Education providers facing huge strain on their finances thanks to 40% pension hike

Schools, colleges and universities across the UK are facing a massive increase to their outgoings, many of which may find unaffordable.

Last September, the Department for Education announced that employer contributions into the Teachers’ Pension Scheme (TPS) would increase this September from 16.5% of pensionable salary to a whopping 23.6%. This means that with just 12 months’ notice, institutions in the UK overall must find an additional £1.1bn each year to fund the TPS.

In the short term it appears that State schools and colleges have secured the necessary funding from the government to cover the contribution increase, however, after this, it is not clear if schools and colleges will be expected to bear the cost alone. If this turns out to be the case, savings will need to be made and the detrimental impact of that on education services provided across the UK will be massive. Increases in tuition fees, reduction in services or job cuts may be required to fund the additional costs – none of which would be a positive outcome.

One possible solution for non-State institutions is to look at alternative pension arrangements outside the TPS.

What about the TPS itself? Well, for its 667,000 active members, 607,000 deferred members and 717,000 pensioners, it is a very generous, defined benefit (DB) pension scheme backed by the State and ultimately the tax payer. DB schemes are seen as the ‘gold standard’ for pension provision in the UK, but in the private sector they have been declining for a number of years because they are simply unaffordable and unsustainable for those employers supporting them. Increasing life expectancy, low interest rates and previous scheme deficits have all pushed up the running costs, leaving employers with no option but to opt for the less risky, less expensive and less generous defined contribution pension arrangements.

In my opinion TPS does need a radical reform to make it affordable and sustainable for the long term. As unfair as this contribution increase seems, perhaps it is the wakeup call the education sector needs in order to rethink their pension strategy.

Stuart Price, is Partner and Actuary at Quantum Advisory, which has offices in Amersham, Birmingham, Bristol, Cardiff, and London. Quantum provides pension and employee benefits services to employers, scheme trustees and members.

For more information about Quantum Advisory, please visit: https://quantumadvisory.co.uk.