Pensions issues for Colleges 8 October 2018 Julian Gravatt AoC deputy chief executive

What this presentation covers The big Teacher Pension Scheme issue Pension regulations Local Government Pension Scheme update Options for colleges What government will do – and won’t do

AoC and pensions Our representative role Representing colleges on DfE TPS Scheme Advisory Board and liaison with LGA Explaining college pension issues Pressing HM Treasury to revisit the 2011-15 public sector pension reforms in the light of costs Our advisory role No-one at AoC able to give regulated personal financial advice

Autumn budget

The Autumn budget What’s about to happen NHS contributions up 6% to 20% TPS contributions up 7% to 23% Civil service contributions up 6% to 27% £6 billion extra in contributions Helps pay for the NHS deal (£6 bil extra a year) Why is no one making more of a fuss? Valuations are provisional and secret Pensions are too boring and complicated

Pension receipts/ payments 2019-20 baseline UK govt Employers £21.1 billions Pensions £43.4 billion Employees £9.5 billion Annual shortfall of receipts against payments means a higher Public Sector Net Debt Net pension cost £12.0 billion

Pension receipts/payments 2019-20 baseline Forecast 2019-20 Pensions (£bil) ER EE Other Net cost NHS (11.9) 6.8 4.6 0.2 (1.3) Teacher’s (10.7) 4.1 2.4 (4.0) Civil Service (6.8) 2.8 0.7 0.1 (3.0) Armed Forces (5.0) 3.1 - (1.9) Police (3.9) 1.0 0.6 (2.2) Fire (0.9) (0.7) Rest of UK (4.2) 1.9 1.1 (1.1) Baseline (43.4) 21.1 9.5 0.8 (12.0) Extra contributions? 6.0 Revised 27.1 (6.0) Source: OBR Economic and Fiscal Outlook Table 2.2.3, March 2018

Pension receipts/payments Impact of higher contributions Key points £43.4 bil/year paid to pensioners & dependents £31.4 bil/year in contribution income £12.0 bil/year net cost The net pension cost is charged against the Public Sector Net Debt (ie makes the deficit higher) If contributions rise in 2019, net pension cost falls Higher contributions = lower deficit “A spending cut in curious clothing” (Paul Johnson, IFS, in commentary on March 2014 budget

Net public service pension cost Impact of higher contributions

Pension receipts/ payments Impact of higher contributions UK govt Employers £27 billions Pensions £43.4 billion Employees £9.5 billion ER contributions up £6 bil Net cost down £6 bill Some of the saving recycled in extra funding Net pension cost £6 billion

Pension receipts/payments Impact of higher contributions Forecast 2019-20 Current rate New rate? % rise Current ER (£bil) New ER (£bil) Change (£bil) NHS 14.1% 21.5% +52% 6.8 10.3 +3.5 Teacher’s 16.4% 23.6% +43% 4.1 5.9 +1.8 Civil Service 21.1% 27.2% +29% 2.8 3.6 +0.8 Armed Forces 49-53% 3.1 Police 21.4% 1.0 Fire 11-22% 0.1 Rest of UK Varies 1.9 Baseline 21.1 +6.1 Source: OBR Economic and Fiscal Outlook Table 2.2.3, March 2018 for current ER cost plus publicly available figures on contributions. The process is shrouded in secrecy

The 2019 spending review The longer term issue Employer contributions up by £6 billion a year Reduces net pension cost by same amount Promise of extra funding in 2019-20 to NHS, schools and colleges but: - is everything covered? - for how long?

Teacher Pension Scheme

Teachers’ Pension Scheme TPS 2015 Employers Teachers TPS 2015 Career average pension Accrual at 1/57th (slower) Revalued CPI+1.6% (fast) “10 year protection” Pre-2015 benefits fixed Characteristics Designed for long careers Govt holds liability Income related Contribution 7.4% to 11.7% Fixed contribution 16.48% Teachers’ Pension Scheme

TPS finances 1. Valuation as at 2012 £ bil Assets 176 Liabilities 191 Deficit (15) Funding level 92% 2. Setting the 2015 rate % Future accrual 10.8 Deficit recovery 5.6 Admin levy 0.08 Employer contribution 16.48 3. Income/Exp 2018-19 £ bil Employers 4.1 Employees 2.2 Pensions (10.3) Net spending (6.9) 4. Contribution rates % Employer 16.4 Employee (average) 9.6 Scheme cost (2015-9) 26.0 Sources: Tables 1, 2 and 4 Government actuary valuation of TPS, June 2014; Table 3: OBR EFO tables 2.2.3, March 2018

TPS finances Key points about TPS 3nd largest public sector scheme (after NHS, LGPS) It’s an unfunded scheme (not a fund) Employer (£4.1 bil) & employee (£2.2 bil) contributions less than pension spending (£10.3) The last valuation (as at 31 March 2012) assessed TPS as having a 92% funding level The valuation resulted in a higher employer contribution (16.48%), one-third (5.6%) of which is to cover the assessed deficit

