College pension contributions set to rise and could cause 'financial crisis' in FE

The employer contributions colleges pay towards teacher pensions look set to rise and could cost them an extra £100 million a year, a move which one sector leader has warned could spark a “financial crisis” in FE.

The outcome of a valuation of teachers’ pensions, which the Treasury runs every four years, suggested the public sector workers will get improved benefits from April 2019.

New “draft directions” for the Teachers’ Pension Scheme, published last Thursday, then stated that “early indications are that the amount employers pay towards the schemes will need to increase”.

It is unclear at this time what the employer contribution rate will eventually be.

But in a move which is likely to frustrate college leaders, the Department for Education has committed to “providing additional funding to maintained schools and academies in 2019-20 in view of the unforeseen costs” while it is only “looking at” how it can “support FE colleges with the additional costs involved where necessary”.

The introduction of higher employer pension contributions for college teachers will be welcomed news to them following the DfE’s decision not to fund a salary rise, despite doing so for school teachers.

But on the other hand it is likely to trouble college leaders who continue to struggle with significantly tight budgets and funding cuts.

Colleges currently contribute £350 million annually towards the pension scheme but the Association of Colleges has warned an increase in contributions could force them to stump up an extra £100 million on top.

“This would be 1.4 per cent of total income and would play havoc will financial plans drawn up this summer – unless there is full compensation for the higher costs,” the association said.

Bill Watkin, chief executive of the Sixth Form Colleges Association, warned that a significant increase in employer contributions to the Teachers’ Pension Scheme “has the potential to lead to a financial crisis in our sector”.

“Years of cuts, cost increases and a static funding rate since 2013 have had a negative impact on staff, students and the financial health of institutions,” he said.

“The government must find the funding to cover any increase in employer contributions and this funding must be for the long term.”

He added: “We have made it clear that any financial support offered to schools to cover these costs must also be extended to Sixth Form Colleges, and that this funding is no substitute for a desperately needed increase to the 16-19 funding rate in next year’s spending review.”

Julian Gravatt, deputy chief Executive of the Association of Colleges, said: “We’ve been highlighting to colleges and government since 2016 that the teacher pension valuation ‎is likely to result in cost increases which will be hard to manage given current funding levels.

“It is good news that the Treasury plans to cover the higher cost for the period to March 2020 but it is unclear what happens after that. It’s difficult for colleges to make long-term plans when the information is presented so late.”

The DfE draft direction stated: “Initial indications are that the protections in the new cost cap mechanism mean public sector workers will get improved pension benefits for employment over the period April 2019 to March 2023.

“This test, known as the cost control mechanism, was introduced to offer taxpayers and employees protection from unexpected changes in pension costs.

“In addition, early indications are that the amount employers pay towards the schemes will need to increase.

“This is because of proposed changes to the discount rate, which is used to assess the current cost of future payments from the schemes.

“At this time, we’re unable to provide information on what the employer contribution rate will be, but the Department will be providing additional funding to maintained schools and academies in 2019-20 in view of the unforeseen costs.

“The department is also looking at how it can support FE colleges with the additional costs involved where necessary and will further consider the funding position for HE establishments as the valuation progresses.”

The DfE added that it will now complete the valuation and, following discussions with the Teachers’ Pension Scheme Advisory Board, will provide details of the employer contribution rate and any options for amending member benefits.

“We will of course continue to provide further updates as soon as information becomes available,” it added.