandably concerned about their future. This in turn could lead to more division when it comes to making a decision about the school’s future in the TPS – staff who might previously have accepted the economic necessity of leaving the TPS, especially with the added financial impact of the pandemic, may hold out instead for the halfway house of phased withdrawal.

However, as we noted at the time of the 2019 consultation, running a phased withdrawal approach is more complicated, both in the cost and administration of running dual schemes and in managing staff relations and the impact on recruitment. It also remains the case that the protection afforded current staff is unstable – the option to leave the TPS entirely is still there.

Crucially, for the financial position of many schools, and as acknowledged in the government response, any savings from phased withdrawal are not realised immediately. They are also unpredictable as to when they might arise – it may be over a period of years, or even decades, especially for schools with a low ‘churn’ of staff turnover, something which may be slowed further in the mixed economy approach. In the meantime, the increased TPS employer contribution is a regular fixed cost. The contribution rate is also expected to increase again at the next scheme valuation, due to be implemented in April 2023.

So, while some independent schools may welcome the option to ringfence the costs of the scheme, at least under the current contribution rate, the phased withdrawal approach will not be a solution in all cases and in others may only be a temporary fix.

Next steps

The government had expected to make its decision on the proposals ‘by late 2019’; the delay is no doubt explained by the concerns of Brexit, a general election and a global pandemic requiring attention. The proposed timetable now is for regulations to effect the proposals to come into force in ‘spring 2021’ and for independent schools to be able to ‘request phased withdrawal from then’.

Even that timetable may be tight, given that the government has also committed to consult on the draft regulations, which have not yet been published. The response notes that the government will liaise with the ISC and member and employer representatives ‘to fully develop’ the proposed change and the draft regulations. It adds that, in drafting the regulations, ‘further consideration will be given to the treatment of existing staff members who are, or might become, deferred during that employment’. We should, therefore, expect some further development of the proposals by the time the draft regulations appear for consultation.

Conclusion

The government’s decision to proceed with the phased withdrawal proposal is not a surprise – it does offer an option which some schools may adopt as an alternative to leaving the TPS entirely. However, the phased withdrawal option is not a universal panacea.

With the many significant challenges facing independent schools at present, not least managing their operations in a global pandemic, the situation remains a difficult one for governors, staff, parents and pupils. For independent school governors making decisions about what is in the best interests of their charity, the availability of the phased withdrawal approach will be a relevant factor to consider along with other options. As we noted in our blog of May 2019, what remains essential throughout this period is that the governors get their governance right, so that they can feel confident in the difficult decisions to be made, and communicate with interested parties in a clear, timely and thoughtful manner. With the addition of the phased withdrawal option, the need for assured decision-making and clear communications is likely to be even greater.