Pensions and independent schools

Pensions and independent schools

Many independent schools in Scotland are participating employers in schemes such as the Scottish Teachers Superannuation Scheme (STSS), which provides pensions on a final salary basis, and the Scottish Teachers Pension Scheme 2015 (STPS), which operates on a career average revalued earnings or CARE basis. Participation in these defined benefit schemes is often seen as an important tool in recruiting the best candidates for teaching positions, but at the same time schools are facing funding pressures and this has only been exacerbated by the pandemic. The prospect of ever-increasing employer contributions is an additional challenge at a time when funding is already problematic.

There are equivalent public sector pension schemes for teachers in England & Wales. Independent schools there have been encountering the very same funding issues as their Scottish counterparts and many of them have responded by seeking to withdraw from the Teachers’ Pension Scheme and put in place alternative pension arrangements for their staff.

The current situation

Indeed following a Freedom of Information request last year, the Department for Education reported that almost a quarter of independent schools in England & Wales had either withdrawn from the scheme or had indicated that it was their intention to do so. Much of this activity seems to have been the result of an increase in the employer contribution rate in 2019 from 16% to 23%. A further increase in the employer contribution rate is likely later this year and could lead to more withdrawals. No independent school in Scotland has withdrawn from the STSS or STPS so far, but since they are experiencing exactly the same issues it‘s potentially only a matter of time before we see a similar process here.

Are there implications if schools withdraw?

Unlike defined benefit pension schemes in the private sector, there are currently no exit penalties charged if an employer ceases its participation in the STSS or STPS. We also understand that there are no plans in contemplation to amend the regulations governing the schemes to introduce any such exit penalties.  However, that could well change, particularly if independent schools started withdrawing from the schemes in considerable numbers. Based on our experience of previous major changes in pensions law, if such plans were announced it is likely they would also specify a “cut-off date” beyond which no withdrawal would be possible without triggering payment of an exit penalty. In the past, this has frequently been the date of the announcement itself. Any such penalty incurred by a school is likely to be in the region of several hundred thousand pounds, possibly even in the millions.

Next steps

Any independent school which is considering ending its participation in these schemes may therefore have a short window within which it may do so, particularly given the ‘lead in’ time required to implement the changes in their pension scheme. Carrying out an effective consultation with the affected staff is vital, and given the importance of legal and actuarial advice in taking those steps and putting in place alternative pension arrangements, the sooner they start that process the better the likely outcome. If you have specific questions, our Head of Pensions, Steven Dunn, will be happy to help.

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