TPS 2020 Valuation: possible new employer contribution rate

ISBA notes that: “HM Treasury expect to finalise the 2020 Valuation in September 2023. However, they have made sufficient progress on the various HM Treasury led directions to be able to say that “the direction of travel is in the order of 5% points increase in the employer’s contribution rate” (from the current rate of 23.6%).”

Tim Williams, Senior Consulting Actuary, said: "If we look at the 2016 valuation, the notional funding level was around 90%, but it’s important to remember that there are no assets as such so this is not the main driver for the future cost of benefits in the scheme (although there is a proportion of the employer cost that is in theory addressing the 'notional' funding shortfall). There is certainly a big shortfall between the amount being paid in by employers and teachers each year and the amount being paid out as pension and cash benefits, but the difference is met by the Treasury. This shortfall in payments is not going to be greatly affected by the expected increase in contributions next year.

"Although nothing is certain until the 2020 valuation report is published, we can fairly confidently predict that if the discount rate is cut and the liabilities increase then, unless something unexpected happens to the notional assets, there will be a similar sized share of the employer contribution rate that is in theory addressing the notional shortfall. We would continue to expect to see a very much higher level of payments out of the fund than the level of contributions being paid in. 

"However, given this is an unfunded scheme, with any net shortfall of payments coming from the Treasury, this largely becomes a political question – reducing the discount rate, and so increasing the cost, is a source of funds for the Government as it increases the amount that non-public sector bodies pay into unfunded pension schemes now. To the extent that governments see that as a useful source of income, then there remains a risk of further increases."

Upward pressure on the school contribution rate has been expected since the Government announced the outcome of the 2021 'Superannuation Contributions Adjusted for Past Experience' (SCAPE) discount rate consultation (Teachers’ Pension Scheme: SCAPE discount rate consultation), and with all the operational challenges being faced by the sector (from the current high inflation environment, energy cost risks, to the potential for VAT and business rate reliefs to be removed in the future) this news is likely to cause many schools to consider future participation.

Furthermore, ISBA has also noted that the new rate is likely to take effect from April 2024, not September as many were hoping. This means schools considering their options will likely want to act quickly.

There are many options open to schools in this regard, from cost sharing and phased withdrawal to parallel options and TPS exit, with the right option for a given school very much dependent on its unique circumstances.

At Barnett Waddingham we have extensive expertise in this area and have helped many schools with pensions and benefits strategy, design and implementation and staff engagement.

Full details can be found on our Teachers’ Pension Scheme page.