Consultation on proposed increases in contributions for members of the Teachers Pension Scheme (TPS) in 2013-14; and the removal of provisions governing scheme valuations and cap and share arrangements Government response January 2013
Contents Introduction 3 Scope of the Consultation 3 Background 3 Proposals for the Teachers Pension Scheme from April 2013 to March 2014 4 Main findings from the consultation 8 Summary responses to the six questions 9 Question 1: Do the proposed tiered contributions meet the objectives set out by the Government in the Spending Review? 9 Question 2: Are there any consequences of the proposed contribution tiers that you consider have not been addressed? 10 Question 3: Do you consider that there are equality issues that will result in any individual groups being disproportionately affected by the proposed contribution tiering? If so, what do you consider to be the disproportionate effect? 12 Question 4: The proposed tiering structure above proposes moving from seven tiers to eight, to accommodate the additional tier at 40,000-45,000. From an administration perspective, do you anticipate issues in implementing the revised tiering structures by April 2013? 14 Question 5: Do you think that the proposed change to dealing with retrospective pay awards and mid-month changes is necessary? If not, what alternative would you propose? 15 Question 6: Are the proposed amendments to the Teachers Pensions Regulations 2010 appropriate? 16 Summary of conclusions and next steps 17 2
Introduction 1. In July 2011 the Department consulted on proposals to increase contribution rates for members of the Teachers Pension Scheme (TPS). Following the consideration of responses to that consultation, tiered contributions were introduced into the TPS from April 2012. 2. This consultation set out the Government s proposals for further increases to teacher contributions from April 2013. This consultation also set out the Government s proposals to remove the current provisions in the TPS regulations covering scheme valuations (also known as actuarial review) and cap and share arrangements. These provisions are no longer necessary, as the Government is implementing a reformed TPS from 2015, which will include new arrangements for conducting valuations. Scope of the Consultation 3. The purpose of the consultation was to seek views and evidence on: whether the proposed contribution increases meet the principles set out by the Government; the administrative implications of the proposed changes; and, whether the proposed regulation changes to remove provisions on scheme valuations and cap and share are appropriate. To assist with this, the Department set out specific questions on which it welcomed responses, although consultees were invited to respond on any aspect of the proposals. 4. The responses reported in this document relate to the consultation on the contribution increases in 2013-14 only; and the Government s proposals to remove the current provisions in the TPS regulations covering scheme valuations and cap and share arrangements. 5. The Government remains committed to securing the full savings announced in the Spending Review 2010 and further proposals will be brought forward for 2014-15, and beyond, following further discussions between the Government and the public service unions and employers. Background 6. Providing good quality pensions is becoming more challenging given increasing life expectancy. That is why the Government set up the Independent Public Service Pensions Commission (IPSPC) chaired by Lord Hutton to make recommendations on how such pensions can be made sustainable and affordable, whilst remaining fair to the workforce and the tax payer. 7. The IPSPC, as part of its review, produced an interim report considered the case for delivering savings on public service pensions within the spending review period 3
- consistent with the Government s commitment to protect those on low incomes - to contribute towards the reduction of the structural deficit. In his interim report of 7 October 2010, Lord Hutton recommended that increased longevity and the imbalance between employer and employee contributions are strong reasons to make short-term changes to pension contributions pending a more fundamental redesign of the schemes. 8. The Terms of Reference, Interim Report (dated Oct 2010) and the Final Report (dated March 2011) can be found at http://www.hmtreasury.gov.uk/indreview_johnhutton_pensions.htm 9. The Government announced in the 2010 Spending Review that it accepted the findings of the interim IPSPC Report on public service pensions and that it would therefore seek progressive changes to the level of employee contributions. The total overall savings are 2.8 billion per annum across the public service pension schemes by 2014-15. These savings are to be introduced incrementally over three years starting in April 2012, on a 40%: 80%: 100% basis. 