In line with all Public Service pension schemes, the Teachers’ Pension Scheme (TPS) is set to undergo major reforms, which start to take effect from the 1st April 2015.
The reforms will see teachers’ pension accrual move to a career average revalued earnings (CARE) basis – replacing the current final salary system – with a Normal Pension Age (NPA) that is linked to the State Pension Age.
This change is part of a much wider set of pension and tax reforms that will have significant implications for all employers in the education sector.
In addition to new responsibilities regarding auto enrolment, schools are facing higher pension-related payroll costs for teachers in three areas:
- Employer TPS contributions of 16.4% will be introduced later this year, alongside a new ‘Scheme Administration Charge’ of 0.08%, also charged to employers.
- Contracting out via the TPS will also come to an end in April 2016, adding a further 3.4% of relevant earnings to schools’ NI costs.
- Finally, for anyone entering the new CARE scheme, overtime payments will, for the first time, form part of pensionable pay.
These changes, however, may ultimately have less impact on schools’ finances than the new, later, retirement ages in the CARE scheme. Broadly speaking, any teacher currently under the age of 50 will now have a NPA of 66-68, rather than 60, as is the case today for most staff. This will have inevitable consequences for the demographic (and salary) profile of the staffroom over the coming years.
With later retirement ages set to become the norm, ill-health, motivation or competency issues amongst longer-serving teachers are likely to become more common. Managing these situations will require a more proactive and collaborative approach to retirement planning, informed by a detailed understanding of the TPS.
With the right knowledge it may be possible to improve a prospective retiree’s financial position considerably, at little or no cost. Phased retirement, for example, is a widely used option, and the CARE scheme will extend the existing flexibility in this area.
Another common approach is for a teacher to ‘retire’ and then be re-employed on a new contract. In this scenario, the TPS abatement rules need to be considered, and the introduction of the CARE scheme has created a new potential trip-wire for the unwary. Upon re-employment, the teacher will accrue benefits in the CARE scheme and the later NPAs will apply. To the surprise of many, this new rule will also be backdated to any retirements that have occurred since 1st April 2012.
Senior Remuneration Policy
As the Lifetime and Annual pension allowances have fallen over recent years, increasing numbers of headteachers and other senior staff have been snared by one, or both, of the lower limits. Unanticipated tax charges of, in some cases, tens of thousands of pounds can negate the benefits of a promotion and pay increase.
Senior remuneration policy is therefore already a minefield for governing bodies seeking to attract, motivate and retain the best leaders, as well as structure remuneration efficiently. And it’s about to become even more complex as teaching staff start to accrue CARE pension benefits in addition to their existing final salary rights.
To date, the information provided by TPS to teachers over the introduction of the CARE scheme has been quite limited and the main teaching unions’ communications have arguably lacked balance.
The result: widespread discontent and confusion about pension provision – traditionally seen as one of the major benefits of joining the profession – despite the fact that the TPS remains one of the very best pension schemes in the UK.
Against this background, clear, employer-led communication is very welcome.
The number of options open to teachers to either improve their pension benefits and/or bring forward their retirement date is wider then ever. The new defined contribution pension freedoms open up the option of ‘bridging pensions’ for early retirees. Within TPS, Faster Accrual has now been added to the existing Additional Pension Benefit option.
It is also possible to ‘buy out’ any early retirement costs in TPS above the age of 65, although this is a one-off opportunity and must be done within 6 months of joining the CARE scheme.
Expert Advice is Key
All these factors are contributing to an increased need for schools to develop a pensions and retirement strategy. Pilot Consulting specialises in advising schools on these issues, drawing on an in-depth understanding of the TPS and wider pensions legislation.
We use proprietary models to identify cost savings, mitigate tax, or compare retirement options and so are uniquely placed to guide you and your staff through the issues and opportunities arising from the scheme changes.