TPS membership 1. As at 31 March 2018 Members 667,000 Deferred 607,000 Pensioners/Dependents 717,000 Total 1,991,000 Sources: Table 1 TPS financial statements 2017-18. Table 2. AoC estimates for members and costs. Employer numbers from TPS financial statements for 2017-18 2. Membership (approx.) Members (est) Employers 2018 ER contribs (£mil) Schools 480,000 7,331 Private schools 50,000 1,477 Colleges 70,000 335 350 Universities (post-92) 65 300 Other 17,000 532 Total 667,000 10,177 4,100

TPS membership Key points about TPS 2 million members, deferred and pensioners 4% of working age adults active or deferred member TPS covers most teachers but not those in old unis who are in USS State-funded schools account for 70-75% of TPS members and contributions Colleges 8-10% of members and contributions Figures incomplete

TPS valuation The new post-2015 rules for valuation Public Service Pension Act 2013 Four year cycle for valuations Valuation as at 31 March 2016 sets rates for 2019 HM Treasury sets directions Scheme Advisory Boards offer advice on assumptions A new cost cap mechanism takes effect for the first time

TPS valuation process Scheme assumptions (drawn from the data) Pensioner mortality Age retirement from service Ill-health retirement from service Voluntary withdrawal from service Death before retirement Promotional pay progression Commutation of pension for cash at retirement Family statistics

TPS valuation process Central assumptions (set by HM Treasury) Discount rate – down from CPI+3% to CPI+2.4% Earnings growth Future price changes - affects pension increases Post-retirement life expectancy (down, say ONS) State pension age – no assumption about changes Commutation to lump sum on new schemes

TPS valuation so far All very late.. Scheme assumptions agreed in July 2017 HM Treasury issued draft directions in Sept 2018 TUC and Employer groups have responded to draft Time short to make changes by April 2019 Works like a 1914 train timetable (ie hard to change) The process (including the cost cap) is set out in law The 15 year deficit recovery period is fixed Main variable is the discount rate decision There’ll be a review of cost cap – but not until 2022

Current public sector valuations New ER rate Improved benefits because of the cost cap floor breach ER rate (no cost cap) Within cost cap Current ER rate The lower discount rate (2.4% not 3%) Mortality Lower payrises Other adjustments Adapted from a LCP presentation

TPS contribution rate change Employer rate now 16.4% Changes in financial assumptions + Impact of longevity change - Change in past service adjustment Various other changes Employer rate, no cost cap c19.5% Cost cap rectification Cost of deferral to September 2019 Employer rate, provisional c23.5% A 40+% rise in costs Notes: The 2018 TPS valuation is provisional and confidential which is why detailed figures are not included in this table

TPS employer contribution (%)

The cost cap in the TPS Designed to protect employers from increases but.. Falling longevity and lower than forecast pay means pensions are worth less to members This is a cost cap floor breach Scheme Advisory Board has 6 months to make proposals to DfE. Hopefully this will be quicker DfE plans to improve the scheme by April 2019 With teaching employers paying higher bills from September

The TPS cost cap options Options to improve the scheme Faster accrual rate Lower member contributions (ruled out by HMT) Other changes? Faster indexing? Lower actuarial reduction on early retirement? What happens next Scheme Advisory Board meets end of October DFE makes decision Implementation from April 2019 to March 2023

The cost cap implications Understanding what is going on The cost cap mechanism requires DfE to improve TPS benefits. Teaching employers will pay for improvements using money which would otherwise be available for pay Decisions made on wrong assumptions in 2011 bite teaching employers in 2019 Tax implications (for higher paid TPS members) Faster TPS accrual in 2019-20 and beyond may mean more people on higher salaries exceed annual or long- term allowance

HM Treasury’s draft directions AoC response to HM Treasury consultation Delay the valuation for one year to avoid need for short- term funding before spending review Stick to the timetable set in 2011 in which the discount rate is changed every 5 years Accelerate the review of the cost cap mechanism which is currently due to run until 2022 Allow DfE to cut member contributions Don’t charge teaching employers for the costs of delay given that Treasury was 6 months late If, despite the above, you go ahead, provide funding

The impact on budgets Teacher £30,000 salary On costs Now Future Extra National insurance £4,140 Pension £4,945 £7,050 +£2,105 Total on costs £39,085 £41,450 Teacher £30,000 salary Impact for a teacher earning £30,000 On-costs rise by £2,105 (7% of their salary) to £11,450 (38%) College £20 mil budget Variety of impacts Extra costs of £400,000 in 2019-20 Possibility of short-term DfE funding Makes harder to increase pay Likely to result in job losses Long-run costs are higher

Some funding? A pension grant? Due for consultation DfE has promised to compensate state-funded schools and colleges Funding only until March 2020 (7 months) May only cover some teaching costs (eg those related to 16-18 education) TPS ER c5% of college income (£350 mil) Increase to 23+% costs 2% more of income (£140 mil) AoC has written to Skills Minister, included this issue in Autumn budget, talked to officials about it