10. In a statement in July 2011, the Chief Secretary to the Treasury reiterated the Government s intention to protect low earners and set out the Government s proposal that: anyone earning less than 15,000 per year Full-Time Equivalent (FTE) will see no increase; those earning between 15,000 and 21,000 per year FTE will see a gross increase of no more than 1.5 percentage points by 2014-15 (this amounts to a 0.6 percentage point increase in 2012-13 on a pro-rata basis); and no individual will see a gross increase of more than 6 percentage points by 2014-15 (this amounts to a 2.4 percentage point cap in 2012-13 on a prorata basis). Proposals for the Teachers Pension Scheme from April 2013 to March 2014 Contribution Increases in 2013-14 11. Following implementation of tiered contributions in April 2012, the Department has been monitoring opt-out rates amongst teachers. To date there has been no discernable increase in opt-out rates, from which the Department has concluded that the tiering structure is achieving the Government s aims. 12. The Department s starting point for the 2013-14 contribution increases was to rollforward the current structure to deliver the next 40% of the savings. However, following discussion with stakeholders, the Department considered whether changes to the current structure are necessary to provide further protection to 4
some groups. In particular, the Department considered representations that greater protection should be provided to the lower paid and that the tier from 40k- 75k was too wide (meaning that some classroom teachers were facing the same increase as some head teachers). 13. The proposed contribution rates for 2013-14, on which the Department consulted, are as follows: Pensionable annual earnings in relevant year ( ) Contribution Rate in 2013-14 Increase (against 2012-13) Lower Upper Tier % Tier % Below 14,999 6.4% 0.0% 15,000 25,999 7.0% 0.0% 26,000 31,999 7.9% 0.6% 32,000 39,999 8.8% 1.2% 40,000 44,999 9.2% 1.2% 45,000 74,999 10.1% 2.1% 75,000 99,999 10.6% 2.2% 100,000 150,999 11.2% 2.4% 14. This proposal rolls forward the existing tiering structure and distribution approach for those earning up to 40k, with the exception that tier 2 has been capped at 7% to ensure those earning up to 26k will see no further increase beyond the 0.6% applied in April 2012. This provides greater protection for 90.6k (13.9%) of the workforce (in tier 2). The proposal introduces a new tier of 40-45k, which moves 14.4% of the workforce from tier 6 to tier 5 and provides greater protection for 94.5k (14.4%) more members. This is intended to address concerns that the previous tier 6 was too broad and also an anomaly created by tax relief, which meant that teachers in the 40-45k income bracket faced a greater impact on their take home pay than those on 45-55k. The new tier means that those who earn more will face the larger reduction in take-home pay. However, providing the above protection requires an increase of 0.5 percentage points for those earning 45-75k in order to deliver the savings foregone by introducing the new tier. 15. The proposed tiers are designed to be consistent with the Government s principles of protecting the low paid; progressive; and minimises the risk of opt-outs. TPS members are employed in a range of different settings. However, the majority are employed in maintained schools, where pay is set in accordance with the School Teachers Pay and Conditions Document. The proposed tiers are therefore intended to reflect the different pay scales typically in use in maintained schools as a proxy for all TPS members, regardless of where they are employed. 5
Mid-month Salary Changes and Retrospective Pay Awards 16. During last year s consultation the Department set out two options for employers to determine which salary rate should be used to allocate the contributions tier that should be applied to each individual teacher. They were: Option 1 - determine each member s contribution tier at the beginning of the year, and apply that to all subsequent months; and Option 2 - set the tier each month based on the salary within that month (on a pro-rata basis). 17. Following the consultation the Department implemented option 2. However, since implementation, a number of employers raised concerns about the administrative burden caused by calculating the contributions to be deducted following the application of retrospective pay awards. The Department therefore proposed an amendment to the current arrangements such that in the event of a retrospective pay award, the employer would determine the new contribution rate based on the new FTE salary, and that would be applied to all member s salary paid in that month (including arrears). FTE is defined as total pay in the month, excluding back pay, multiplied by 12 (on a pro-rata basis). Removal of legislative provisions governing actuarial review and cap and share arrangements 18. The Regulations which govern the TPS currently include provisions for contribution rates to be determined, following an actuarial review of the scheme, and cap and share arrangements whereby the split of contributions between members and employers would be determined. The actuarial review of the TPS, along with similar reviews of other public service pension schemes, was put on hold whilst the Government considered the implications of the change to the discount rate, announced by the Chancellor in Budget 2011, which is used to calculate the contribution rate and the implications of pension reforms to public service schemes. 