How independent schools can empower their people with flexible pension options

Independent schools are facing some very real cost challenges on many fronts.

In her Autumn Budget speech, Chancellor Rachel Reeves revealed several Government initiatives which will significantly impact the education sector: 

•    the removal of the VAT exemption from 1 January 2025;
•    increases to the National Minimum Wage; 
•    an increased employer National Insurance (NI) rate; and 
•    the lowering of the NI threshold. 

Each one of these would be significant in isolation but the combination of these changes, hot on the heels of the recent 5% increase to Teachers’ Pension Scheme (TPS) employer contributions, is not to be underestimated.

Examples in practice

To help illustrate the ramifications of the NI changes alone, let’s look at a staff member earning £35,000. A 1.2% increase in employer NI, and the lowering of the NI threshold from £9,100 to £5,000 means that the extra employer NI payable for this single employee is £925.80 per annum.

Put another way, if a school had budgeted for a 3% pay rise, they would need to reduce this increase to just 0.67% to mitigate the increased NI costs. 

With the budgets for salary increases diminished, is now the time for independent schools to be thinking about pension flexibility?

What is the appetite for pension flexibility among teachers?

We wanted to understand more about teachers’ views on their pension entitlement, so we partnered with the Education Policy Institute (EPI) to conduct a research project. The EPI’s recent article ‘Do teachers want pension flexibility?’, based upon this research, contains some ground-breaking findings. 

Teachers on average contribute 9.6% of their salary, with their school contributing 28.6% (38.2% in total). That’s a significant contribution, especially when compared with the UK auto-enrolment minimums which are currently just 8% in total (5% employee, 3% employer).

With such significant funds being paid into their pension, would some teachers prefer the option to forego some contributions to increase salary? Teacher TAPP, a daily survey app for teachers asked that very question and out of over 10,000 responses, 19% said they would like to trade some pension for more salary today. That’s one in five teachers looking for more flexibility. 

When you dive deeper into the numbers, there is some correlation with age. Younger teachers have a stronger preference for this option with almost three out of ten (28.5%) saying would like flexibility.

How can a teacher achieve pension flexibility?

It’s up to each school (or trust) to decide whether to offer flexibility. However, an increasing number of independent schools are now offering pension flexibility through a new defined contribution (DC) pension scheme called the ‘alternative scheme’. There are several ways this could be offered:

•    Parallel option: Offering an alternative scheme alongside TPS for those teachers who decide to opt out.
•    Phased Withdrawal: Teachers who were employed before a ‘freeze date’ would continue to have access to TPS unless they opt out and join the alternative scheme. New hires would only be offered the alternative scheme.
•    Full withdrawal: Independent schools have the right to leave the TPS and offer an alternative scheme to all teachers.

It’s important to highlight that changing pension provision should only be done after giving all options full consideration and receiving appropriate professional advice.

Under an alternative scheme, schools can then offer flexibility on the employer contribution element, allowing the teacher to take a portion as taxable income (less employer NI) instead of a pension contribution. Typically, these options could instantly increase a teacher’s take-home pay by up to 10% or more.

How salary sacrifice can help

When implementing an alternative DC scheme, schools should also consider introducing salary sacrifice (also known as salary exchange) to help further mitigate cost increases. This method of paying pension contributions allows employees to get tax relief immediately as well as saving them NI on their own contribution. Importantly, schools also benefit from NI savings - of 13.8% (15% from April 2025) of the teacher’s contribution – which could be used to bolster salary increase budgets.

If we go back to the £35,000 employee example above and assume that they shift to paying 5% through salary sacrifice, the extra employer NI reduces from the £925.80 above to £663.30. That means their salary increase could be 1.32% rather than the 0.67% cited above.

How can technology help

Whilst offering pension flexibility may seem like an administrative headache, it can in fact be fully automated through a flexible benefits platform, enabling teachers to model various pension scenarios and choose the option that works best for them.

Beyond pensions, these platforms can also fully automate payroll reporting and make it easier to offer a wider range of voluntary benefits to attract and retain people, including top up life assurance, healthcare, dental cover, cycle to work, and green car schemes.

BW offer an award-winning benefits platform called 4me, which is highly configurable and includes a pension flexibility module designed specifically for independent schools. This can help ease the administrative burden and enables schools to offer an extensive range of benefits to keep teaching and support staff fully engaged and motivated. 

With 4me, your people can view and select benefits on a platform, as well as being able to view their total rewards package, giving them a clearer view of their overall benefits.  

How can we help?

As a leading independent UK professional services consultancy across risk, pensions, benefits and investment, we have over two decades of expertise in delivering consultancy and services to schools, universities, and educational organisations.

If you would like to discuss anything-benefit related or would like to see a demonstration of our platform, please contact scott.farquharson@barnett-waddingham.co.uk