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

2. 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

3. 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 public sector pension reforms in the light of costs
Our advisory role
No-one at AoC able to give regulated personal financial advice

4. Autumn budget

5. 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

6. 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

7. Pension receipts/payments 2019-20 baseline
Forecast
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

8. 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

9. Net public service pension cost Impact of higher contributions

10. 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

11. Pension receipts/payments Impact of higher contributions
Forecast
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

12. 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 to NHS, schools and colleges but:
- is everything covered?
- for how long?

13. Teacher Pension Scheme

14. 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

15. 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
£ 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

16. 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

17. 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 Table 2. AoC estimates for members and costs. Employer numbers from TPS financial statements for
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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. TPS employer contribution (%)

26. 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

27. 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

28. 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 and beyond may mean more people on higher salaries exceed annual or long- term allowance

29. 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

30. 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
Possibility of short-term DfE funding
Makes harder to increase pay
Likely to result in job losses
Long-run costs are higher

31. 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 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

32. Pension regulations

33. 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
i.e. teaching staff in colleges can join TPS

34. 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,
All non-teaching staff in colleges can join LGPS

35. 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

36. 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 %
Income-related
Contributions %

37. LGPS and colleges

38. LGPS 2014 Support staff Colleges LGPS 2014 Career average pension
Income-related
Contributions %
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

39. 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

40. 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

41. 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

42. 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 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

43. Options for colleges

44. 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

45. 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

46. 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

47. Longer-term issues

48. 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

49. 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?

50. 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?

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