19. The Government has now announced that it will be proceeding with the implementation of reformed public service schemes by April 2015. The reformed schemes will include new arrangements for managing future cost pressures, including an employer cost cap. The Public Service Pensions Bill, which is currently passing through Parliament will provide for these new arrangements. 20. In light of the new arrangements for setting contribution rates, which will come into effect in 2015, there is now no need to carry out the currently suspended TPS actuarial review or the cap and share processes. The Government considers that the money and resource, which would be used in conducting such processes, is better served focusing on the actuarial valuation which will be needed in order to 6
set up the new TPS. After all, the true costs of the Scheme going forward can only be determined in the full light of the reforms being introduced. 21. Although the currently suspended actuarial review will not be completed, there will still be visibility and financial control, as costs which would have been shown in the suspended actuarial valuations will still show up in the actuarial valuation, which will be carried out for the new scheme. There will also still be annual valuations of the TPS for accounting purposes, using the same data, although these valuations are not used for setting contribution rates. 7
Main findings from the consultation 22. This report summarises the findings that have resulted from the public consultation on the proposed employee contribution increase to the TPS in financial year 2013-14; and proposals to remove the current provisions in the TPS regulations covering scheme valuations and cap and share arrangements. 23. The Department received a total of 41 responses to the six questions. The respondents fell into the following categories: Other 8 School 8 TPS Member 8 Local Authority 6 Higher Education 3 Employer 3 Union 3 Further Education 2 Total 41 24. Those that fell under the other category include individuals, payroll administrators, finance managers, pension specialists, and directors of corporate services. 25. A summary of the main issues raised is provided below: The Department has failed to provide sufficient justification to demonstrate an increase in employee contributions; The proposals will have a disproportionate impact on members by reference to their protected characteristics; Contribution rates based on full-time equivalent (FTE) salary will have a disproportionate impact on the predominantly female and part-time members; The increase in employee contributions will deter teachers from seeking promotion for senior leadership positions; The proposed increase in employee contributions plus the employer contribution (currently at 14.1%) could buy greater benefits elsewhere; The proposals will increase opt-out rates, particularly for those new to the profession; Greater protection should be provided for those earning up to 45k; The proposals do not take account of increased salaries in London; and Early confirmation of the proposed changes is required in order to avoid any implementation issues. 8
Summary of responses to the six questions Question 1: Do the proposed tiered contributions meet the objectives set out by the Government in the Spending Review? Summary of responses 26. There were 25 responses to this question. 27. A third of respondents including unions agreed that the proposed tiered contributions meet the objectives set out by the Government in the Spending Review, but expressed concerns that it had been met at a cost to TPS membership. 28. Respondents who disagreed thought that the increase in contributions was unnecessary, as the, TPS was an in profit viable scheme and any increases in contributions were designed to reduce the Government deficit. Respondents also raised concerns that without a valuation of the scheme, the Department failed to provide sufficient justification to demonstrate that an increase in employee contribution rates is required in order to improve the balance between employee contributions and the taxpayer, leading to a potential increase in opt-outs. 29. The majority of respondents said they were unsure if the proposals met the objectives set out in the spending review, but made no further comment. Conclusion 30. The consultation document made clear that the scope of the consultation was to seek views and evidence on the way in which contribution increases might be implemented, rather than the Government s decision to increase contributions, which was taken in response to Lord Hutton s interim report. 31. In light of the new arrangements for setting contribution rates, which come into effect in 2015, there is no need to carry out the currently suspended TPS actuarial review or the cap and share processes. The Government considers that the money and resources used for conducting such processes is better served focusing on the actuarial valuation which will be needed in order to set up the new TPS, as the true costs of the scheme can only be determined once the reforms have been introduced. 32. Some consultees argued that the increase in contributions may increase opt-out rates. The Department is committed to minimising the risk of members opting out of the TPS. The proposals for 2013-14 are are designed to provide a significant degree of protection to those on lower salaries and are in the early stages of their career and will therefore see the smallest increase in their contribution rates.the conclusion from the responses received, that are relevant to the specific 9
