Teachers’ pension scheme: strategy following the SCAPE discount rate announcement

On 30 March 2023, the Government announced that, following an extensive consultation, the SCAPE discount rate for unfunded public service pension schemes, such as the Teachers’ Pension Scheme (TPS), would be reduced from 2.4% a year to 1.7% above the annual rate of the consumer prices index of inflation.

The announcement is important given that changes to the SCAPE discount rate are usually a good indicator as to whether employer pension contribution rates under such schemes are likely to rise or fall. Unfortunately for TPS member schools, a lower SCAPE discount rate usually means higher employer contributions are on the horizon.

As outlined in more detail here, although the announcement is not definitive as to what any new employer pension contribution rate will be, it is the strongest indicator yet that a significant rise, of possibly up to 30%, could be imminent.

Unsurprisingly, since the announcement, we have seen a further surge in enquiries from schools regarding strategy in relation to the TPS. For some schools, any increase in TPS costs will be viewed as unsustainable. Those schools may be considering consulting over a proposal to withdraw from the scheme, ideally to take effect before any increase comes into force. At present, it is understood that any increase will be implemented in April 2024, although this may be delayed until  September 2024 – as was the case with  the 2019 increase.

With this in mind, it is important to emphasise the likely timeframe for implementing a withdrawal from the TPS or other contractual change in pension arrangement. A change in contract terms must be preceded by “meaningful consultation” with affected staff, and consultations of this nature can be both time consuming and resource intensive.

Our experience is that consultations over a proposed withdrawal from the TPS are taking in the region of one to two terms on average to conclude. Schools will also need to bear in mind that in most cases it is not advisable, nor will they be in a position, to meet and consult with appropriate representatives of the affected employees during school holiday periods. This will need to be factored into the proposed timescale for implementation.

In addition, it is also important to account for a period of contractual notice within a school’s timeframe for implementing a withdrawal from the TPS. This reflects the possible risk that, as a last resort, a school may need to dismiss and offer re-engagement to staff, where it is not possible, following consultation, to reach agreement and it is considered necessary to proceed with the proposed changes. In most cases, this will be one term’s notice and there may be specific dates to which a school would need to adhere in relation to the giving or expiry of notice.

It is also important to ensure that sufficient time is allocated to preparing for the consultation, including formulating a business case, preparing communications, and identifying the proposed alternative pension scheme.

Taking the above into account, a withdrawal from the TPS may take up to a year in total to implement, including preparation.

It is currently unclear when the Government will confirm the TPS employer contribution rate for 2024. We understand, however, that the current intention is to finalise the valuation of the scheme in late summer. As such, it is possible that we will not have clarity on the final position until the autumn at the earliest.

Some schools may legitimately decide to wait for the final announcement prior to determining their strategy and, potentially, consulting with staff. In those circumstances, however, it is important to be clear that, given the timeframes noted above, it is unlikely to be feasible, without risk, to implement a withdrawal from the TPS in advance of September 2024 at the earliest.

If any increase in the employer contribution rate is implemented in April 2024, this will result in a period of time in which a school will need to absorb that cost, prior to implementing change. Schools will need to budget for this, potentially significant, increase in costs and should bear this in mind when formulating their strategy for addressing the TPS risk.

We have supported a significant number of schools in relation to consultations regarding the TPS. If you have any queries regarding this note or require support with this issue, please contact Rachel Parkin or Oliver Daniels.