Once seen as an essential part of most employee contracts, defined benefit pension schemes have become increasingly expensive over the years. There are lots of factors involved in this, but a key part is that we’re all living longer, meaning our pensions need to be paid for longer.
In the private sector, the overwhelming majority of employers have moved away from older-style defined benefit schemes to fixed-cost defined contribution (money purchase) schemes. This trend has been ongoing for more than a decade now, with defined benefit schemes now a rarity.
In broad terms, defined benefit schemes make a promise of certain level of pension on retirement, whereas defined contribution schemes make a promise of a certain amount of money being paid in, with the eventual retirement income dependant on a lot of different factors.
The impact of the increased costs for defined benefit pensions are also being felt in the public sector, and not-for-profit organisations, too, although many public sector workers are still offered some form of defined benefit pension.
And the impact of increasing costs is now a significant issue for independent schools, with 62 independent schools set to withdraw from the Teachers’ Pension Scheme in England & Wales.
Making a change away from the teachers’ pension, whether in England & Wales or in Scotland, might be financially prudent, or even financially necessary, for a school, but it’s important that any changes are handled with care.
Advance planning is strongly recommended. Schools need to understand their legal position, both under the relevant teachers’ scheme, and also their own contracts of employment and any collective bargaining agreements that may be in place.
Planning also needs to cover not just how to explain the proposals to staff, but, perhaps more importantly, to look at what will be offered instead. Schools have to provide a scheme that at least complies with auto-enrolment criteria. Schools will almost certainly have an auto-enrolment vehicle already for their non-teaching staff. Does the school want to put all staff into the same pension scheme? on the same terms? Or will enhanced terms be offered to teaching staff?
Consideration should also be given to other benefits which may be of value to their staff such as death in service cover, or critical illness cover. As part of the planning process, schools may wish to consider what flexibilities there are in the new scheme being proposed.
For the most part, formal consultation may not be a legal requirement. However, this will depend on the contracts and any agreements the school may have with recognised unions.
Even where no formal consultation is needed, clear and open communication with teaching staff is vital, and is likely to help with staff relations, particularly with long-serving staff who will have been keeping an eye on their pension and perhaps anticipating their retirement.
Schools should try and anticipate staff concerns, and not hide from them but address them clearly.
Going through any process of pension change can be challenging and can have a significant impact on staff morale. In the schools’ sector, there may also be retention issue if other (state) schools continue to offer defined benefit pension schemes.
However, for many independent schools the rising costs of the teachers’ pension schemes, and the risk that these costs will increase again, mean that managing their pensions costs, including by exiting the relevant teachers’ scheme, is something which should at least be considered.
This article was written by Vanessa Ingram, Pensions Law Consultant. If you have any queries or comments regarding the above article, please contact us.