It’s not controversial to say a key regulatory objective is to encourage consumers to shop around for financial services products. As well as driving competition, it also ensures the customer gets the product best suited to their needs. This is also the case where the customer is an employer choosing a workplace pension. So reports that some independent schools are asking advisers to “rubber stamp” recommendation of an off-the-shelf solution are somewhat concerning.
In this Q&A, we outline why independent schools are increasingly looking at new defined contribution (DC) arrangements, and some of the key issues advisers can discuss with schools to help ensure they keep an open mind.
Why are independent schools moving to DC schemes?
Employer contributions to the Teachers’ Pension Scheme (TPS) in England and Wales increased by approximately 40% from 1 September 2019. As independent schools aren’t eligible for government funding to cover the increase, there’s an increasing number of them looking to make efficiency savings. For many, the most appropriate way of doing this is to change the teachers’ pension arrangements.
Can schools close access to TPS for new entrants?
Under current regulations, all schools admitted to TPS must offer access to all their eligible teachers. The Department for Education recently consulted on plans to allow independent schools to close access to TPS to new joiners only, and a response is awaited. This “phased withdrawal” option would only deliver cost savings to schools over a period of time through staff turnover. However, this may not suit schools that have a more urgent need to address their additional pension costs.
Are there regulatory reasons why schools should shop around?
Legal responsibility for automatic enrolment rests with the employer so it’ll need to ensure the minimum requirements are met. The scheme must offer a default arrangement that’s
suitable for teachers who don’t actively make investment choices. However, it also needs to offer the flexibility for those who do. For example, sharia-compliant funds and/or a wide choice of ethical funds will be more important to teachers in some schools than others. The scheme should also offer value to all members. The existing workplace pension for non-teaching staff may not meet these needs.
What advantages does shopping around give? It allows schools to find the best value solution that’s tailored specifically to the needs of their teachers. An off-the-shelf solution may have charges which reflect the profile of teachers at other schools and the fund range might not sufficiently reflect member preferences. Employer pension contributions are a significant investment and schools may want to help ensure teachers value this by bespoke branding of member communications.
What factors should schools consider?
In addition to investment choices and member charges, schools should also try to understand the relative importance to members of:
- The pension provider’s policy on social responsibility
- The ability to continue contributing to any new plan if they leave teaching
- Having online access to their plan via the provider’s website or mobile app
The school will also need to understand:
- The number of teachers who have previously opted out of TPS and whether this is an affordability issue. This could help inform the employee contribution framework for a new scheme.
- How many of their teachers have elected to pay extra contributions to the TPS, and the options chosen. This will provide further colour to the contributions affordability picture and shape what needs to be disclosed in consultation documentation.
- How many of their teachers aren’t earning a taxable income or are earning less than the primary threshold for National Insurance Contributions. This will help determine if a scheme operating on a relief at source or salary sacrifice basis will be beneficial.
Will shopping around help schools get teachers to agree to a change in pension? There’s no guarantee that teachers will agree to changes to their pension arrangements without challenge. It’s worth remembering that teachers’ pensions underwent significant structural overhaul in 2015 and there are unresolved equality issues as a result of those changes. So teaching staff may be entering into negotiations already feeling battle-worn. But there’s no doubt that genuine consultation with staff will be key to member engagement and acceptance.
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