Valuation

Every four years, the Government Actuary’s Department (GAD) carries out a valuation of all unfunded public service pension schemes. Teachers’ Pensions is one of these schemes.

The valuation is the process by which scheme costs are measured and managed. It assesses the long-term cost of providing pensions and other benefits to members of each public service pension scheme and determines the appropriate employer contribution rates going forward.

What was the result of the latest scheme valuation for the Teachers’ Pension Scheme?

Following the scheme valuation, it was determined that employer contributions needed to increase to ensure that the costs of the pension scheme remain affordable, at the levels set in 2015. This increase was put in place from September 2019. The valuation also indicated that while costs were likely to increase in respect of the period 2019 to 2023, over the longer-term member benefits need to rise to return them to the level agreed in 2015. Member and employer representatives came together to discuss changes to member benefits, which led to a recommendation that, for the Teachers’ Pension Scheme, the rate at which pensions accrue should be improved.

Before any such change to the benefit structure could come into effect, the Government was denied leave to appeal the decision that the Transitional Protection provided as part of the 2015 public service scheme reforms was discriminatory on age grounds. An Employment Tribunal (the McCloud and Sargeant cases) will now determine how this will be remedied. As a result the change to the benefit structure is currently on hold pending the Employment Tribunal decision.

In short, nothing. As soon as the outcome of the Employer Tribunal is known we’ll inform you of the result and provide as much information as possible.

The Employment Tribunal will determine the changes needed. It’s too early to estimate how long will be needed to implement the changes. We’ll keep you updated as we know more.

We’ll provide further information on likely timescales when we’re made aware of them.

The valuation results show that the cost of providing pensions has increased. The Government decided to increase the employer contribution rate to the Teachers’ Pension Scheme to 23.68% (including the administration levy of 0.08%), with effect from 1 September 2019. This aligned the increase with the academic year and allowed employers additional time to plan for its implementation.

The higher contribution rate was introduced from 1 September 2019. Although this could have been effective from 1 April 2019, the Government decided it was more appropriate to implement the revised employer contribution rate for the Teachers’ Pension Scheme on 1 September 2019, to align with the academic year and allow employers additional time to plan for its implementation. The Department for Education consulted on the additional funding that may be provided to some Teachers' Pensions Scheme employers to cover the additional costs.

The Government has estimated that the cost of any likely adjustment to benefits will be at least similar to the cost of the proposed benefit improvements on which the revised employer rate is based.

If the revised employer contribution rate were not implemented from September 2019 as expected, a significant scheme deficit would occur. If that happened, there would need to be a further increase to the employer rate to address the deficit.

Costs relating to member experiences have fallen as a result of reforms, however member costs are just one factor used to determine the cost of the Scheme.

The cost of providing pensions is determined by a number of factors, including key assumptions on the ‘discount rate’. Future payments are discounted using the ‘discount rate’ to provide a cost of providing benefits in today’s terms. If the discount rate is reduced it means that the cost today, to provide benefits in the future, increases.

HM Treasury reduced the discount rate for public service pensions to reflect the lower expected future growth in the economy.

The cost of providing pensions is determined by a number of factors, including the assumptions adopted for the scheme valuation. The key assumption leading to the increase in costs is the ‘discount rate’. Future payments are discounted using the ‘discount rate’ to provide a cost of providing benefits in today’s terms.

HM Treasury changed the discount rate for public service pensions to reflect the lower expected future growth in the economy. A lower discount rate means a higher cost of providing benefits.

The Department for Education recently concluded a consultation on the proposed funding arrangements. The consultation set out the Department’s proposal to fund those employers who are most reliant on government grants. Responses to the consultation are currently being analysed and a final decision on the funding position will follow.

Independent schools participate in the Teachers’ Pension Scheme on a voluntary basis and can therefore leave the Scheme at any time. The school or it’s representative(s) must write to Teachers’ Pensions setting out the date from which participation in the Scheme will cease.

Once you leave the Scheme, all your employees will cease to be eligible to participate and their pension provision will become deferred. Further information on how to leave the Scheme can be found in our checklist.

A consultation – seeking views on proposed changes to the way independent schools withdraw from the Scheme – runs from 9 September to 3 November 2019. Further details are available on the Department for Education consultation hub:

https://consult.education.gov.uk/school-employment-division/teachers-pension-scheme-independent-schools-phased/

You can choose to leave the Teachers’ Pension Scheme but you’ll be required to consult with your staff on any changes and enrol your employees into another qualifying pension scheme. We recommend you take advice if you choose to follow this route.

If the new scheme that you offer is a ‘Defined Benefits’ scheme then your employees may be able to transfer their teacher’s pension over to it, as long as they do this within 12 months of entering the new scheme.