Both schemes offer attractive pension benefits to staff, but funding them is expensive. The schemes are defined benefit schemes, which means benefits are guaranteed upon retirement and based on individuals’ final salary just before retiring.
Teachers' Pension Scheme
A key change occurred on 1 September 2019 when TPS contribution rates increased significantly. The Teachers’ Pension employer contribution rate increased sharply from 16.4% to 23.6%. With the additional employer contribution of nearly £3,000 for a teacher on a gross salary of £40,000, it is easy to see why the rate rise has had an impact on total salary costs.
The rise has been funded via the Teachers’ Pension Employer Contribution Grant and so there has, to date, been no net cost to academies.
The TPS has over two million members and is one of the largest pension schemes in the UK. A full actuarial valuation exercise is completed once every four years to ensure that ongoing contributions from both members and employers are sufficient to meet the obligations of the scheme. The last full valuation in 2016, which was published in 2019, revealed the scheme was in deficit by around £22 billion, up £7 billion from the previous valuation with economic conditions and increased longevity attributed as the key factors.
There are different schemes and membership of a particular scheme will depend on when the teacher entered the teaching profession. Until 2012, teachers were enrolled in the Normal Pension Age (NPA) final salary scheme. The CARE, or Career Average Revalued Earnings, scheme replaced the final salary scheme in 2012 and under this scheme a retiree’s pension is calculated by using an average salary. The new approach was introduced in an attempt to combat the increasing deficit in the scheme and to make this more manageable in the future with an ageing population. This should work, but it will take some time before the impact is seen in the pension valuation.
Local Government Pension Scheme
In terms of annual financial statements, the focus has been on Local Government Pension Scheme (LGPS) liabilities, as these are shown on academy trust balance sheets and are therefore more visible.
Trustees have become accustomed to the fluctuating nature of these liabilities, and generally accept that the deficit is an accounting deficit with no direct impact on the cash contribution levels paid by their trust.
The stock market has fluctuated significantly during the period of the pandemic. Over the course of the year to 31 August 2021, equity values increased significantly which resulted in the gross asset position of the LGPS being at a higher value at that date compared to the previous year. However, there have also been changes to the assumptions made by actuaries which have increased liabilities by a greater amount in most cases. In particular, assumptions around the rate of salary increase and scheme liabilities discount rates have increased significantly compared to the previous year.
These effects counteract each other, however, the increase in gross asset values have not been as great as the increase in scheme liabilities. As a result, net pension liabilities have generally grown between 2020 and 2021.
Despite the LGPS deficit being outside the trust’s control, it remains a topic which trustees are keen to discuss because the large liability makes them nervous, even if their auditors are advising that it is merely an accounting deficit that they do not need to be overly concerned about.
There is no national LGPS, with each Local Authority administering their own scheme and, as a result, the levels of both employee and employer contributions can vary significantly depending on geographical location.
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