We are continuing to see a movement away from the Teachers’ Pension Scheme (TPS) among independent schools. Many schools have withdrawn since the significant increase in the employer contribution rate in 2019, or implemented one of the alternative models for addressing TPS costs. For those that have decided to wait and see what happens at the next valuation, the outcome of the government’s consultation on the “SCAPE” (Superannuation Contributions Adjusted for Past Experience) discount rate should serve as a warning of the likely direction of travel for TPS costs.
What is the SCAPE discount rate and why does it matter?
The SCAPE discount rate is one of the key assumptions that needs to be made in calculating TPS contributions.
The consultation concluded that the SCAPE discount rate should continue to be based on expected long term GDP growth (rather than an alternative method).
The rate will be reduced from inflation plus 2.4 per cent to inflation plus 1.7 per cent, amounting to a 0.7 per cent reduction. To put that in context, there was a reduction of 0.6 per cent for the previous TPS valuation, which resulted in the rise in employer contribution rates from 16.48 to 23.68 per cent.
In the Government’s own words:
“The Government is aware that the updated SCAPE discount rate will generally lead to higher employer contribution rates for most unfunded public service pension schemes resulting from the 2020 valuations.”
That marks a bit of a change in tone from the recent update posted on the TPS website (last updated January 2023), which stated that:
“There’s been a suggestion that the employer contribution rate will rise significantly in 2024. At present it’s impossible to know what the results of the 2020 scheme valuation will be and what affect that could have on contribution rates, whether it be a rise or drop.”
Of course, it is too early to say what the final employer contribution rate will be, but we now have a fairly clear indication that rates are likely to increase, and potentially significantly.
There had been some suggestions that the new employer contribution rates might not be implemented until September 2024 (to line up with the academic year, as was the case in 2019). However, the consultation document suggests that new employer contribution rates will be implemented in April 2024.
When will schools know what that rate is likely to be? That remains unclear, but the update from the TPS that I refer to above goes on to state that:
“It’s likely that we won’t have confirmation on this until at least late 2023 at the earliest, but we’ll let you know as soon as possible to better prepare you.”
Schools will need to prepare for the now distinct possibility that an increased employer contribution rate will be confirmed in the coming months. This could affect a range of schools, including:
- Governing bodies that have been holding off until the next valuation date (who might now be dusting off their business case documents),
- Schools that have implemented a model that is based on the total pay and benefits of affected staff,
- Schools that have implemented phased withdrawal (who may need to re-consider whether that model is likely to provide sufficient cost savings),
- Schools that are mid-way through a consultation process.
If you require further information about anything covered in this briefing, please contact Hugh Young or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2023