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14 May 2019

Dealing with the challenges of the Teachers’ Pension Scheme – finding the calm corner among the crisis management and financial black holes

The Government’s recent response to its short consultation, Funding increases to teachers’ pensions employer contributions, confirmed, as expected, that the Government will not fund the additional cost to independent schools of an increase in employer contributions brought about by the latest valuation of the Teachers’ Pension Scheme (TPS). In an already testing environment, it is for independent schools to find a way to meet this latest challenge. Doing so will involve skills and knowhow in financial controls, pensions, employment law and relations, communications, stakeholder relations, perhaps fundraising or restructuring and, above all, sound governance.

Background – how did we get here?

The TPS, as an unfunded public sector pension scheme, is subject to valuation every four years. When the most recent valuation was carried out, forecasts of lower than expected growth in GDP meant that the estimate for employer contributions to the scheme was increased to 22.8% (from the current 16.48%) for the period 1 April 2019 to 31 March 2023. However, because the increase is not being implemented until 1 September 2019, the increase was adjusted to 23.6%, a 43% increase on current rates.

What happens now?

As independent schools are only too aware, this is a significant change to deal with in a highly compressed time period. It is significant that the Government’s consultation response, published on 10 April 2019, noted that the responses from independent schools focused less on asking the Department for Education to provide funding to independent schools for the increase (28% of independent school respondents responded to that question), but more on independent schools’ continued membership of the TPS – the indication being that independent schools were already finding TPS funding levels unsustainable, even before the increase. Indeed, the announcement of the contribution increase has already been the catalyst for a number of independent schools starting the process for leaving the TPS and it is notable that over half of the independent school respondents to the Government consultation highlighted leaving the TPS as a likely impact of the increase.

The only mitigation the Government has offered independent schools is that it will ‘begin to work to consider’ allowing independent schools to leave the TPS via phased withdrawal, in essence allowing current staff to remain in the scheme while closing it to new members. The Government plans to consult on such a move, but there have already been statements from unions that they will oppose it and, if it does go through, the proposal raises its own challenges for school governors and bursars to consider.

What should we do?

Some schools will be in the enviable position of being able to absorb the increased cost without any significant impact on their operations, at least in the short term. For others, as noted above, it will have been clear that the increase was not affordable. Most schools are likely to be somewhere in the middle. For those schools which have not had the decision effectively made for them, it is important not to rush into a decision unprepared – the Governors are the guardians of their charity’s funds. The new contribution rate is set until 2023, the budget for the 2019-2020 school year will have been agreed, so there is a bit of time now (subject to keeping a keen eye on the finances) to ensure that the right decisions are made in the right way.

Get your governance right

There are many vested interests in this area, including teachers worried about future livelihood, other staff comparing their own pensions arrangements, parents concerned about the impact on fees and their children’s future, other pensions providers offering new business and school groups considering new school acquisitions. Governors can expect to be asked questions and for their decisions to be challenged. Ensuring now that the governance is in good order will help give the Governors, and those affected by their decisions, the confidence that their decision-making stands up to scrutiny. For example:

  • Do you have a quorum of unconflicted Governors?
    On such a topic, it is likely that a number of the Governors will be conflicted, eg those with children at the school will have an interest in the possibility of school fees rising or education provision being diminished to allow for increased pension contributions, as well as in the potential impact on staff retention and morale if pension provision is changed. Taking steps now to identify and address potential conflicts will ease the decision-making process further down the line.
  • Have you reviewed your financial controls and risk management procedures?
    Is the school having to eat into reserves to cover the initial TPS cost increases? How does this affect the school’s robustness to meet other expected (or unexpected) risks? The pension costs are a fixed cost every month – might the school be at risk of running out of cash? Is a Serious Incident Report to the Charity Commission needed?
  • Are your procedures for recording Governor decisions up to scratch?
    The decisions which the Governors will need to consider on the TPS are likely to be difficult decisions, calling for fine-tuned judgments. For example, the Government has been clear that teachers’ pensions are ‘among the most generous in the country’ and that the TPS is one of only eight guaranteed by Government so, while a decision to stay in the TPS can be seen as supporting the important consideration of staff welfare, to others it could appear to be gold-plating. Whatever the Governors’ decision, it is likely that some will not like it. Governors will need to be confident that they stand behind their decision and be ready to justify it as being in the best interests of the charity in furtherance of its objects.

The Charity Commission publishes free guidance, such as It’s your decision (CC27), Conflicts of interest (CC29), Charities and risk management (CC26) and Charity finance: trustee essentials (CC25).

Make sure you are properly informed

Governors need to ensure they are properly informed in their decision-making. If they have not done so already, Governors should see that they understand the current position, as well as the options before them. For example, conduct a review of staff contracts to be clear about the current obligations to staff, and what is being offered in any ongoing recruitment; review the school’s reserves and risk register; understand the local risks and opportunities and the options available.

Take professional advice

If coming out of the TPS is one of the options under consideration, the Governors will need to be aware of and understand all the potential alternatives available, so that they can determine which is the most appropriate for the particular circumstances of their school. ISBA is offering a potential alternative scheme but it will not be the only option to explore. Governors may want to work with a pensions consultant to explore the options and may need legal and financial advice to help them feel confident of understanding the potential impact on the school and its stakeholders. A decision here can have significant legal consequences, including changes to employment contractual terms and a need to implement a proper consultation process with staff, also allowing staff the opportunity to take advice on the impact on their financial position. The decision would need to be documented properly, helping Governors to explain and, if necessary, justify their approach.

Agree and implement your communications strategy

There is a lot of noise in this area and stakeholders will likely be feeling unsettled, at what is already a stressful time for many in exam season. In the absence of communications, people will believe the rumours and the school’s reputation may suffer. To prevent this, schools should agree how and when they will communicate with interested groups and do so with a consistent and clear message. The communications strategy should also include means for concerns to be raised, and how the school will respond to those concerns. If at some point a decision is made to consider leaving the TPS, the communications strategy would need to encompass the proper consultation required to comply with employment and pensions law. Getting the communications right can help bring stakeholders with you, alleviating the risk of legal challenges and protecting the school’s reputation.

Future-proofing

For many, there is an element of ‘wait and see’ about the current situation. Many are not making any immediate changes, but are watching to see what other options may be available, as well as what other schools are doing, particularly bearing in mind that it is thought likely that employer contributions are likely to rise again after the next valuation. Even the maintained sector is not settled, as the Government’s promise of funding extends only to 2019-20; after that it is a matter for the forthcoming spending review. And, of course, it is not as though TPS costs are the only problem facing independent schools. Whatever decisions regarding the TPS the Governors make now and in the next few years have to be considered in the context of all the likely demands and challenges, from austerity and Brexit to rates relief and VAT – how sustainable is the school’s future or might other options need to be considered? In some cases, this may mean considering options for merger, sale or closure.

Conclusion

Independent schools have been coming in for a lot of criticism lately, and it is easy to take for granted what school governors do and to forget how difficult, and often thankless, a role it is. School governors have not created the TPS crisis, and they cannot change it; they can only deal with it, as they have to deal with all the challenges which fall to the charity trustee’s lot. What is in the Governors’ control is to manage their governance and decision-making, so that they make timely and informed decisions which are seen to be proper, even if others might have decided differently. Similarly, teachers and parents are caught up in this through no fault of their own. Hopefully, if Governors maintain robust governance and communicate their decision-making in a clear, timely and thoughtful manner, they will bring interested groups with them in the tough decisions ahead.

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