Teachers’ Pension Scheme rate increase could hit schools hard

The recently announced proposed increase in Teachers’ Pension Scheme (TPS) employer pension contributions from 1 September 2019 has come as a huge shock to the independent school and academy sector.

The Treasury has indicated that the employer pensions contribution rate will increase from 16.48 per cent of pensionable earnings to 23.6 per cent – an increase of over 40 per cent. Most schools were expecting an increase to around 19 per cent and had prepared budgets and forecasts on that basis. Given up to 80 per cent of costs in a school are staffing, and around 90 per cent of those are teachers’ salaries, this will have a major impact.
To put this into perspective, the increase will mean a medium-sized independent school or academy with a teacher pay cost of £5 million will have to find an extra £360,000 per annum – a critical level of extra funding.

The effect on academies

With several academies already suffering financial problems and several being forced to join forces with larger groups, the latest blow could prove fatal. At this stage, the Department for Education (DfE) have indicated that they will fund part of the increase, but only in the first year – so what happens thereafter?

This increase has come at a time when academies were beginning to operate with more of a business mind-set, looking forward and planning for the future and identifying alternative sources of income, such as lettings. However with such a significant increase in their biggest cost it’s inevitable that we’ll see more mergers and collaborative working – most academies have worked hard to deliver cost cutting measures and there’s little more that they can do to meet such a significant increase.

The effect on independent schools

The independent sector will be affected in a similar way. We’ve already seen a number of smaller schools close and for many more this will surely be the final nail in the coffin. The sector’s umbrella bodies are coordinating a response and taking actuarial advice on the assumptions underpinning the Treasury proposals.

In the meantime, this matter should be at the top of the agenda for any finance committee. There are very few schools that can absorb a cost increase of this magnitude or be able to pass the cost on to parents in the form of increased fees. It’ll almost certainly mean that the school will need to reconsider its strategic plan, as well as looking at teacher cost saving measures such as reviewing teacher contact time, class sizes and considering more use of teaching assistants, who aren’t part of the TPS.

What to do now

Clearly, this increase is going to have a significant impact on schools across the country, particularly those operating extremely tight budgets already. Schools will want to revisit their budgets and forecasting sooner rather than later, and academies should keep an eye out for any further announcements from the DfE regarding any potential future funding.

If you have any questions or want support with your school’s finances and budgeting, contact your usual Moore Stephens adviser, or our Head of Education, Heather Wheelhouse.

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