Pensions update: are staff pension costs within the education sector sustainable?

With pension contributions increasing, we have an increasing number of education clients considering ways to reduce pension cost and risk.

For those of you in the education sector pension costs may be a particular issue at the moment. With pension contributions increasing, we have an increasing number of education clients considering ways to reduce pension cost and risk.

Education institutions participate in a diverse range of pension schemes.

Employer contributions to the Teachers Pension Scheme are currently 16.48% of pensionable pay. Contributions to the defined benefit section of the Universities Superannuation Scheme are currently 18% of pensionable pay (up to the threshold salary of £57,216.50). In the Local Government Pension Scheme employers pay the balance of costs based on triennial actuarial valuation results. Currently the average employer contribution to the LGPS in respect of the cost of future pension benefits is 17.6% of pensionable pay, with the spread of employer contributions being between 13% and 30%. The average deficit cost in respect of past service pension benefits in the LGPS is an additional 7% of payroll.

For education institutions participating in the LGPS, alternative ways to reduce pension cost and risk usually means setting up a subsidiary company to employ all new support and professional service recruits. The subsidiary company is not a ‘scheduled body’ in the LGPS, so the subsidiary company can offer staff any pension arrangement it likes providing it complies with auto-enrolment minimum requirements. Setting up a subsidiary company and procuring a new pension arrangement (and often a new death benefit scheme) requires consideration of a number of strategic issues including; how to structure the new company; tax considerations; employment and pension issues; procurement issues and how the new company will provide services back to the education institution (and possibly whether to sell services externally).

Some education institutions are also considering transferring existing support and professional service staff to the new company. On transfer, such employees cease to be eligible for membership of the LGPS and instead become entitled to the pension arrangements offered by the new company. Lower grade support and professional service staff are more often targeted for transfer, whilst leaving higher grade professional service staff in the LGPS. To avoid triggering what is often a very significant ‘exit payment’ in the LGPS, it is important for the education institution to leave some active members in the LGPS.

Although less common, a number of education institutions are considering doing something similar in respect of teaching staff, whether that be employing new teaching staff through a subsidiary company or transferring existing teaching staff to the new company. Participating in the TPS usually presents less pension cost and risk to the education institution, but employer contributions of 16.48% of pensionable pay is still a considerable sum, which is subject to future increase.

We have also seen with the recent USS consultation that there is considerable concern about the affordability of continuing the USS scheme in its current form. However, following strike action, the USS’s Joint Negotiating Committee agreed on 27 April 2018 to revoke the proposed changes to the benefit structure and instead set up a Joint Expert Panel to review the results of the USS’s 2017 valuation.

Given the increasing cost of offering USS pension benefits, we have been approached by a number of clients requiring advice on how they can reduce the cost and risk of continuing participation in the USS. For most participating employers completely exiting the USS is not an option due to the significant ‘section 75 debt’ on exit. However, it is possible to do something similar to the above i.e. to set up a new company, separate from the university, to employ new staff or to transfer existing staff.

For those education institutions that have their own trust based defined benefit pension schemes that are still open to future accrual there are a number of ways of reducing pension cost and risk. Solutions can include closing the scheme to new members, benefit changes and then finally closure to accrual. Significant consultation will be required before such changes can be implemented.

Given the competition in the sector and the significant budget pressures faced by education institutions, we are unlikely to see any let up in the move towards making long term pension costs more sustainable.  

Jane Marshall (jane.marshall@weightmans.com) is a Partner in the Employment, Pensions and Immigration Team and is based in Manchester.

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