The government is proposing the first rise in employee contributions to the teachers’ pension scheme since 2015 to avoid a shortfall in the fund.
However, the Department for Education said rates would not rise for the lowest-paid, and the monthly impact for an employee earning £110,000 a year is estimated to be £17 – which equates to just under £200 a year.
The department is also consulting on changing Teacher Pension Scheme (TPS) legislation to extend a pensions guarantee policy to college teachers who are compulsorily transferred to private companies providing public services.
It comes after the skills minister Jacqui Smith announced earlier this week that FE colleges will get a “crown guarantee” the local government pension scheme (LGPS), expected to lower contribution rates and save around £30 million.
In a consultation published today, the DfE explained the six “contribution tier” rates had remained the same since 2015, but the thresholds at which each rate is paid had increased annually in line with inflation.
Increases in thresholds leaves shortfall
As a result, the “estimated yield” from the current structure is now 9.45 per cent, whereas members are “required collectively to contribute 9.6 per cent across the whole scheme membership”.
This is “primarily because of the member contribution tier thresholds increasing at a higher rate (based on CPI) than average salary growth, which has affected the expected distribution of the membership in the contribution tiers”.
The DfE said it had accepted a “unanimous recommendation” from the Government Actuary’s Department and TPS advisory board “to retain the current six-tier structure with the forecast shortfall met by an increase of 0.3 percentage points for tiers 2-6”.
The result would be…
- No change in the 7.4 per cent rate for those earning up to £34,289.
- Those earning between £34,290 and £46,158.99 would see their rate increase from 8.6 to 8.9 per cent.
- Those earning between £46,159 and £54,729.99 would see their rate increase from 9.6 to 9.9 per cent.
- Those earning between £54,730 and £72,534.99 would see their rate increase from 10.2 to 10.5 per cent.
- Those earning between £72,535 and £98,909.99 would see their rate increase from 11.3 to 11.6 per cent.
- And those earning between £98,909-plus would see their rate increase from 11.7 to 12 per cent.
Increases of up to £200 a year
The DfE said the “particular circumstances of a member will determine the precise effect”, but provided “the estimated impact on take-home pay (i.e. after tax relief has been applied) for the majority of members”.
It said a teacher on £30,000 would pay no extra contributions, a teacher on £50,000 would pay an extra £10 a month or £120 a year, and someone on £110,000 would pay an extra £17 a month, or £198 a year.
New Fair Deal for colleges
The DfE confirmed it would have to amend the TPS regulations to extend the New Fair Deal (NFD) to college teachers, who would maintain access to their TPS pension when they are transferred over to private sector companies providing public services.
The Treasury today (November 14) confirmed that the NFD will be opened up to colleges. In September, it proposed to unlock non-statutory policy to colleges now they are public sector organisations.
“As a result of the reclassification and the resulting policy change, continuing access to the TPS will be permitted for employees of FE establishments where the transfer provides for this,” the Treasury consultation document outlined.
“This will allow them to retain access to the scheme, while they remain employed on that public service contract,” it added.
FE Week reported when the consultation opened in September that the reform is more likely to impact members of the LGPS in colleges i.e. cleaners and support staff rather than teachers.
“This should apply to tendering and outsourcing exercises currently in progress, where the transfer of staff has not yet been concluded,” said Nick Donlevy, the Treasury’s director of public spending.
I’m surprised pensions haven’t come up before in the ongoing but narrow debate around pay disparity between schools and FE.
The Teachers pension of 1/57th of pay rolling forward annually (a career average), means the £10k salary gap will result in FE teachers having significantly inferior pensions when they retire, when compared to school teachers.
Chuck in the annual CPI + 1.6% indexation and a smaller pot means less compounding…
The other bit, the tapered contribution rate whereby those at the lower end of pay scales pay a smaller contribution % to get their 1/57th. This currently marginally favours those at the lower end of pay bands.
But… in applying a fixed 0.3% contribution to each salary band, this decision favours those at the top of the scale, for instance:
8.6% + 0.3% = 8.9%, which is a 3.488% increase in contributions to get the 1/57th
11.7% + 0.3% = 12% is a 2.564% increase in contributions to get the 1/57th
Therefore, while the ‘cost’ of pension value favours those at the lower end, this change erodes the extent of that favourability, in effect costing those at lower pay scales disproportionately more than those at the top. It’s easy enough to see the effect as 2 people on £50k will pay a combined extra £240 in contributions, whereas one person on £110k will only pay £198 extra.
It’s always worth looking at proportionality to see who is being helped out more (or is less worse off), sometimes it’s not who you might think.
As for the NFD, looks like a trojan horse to me. It will act as an incentive for unscrupulous employers to shift employees towards pension arrangements where the employer contributions are lower. A tempting strategy in the face of static funding levels. (I’d call them ‘inferior’ pension arrangements. Someone selling you the idea will call them ‘affordable’ pension arrangements)