Employer contributions to the Teachers' Pension Scheme (TPS) set to ease following Government announcement

Employer contribution rates for unfunded public sector pension schemes such as the TPS are determined using the SCAPE (Superannuation Contributions Adjusted for Past Experience) methodology. As pension benefits are paid many years into the future, a key input when calculating the contribution rate is the rate used to discount those future payments into present-day terms (the “discount rate”). A lower discount rate increases the present value of future liabilities, requiring higher employer contributions. Conversely, a higher discount rate reduces the present-day cost of those liabilities and may allow for lower contribution rates.

Reflecting improved long-term GDP growth forecasts from the Office for Budget Responsibility, the Pensions Minister, Torsten Bell, announced last week that the SCAPE discount rate will increase from ‘inflation plus 1.7% per annum’ to ‘inflation plus 2.0% per annum’ (an increase of 0.3%). This change has since been formalised in the Government’s updated valuation directions. While the precise impact on employer contribution rates will not be confirmed until the outcome of the next TPS valuation, the direction of travel is clear. The Government Actuary’s Department noted in its report on the 2020 valuation that a 0.25% decrease in the discount rate could lead to an increase in employer contributions of around 7%. On that basis, the recent 0.3% increase in the discount rate suggests the potential for a reduction of 7% in employer contribution rates.

It is important to note, however, that the discount rate is only one of several factors relevant to the valuation. Other assumptions — such as changes to life expectancy and demographic assumptions — will also feed into the final outcome. Nevertheless, the change in the discount rate provides a useful early indicator ahead of the formal announcement of revised contribution rates, expected later this year and due to take effect from April 2027.

For institutions participating in the TPS, this development will be welcome news and may offer some respite from the significant cost pressures of recent years. It may also affect the decision-making of employers that have considered withdrawing from the TPS. Independent schools, for example – who may withdraw (either on a full or phased basis) – may find it more difficult to justify doing so if contribution rates are set to fall.

That said, the extent of any reduction remains to be seen, particularly when viewed alongside the other factors feeding into the calculation and, even so, TPS employer contribution rates are likely to remain materially higher than those applicable to many alternative schemes in the sector — for example, the Universities Superannuation Scheme, where current employer contributions are 14.5%. In some cases, a reduction in TPS costs may also prompt greater employee pressure for pay increases or broader improvements to remuneration.

In light of this, employers may wish to take the opportunity to revisit their long-term pensions strategy. This could include assessing the continued viability of TPS participation, exploring alternative provision, as well as considering the legal and practical implications of implementing any change.