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Teachers’ Pension Scheme: five reasons Independent Schools should review their arrangements

From 1 September 2019 contributions to the teachers’ pension scheme (TPS) rise from 16.4% to 23.6% of teachers’ salaries. This has prompted independent schools to review their arrangements.

1: Cost challenge:
Independent schools (and universities) bear the full cost of this increase, whilst the government will provide funding to maintained schools and further education institutions for 2019/20.

With pension contributions increasing by over 7%, that will bring the pensions bill to over £70,000 for 10 teachers averaging £30,000 salary. The UK’s 2,500 independent schools are faced with the challenge to find additional funding, or act to mitigate costs.

Before independent schools resort to increasing parents’ fees, reducing staff headcount or holding pay awards, they may consider transferring teachers to another pension scheme.

Changes to pensions arrangements are always emotive, but then so are the other options and independent schools should consider all options available before committing to action.

2: Availability of change:
Under current TPS rules, employers aren’t permitted to direct new joiners into a new scheme while leaving existing teachers in the TPS but are free to make wholesale changes of their pension arrangements. This could be an existing arrangement already established by the employer for non-teaching staff, or an alternative scheme. 

The government is consulting on changing the TPS rules to allow different approaches for new and existing teaching staff.

3: Increase engagement and contributions:
Under a new pension arrangement the employer is free to structure the scheme to drive increased levels of member engagement. Many employers use a tiered contributions structure where members can choose the level of pension contributions they wish to make, and get rewarded for higher contributions. For example:

Employer Pays Employee Pays Total Contribution
10% 3% 13%
15% 5% 20%
17% 7 24%

This starts a real conversation with employees about their pension planning, and balances the costs of the scheme between employer and employee.

4: Cost mitigation
If the employer establishes a new pension scheme for all members, then this can be operated on a salary exchange basis – meaning that contributions from employees are made in lieu of salary and so do not attract employer national insurance payments. 

This means the employer makes the pension contribution and reduces the employee’s salary accordingly, thus saving the employer national insurance of 13.8% on that salary exchanged, and saving the employee any national insurance and tax due on that salary. 

For example 

10 teachers, average £30,000 salary
Each contribute 7% (to attract the maximum employer contribution of 17% in our example)
Total employer contribution: £51,000
Total employee contribution: £21,000
Employer NI saving is 13.8% of employee contribution = £2,898
Net employer cost is £48,102; so salary exchange creates a 5.68% saving
This is a £22,698 saving vs TPS scheme costs
Note that this is an annual saving, which will increase as salaries rise.

This arrangement can be applied across non-teaching staff too (so long as employees continue to earn more than the minimum wage level), to create further savings.

5: Reflecting employees’ needs
Ultimately the quality of any business’ service is dependent on how engaged and motivated their employees are to deliver a great service.

Many industries invest in ensuring employees have access to benefits that reflect their own personal priorities and needs, and are able to build their own benefits package.

Pension contribution matching rules introduce to employees the concept of flexing their benefits package, and with the savings outlined above employers could consider funding areas such as:

Helping reduce the cost of debt, and make salary go further
Boost employee health, for example with a cycle to work scheme
Increase health security for employees – for example dental cover or hospital cash plan
Protecting families in the event of an employee’s illness or death

The impending pension contributions increases will undoubtably create challenges for independent schools, but as I’ve outlined above there are positive reasons to use this moment to review the pension scheme and employer’s wider offering for their people. With clear and open communications the changes considered can help protect teachers’ roles and the business.

We help employers make fully-informed decisions, and deliver great communications to their staff. As a fully-regulated financial adviser we can help both businesses and individuals make firm financial plans for the future.

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Jay Financial is authorised and regulated by the Financial Conduct Authority
FCA Firm number 450655, Independent Financial Adviser, Jacqueline Fancourt