Pension regulations

Teacher pension scheme (TPS) Pensionable employment within Teacher 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 http://www.legon.gov.uk/uksi/2010/990/pdfs/uksi_20100990_en.pdf i.e. teaching staff in colleges can join TPS

Local government pension scheme (LGPS) Employment in Local Government Pension Scheme (LGPS) “A person is eligble 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, sections3 and 4 plus Schedule 2, Part 1, http://www.legislation.gov.uk/uksi/2013/2356/pdfs/uksi_20132356_en.pdf All non-teaching staff in colleges can join LGPS

College staff and pensions 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 Teachers Support staff

Colleges and national systems Support staff Teachers College TPS 91 LGPS funds LGPS Employer Range 11-30% Average 17% Next change 2020 TPS Employer 16.48% flat rate Next change 2019 Income-related Contributions 7.4-11.7% Income-related Contributions 5.5-12.5%

LGPS and colleges

LGPS 2014 Support staff Colleges LGPS 2014 Career average pension Income-related Contributions 5.5-12.5% Contributions Range 11-30% Average 19% LGPS 2014 Career average pension 1/49th accrual rate (fast) Benefits revalued at CPI (slow) Options for cheaper pension (50%) 10 year protection and Final salary link 91 LGPS funds Admin mergers

The 2017 LGPS valuation LGPS wide issues Low interest rates (average rate CPI+2.5%) Longevity slightly reduced (offsets other issues) Widespread desire to tackle deficits Concerns about non-tax raising members More funds (about 1/3rd) graded employers College specific issues Fewer active members College insolvency has made us look riskier Colleges under pressure to pay back deficits faster, make cash payments or pledge assets

The college insolvency regime A new factor – but don’t panic Government reluctant to bail out colleges Risk of disorderly insolvency if law unclear Special administration regimes exist in post, housing, energy etc Special administrator duty to protect learners as well as creditors Technical and Further Education Act 2017 Implementation by end of 2018 Risk for governors in financially weak colleges but only if there is clear negligence

The LGPS Tier 3 review Why the review happened and what it says LGPS SAB reviewed Tier 2 (academies) in 2017 Review covers Tier 3 (unis, colleges, charities etc) Wide consultation with stakeholders Considers options to make unis & colleges admitted bodies and to make exit rules flexible No recommendations because of disagreements What next? LGPS SAB will review the report Uncertain if MHCLG has appetite/ability for reform

The next LGPS valuation Impossible to predict what comes next As at 31 March 2019, sets rates from April 2020 2016 valuation reported average 86% funding level (range 55% to 103%), improvement on 2013 2016 discount rates averaged 4.4% (CPI+2.5%), compared to 5.1% in 2013. Range 3.8% to 5.7% LGPS will also change in 2019 because of cost cap which might add to employer costs Next valuation date is Brexit day. Will this affect discount rates and longevity? Who knows? More funds may grade employers

Options for colleges

The bigger pension picture For everyone Pension age rising in stages towards 68 Single state pension started in 2016 Auto enrolment applies to most of the workforce Private sector companies and charities Most schemes in deficit (5,800, avg 79% deficit) Only 11 of FTSE 250 have open DB schemes Housing associations, charities, old universities, privatised utilities in or moving away from DB

Do colleges have an alternative? TPS 4% of workforce is active or deferred in TPS High on-costs (16.48%) but no employer liability Subsidiary company staff cannot access TPS LGPS Rising costs and liabilities. Exit very expensive Subsidiary companies can be inside or outside Colleges able to offer an alternative scheme but must be very careful over implementation

Implementing an alternative? Some tips Employ new support staff via subsidiary company on different terms with access to a DC scheme Company needs to be part of VAT group with college and with 2 way service level agreement Staff/recognised unions need to be informed and consulted Main aim will be to reduce future liabilities but annual savings may be possible (>1% of income within 2 years) Needs careful handling given rules on advice

Longer-term issues

Policy from 1985 to 2015 Reforms in the past three decades Thatcher govt encouraged private pensions Major govt introduced post-Maxwell improvements Blair govt introduced Pension Protection Fund 3rd term Blair increased state and public sector pension age; also auto-enrolment Coalition govt (2011) changed indexation to CPI, switched off final salary pensions, linked pension age to state pension age In last two years, Coalition improved state pension and introduced flexibility for private pensions

Government policy in future Limited appetite or ability for more reform No action to increase state pension age despite Cridland report saying it should rise to age 70 Public sector pension act 2013 requires govt to consult trade unions on any more reforms Unions “better at protecting pensions than pay” to quote a recent Guardian editorial Government has no majority in Parliament and would need manifesto support (as with 2011 Hutton report) Will contribution rates above 20% change things?

AoC activity What we’ve done in September Communication with colleges Advice (but not regulated advice) Case made to DfE and Treasury Joint working with other TPS employer groups What else should we do? julian.gravatt@aoc.co.co.uk

Julian Gravatt AoC deputy chief executive Any questions? Julian Gravatt AoC deputy chief executive