Last reviewed 13 March 2015

The Teachers' Pension Scheme (TPS) is the defined benefit pension scheme provided by employers to people in "eligible employment" (broadly, teaching staff in local authority and independent schools) in England and Wales and administered by Teachers' Pensions on behalf of the Department for Education. Originally established in the 1920s, its approximately 1.9 million members and 3300 employers face a number of major changes that apply from 1 April 2015. James Borshell of Dentons UKMEA LLP explains.

The pre-April 2015 scheme

Currently, members of the TPS accrue benefits under one of two structures, depending on the date they joined. Members who joined before 2007 receive a pension of 1/80th of final pensionable salary per year of pensionable service along with a guaranteed lump sum based on three times the pension payable at retirement, which can be topped up by commuting pension into an additional lump sum. The structure is set up with a normal pension age of 60 (the earliest age that members can normally draw their benefits unreduced).

Members who joined on or after 1 January 2007 receive a pension of 1/60th of final pensionable salary per year of pensionable service. There is no automatic lump sum but staff can opt to convert their pension into a lump sum at the fixed rate of £12 of lump sum per £1 of pension given up. Staff have to wait longer to draw these benefits as the normal pension age in this section is 65.

Unlike a private sector pension scheme, the TPS is funded on a pay-as-you-go basis. Member and employer contributions are paid into a notional Teachers' Pension Account which then pays benefits as they fall due. Any shortfall is made up by the taxpayer. There have been a number of attempts to move this residual burden of funding the TPS back to members and employers and away from the taxpayer. The Government conducts periodic actuarial reviews of the financial state of the TPS and uses these to adjust contribution rates.

Employer contributions have increased over time. However, the main burden of funding has increasingly fallen on members. The Government initially set member contribution rates at 6.4% in 2007 (up from 6.0% prior to that date). Since then there has been a broad movement upward with a particular jump from 2012 when the Government moved to a tiered contribution structure based on pensionable salary. For the current scheme year, staff earning over £100,000 pay a 12.4% contribution.

The financial crisis accelerated this process further, particularly given the precipitous decline of private sector defined benefit pension schemes.

Negotiating change

The Government set up an Independent Public Service Pensions Commission, chaired by Lord Hutton, to look at the long-term affordability of public sector pensions.

The Commission published its final report in March 2011. This supported the general aim of making the public service schemes pay for themselves and suggested some radical changes in benefits structure, funding and governance to make this happen. The Government announced its proposals to implement these changes in March 2012. These received a broadly negative response from the teaching unions, with only the Association of Teachers and Lecturers (ATL) accepting the proposals as drafted.

Following some intense negotiations and a series of strikes, the Government finalised an improved set of proposals which it set out in a Heads of Agreement. These included an increased accrual rate and transitional protections for staff closest to retirement.

Although this did not appease the unions, it is these amended proposals which come into effect on and from 1 April 2015.

Transition to the new scheme

Most members of the TPS will move over to the new TPS with effect on and from 1 April 2015. There are two groups to which this will not apply.

  • Members who immediately before 1 April 2012 were within 10 years of their normal pension age will continue to accrue final salary benefits in accordance with the TPS rules applicable to them up to retirement.

  • Members who were within 10 years and a day and 13.5 years of normal pension age as at 1 April 2012 will continue to accrue benefits under the old TPS rules up to their "transition date". This date depends on how close to retirement they were. From this date transitionally protected staff will switch to the new TPS.

From April 2015 – the key features

The new TPS provides a pension based on the member's average salary over their pensionable service rather than on their final salary. The pensions industry tends to refer to this as a “CARE structure” (an acronym of "career average revalued earnings"). The career average part of this is provided for by the member accruing a pension of 1/57th of their pensionable salary in each year. This removes the additional funding strain in a final salary scheme created by the fact that members tend to have higher salaries towards the end of their career but any contributions paid at the start of their career will have been based on their salary at that date.

The revalued earnings part of CARE is dealt with by protecting this accrued pension from inflation by revaluing it at retirement by the increase in the consumer prices index (CPI) plus 1.6% for every year to the member's retirement.

Another funding strain on defined benefit schemes is longevity. Again, broadly, people are living longer and so schemes need to pay pensions for longer than expected despite the best efforts of actuarial science. Previous attempts to address this have involved increasing normal pension ages (see earlier in this article for the switch in the 2007 TPS structure).

The new TPS takes a more radical approach. Normal pension age in the scheme is set at the member's state pension age. This is increasing from 65 to 67 by 2028, and then in the longer term to 68. Longer term, the Government has provided that this could increase further depending on periodic reviews of longevity rates. This makes the new TPS normal pension age a bit of a moveable feast, but cuts the potential for cost increases.

Members can mitigate these changes somewhat through an option to retire earlier than normal pension age and meeting the cost of buying out the actuarial deduction that would otherwise apply. They can also opt for faster accrual rates of 45ths, 50ths or 55ths - providing that they pay for it. They will also be able to take up to three phased retirements (up from two) on or after age 55 to ease into retirement, though only two of these before age 60.

In general, funding these benefits will be the responsibility of the members and the employers with the taxpayer's proportion eventually dropping to zero. The new TPS has a couple of cost control mechanisms. The first is a cap on the employer's contribution rates with additional costs being met by additional member contributions. The second is an overall cost cap for the scheme set by the Treasury. Where this is breached, the scheme will need to look to reduce benefit accrual or make other changes to bring costs back within the cap.

Governance of the new scheme

The governance structure for the new TPS includes a number of additional parties to operate the cost caps and bring it more closely in line with the private sector schemes. The new TPS will be governed by a Scheme Manager (the Secretary of State for Education) and the Teachers' Pension Scheme Pension Board. Overall supervision of the TPS will sit with the Pensions Regulator which will issue guidance on governance issues for the Board and the Manager to implement.

Transferring benefits

One major change that applies from 1 April 2015 that is not directly related to the new TPS is that members of the TPS will no longer be able to transfer their benefits to a defined contribution arrangement. This will prevent members transferring their benefits out and then converting them into a lump sum under the new pensions freedoms that come in on that date, and which could otherwise act as a drain on the funding of the scheme.

Necessary change?

In broad terms, this means that TPS members will need to meet more of the costs of their benefits under the new TPS. It may also mean that they receive smaller pensions and that they will have to wait longer to take them. However, there will be a better match between what gets paid into the scheme and what gets taken out. Even if this is not popular, it appears that the Government believes that it is necessary.