Assistant Chief Executive Colleges and pensions 3 November 2016 Julian Gravatt Assistant Chief Executive Julian_Gravatt@aoc.co.uk @JulianGravatt

AoC and pensions Our representative role Representing colleges on DFE (TPS) and LGA (LGPS) groups Explaining college pension issues to government and others Pressing HM Treasury to revisit public sector pension reforms https://www.aoc.co.uk/publications/autumn-statement-submission-2016 Our advisory role No-one at AoC qualified to give regulated personal financial advice Others better placed to help on individual issues (eg PPC) Evidence some consultants do not understand pensions issues as they affect colleges

This webinar Topics Pension regulations and colleges (4 slides) LGPS pension costs (5 slides) The college insolvency reform (2 slide) TPS pension costs (2 slides) Final thoughts (1 slide)

Pension regulations

Teachers’ pension scheme (TPS) Pensionable employment within Teachers’ Pension Scheme (TPS) covers: “A teacher employed by a governing body of an institution that is within the further education sector” (as defined by section 90 of Further and Higher Education Act 1992) TPS Regs 2010, no 990, Schedule 2, Part 1, section 6 (page 95) http://www.legon.gov.uk/uksi/2010/990/pdfs/uksi_20100990_en.pdf

Local government pension scheme (LGPS) Employment in Local Government Pension Scheme (LGPS) “A person is eligible to be an active member of the scheme if employed by a body listed in Schedule 2, Part 1” ..unless they are eligible to be a member of another public sector pension scheme” LGPS Regs 2013, no 2356, sections 3 and 4 plus Schedule 2, Part 1, http://www.legislation.gov.uk/uksi/2013/2356/pdfs/uksi_20132356_en.pdf

Pension regulations and colleges Eligibility Teachers employed in a college eligible for TPS All other college staff eligible for LGPS Subsidiary companies Staff not eligible for TPS (unless seconded in) Staff eligible for LGPS if company is admitted Support staff Teachers

Pension – do colleges have an alternative? TPS Teachers in schools, colleges, post-1992 unis get TPS High on-costs (16.48%) but no liability on institution Subsidiary company staff cannot access TPS Officials reviewing whether to designate subsidiaries under s.28 of the 1992 Act to secure TPS access (no guarantee this will happen) LGPS High and rising costs and liabilities. Exit very expensive Subsidiary companies can be inside or outside of LGPS Colleges able to offer an alternative scheme – but must not give advice LGPS contributions may rise if there are fewer active members

LGPS Pension costs

LGPS 2014 Support staff Colleges 91 LGPS funds LGPS 2014 Income-related Contributions 5.5-12.5% Contributions Range 10-25% Average 15.8% LGPS 2014 Career average pension 1/49th pensionable earnings accrued (fast) Benefits revalued at CPI (slow) Options for cheaper pension (50%) 10 year protection and Final salary link 91 LGPS funds Plan for 8 investment funds

The 2016 LGPS valuation Key features Decentralised system (91 funds, 91 valuations) Common approaches (Scheme board, LGA, 4 actuaries) Takes place every 3 years. Values assets/liabilities as at 31 March 2016 Set contribution rates for 3 years from April 2017 Most colleges have an individual report and contribution rate Room for negotiation on: the assumptions about pay rises the assessment of the employer’s financial standing how to deal with any deficit

Pension valuations are college specific

The issues in 2016 LGPS wide issues Low interest rates (impact on NPV, future returns) Longevity slightly reduced (offsets other issues) Widespread desire to tackle deficits Growing concern on non-tax raising members More funds plan to grade employer financial strength Option to pledge assets or make cash payments College specific issues Recent funding cutbacks = fewer active members colleges College insolvency consultation makes sector look riskier Colleges may face pressure to pay back deficits faster

Tips for the valuation negotiation Some lessons from recent past (tried in different places in 2013) Find common ground with other colleges (and universities) Don’t just accept the assumptions in the valuation Don’t just accept the employer categorisation (esp not a grade C) Explain the college’s financial plans and strengths Discuss options (cash payment, negative pledge on buildings etc) Focus on what you can control Contributions will rise in April 2017. Affects c15% of college costs Pension regulations prevent colleges making bigger changes

The college insolvency regime

The college insolvency plan Background Treasury insisted on this in return for restructuring funding Government now reluctant to bail out colleges Risk of disorderly insolvency because law is unclear Special administration regimes exist in post, housing, energy etc The plan (Technical and Further Education Bill) Power for DfE to appoint a special administrator Duty to protect students as well as creditors Puts unsecured creditors (staff, LGPS) at greater risk

Insolvency issues Some issues and questions about the DfE plan Unfortunate timing given LGPS valuation Upsets a balance struck over 22 years Risky to introduce special admin regime without pension reform Overlap between statutory FE regime and HE student protection Due to take effect in 2018-19. Enough time to review respective role of Ofsted, FE commissioner, SFA/EFA, Transaction Unit etc https://www.aoc.co.uk/publications/autumn-statement-submission-2016 Colleges are being pushed to become financially cautious

TPS Pension costs

Teachers’ Pension Scheme TPS 2015 TPS 2015 Career average pension Accrual at 1/57th (slower) Option to buy faster 1/45th Revalued CPI+1.6% “10 year protection” Pre-2015 benefits fixed More expensive than LGPS Reward long serving teachers Union influence on DFE Govt picks up costs Colleges Teachers Fixed contribution 16.48% Income related Contribution 7.4% to 11.7% Teachers’ Pension Scheme

Future TPS costs What we know Current employer contribution (16.48%) is 4 points above the plan Current valuation reported a 92% funding level as at 2012 Next valuation will assess scheme as at March 2016 Colleges employ 8% of TPS members so are a minority Treasury anticipates higher employer contributions in 2019-20 … this implies a TPS rate of 18% or more but who knows? A cost control mechanism provides some weak control

Final thoughts

Future TPS costs What we know Colleges have been tied into TPS and LGPS for decades Pensions can & have derailed mergers & complex structures College (ER) contributions average 16% and will rise There are ways in which colleges can manage costs at the margin. Decisions on pay & staff have longer term pension implications It will require changes to the law – and political will to do this – for matters to change in a substantial way Any questions? Now or see you at the AoC Conference (15 to 17 November 2016) PPC pension session @AoC conference 15 Nov 2016, 5pm