questions, is that the Department s proposals do meet the objectives set out by the Government in the Spending Review. Question 2: Are there any consequences of the proposed contribution tiers that you consider have not been addressed? Summary of responses 33. There were 32 responses to this question. 34. Over half of the respondents who replied to this question suggested that there were a number of consequences that had not been addressed. Four main issues were raised in response to this question. These, along with the DfE response, is provided below: Issue Changes in contribution rates will increase opt-out rates, particularly for those new to the profession. DfE Position The Department is committed to minimising the risk of members opting out of the TPS. The contribution tiers are designed to ensure that those in the early stages of their career have the smallest increase in contribution rates. To date, monthly opt-out analysis in 2012 shows there has been no discernible increase in optout levels. Between January 12 to November 12, there have been a total of 3,539 elections to opt out, this is a reduction of 422 (10.7%) compared with the same time in 2011. In line with the Government s commitment to support the lowest paid and reduce opt out rates, the proposals for 2013-14 provide even greater protection for these groups who will pay the smallest increase (if any). By opting out of the TPS, members would also lose the contribution the employer makes to their pension (currently 14.1%), funded by taxpayers, this remains a very generous contribution to teachers pensions. A comprehensive communications strategy is being implemented to ensure that all members, and employers, are clear on all of the benefits that the scheme provides. This will ensure that 10
employees make fully informed decisions about participation in the scheme, with the aim of mitigating against the risk of significant increases in opt-out rates. Contribution increases will deter teachers from seeking promotion for senior leadership positions. The tiers have been designed to minimise the impact of the changes in contribution rates and we do not consider that this will act as a barrier to career progression or recruitment. For example, a classroom teacher earning approximately 28,000 would contribute 7.9% of their salary (resulting in additional contributions of 340 in 2013-14). If they were promoted to Deputy Head teacher earning approximately 38,000 they would contribute 8.8% (resulting in additional contribution of 730 in 2013-14). The increase in salary is significantly higher than the additional contributions that they would be required to make. Greater protection should be provided for those earning up to 45k The contribution increases tiers do not take account of increased salaries in London. Providing this level of protection in addition to the increased protection being proposed is not affordable. Consequently, this level of protection will require members in the upper tiers to pay significantly more. The contribution tiers have been based on the pay structure for the majority of teachers in maintained schools. This means that teachers in London whose salaries are higher may have a slightly higher contribution rate than teachers located outside of the capital. However, provided the member remains in London their pension benefits will be calculated based on a higher salary. Conclusion 35. A number of issues were raised and these have been considered in light of the principles behind the proposed contribution tiers. The Department s proposals were designed to mitigate against the risks identified above, nevertheless the position will be carefully monitored and any lessons learned will inform the proposals for the tiering structure and distributional approach for 2014-15 and beyond. 11
Question 3: Do you consider that there are equality issues that will result in any individual groups being disproportionately affected by the proposed contribution tiering? If so, what do you consider to be the disproportionate effect? Summary of responses 36. There were 26 responses to this question. 37. Those respondents who said there would be no equality issues stated that the proposals would not impact on any groups and that the equality assessment for last year s exercise had been completed satisfactorily so they did not want to raise any further equality issues. 38. The majority of respondents who replied suggested there would be equality issues, resulting in individual groups being affected by the proposals. There were four main areas where comments were provided. These, along with the DfE response, is provided below: Issue Contribution increases will have a disproportionate impact on the younger, lower paid, disabled, teachers from black and minority ethnic (BME) groups, and part-time teachers, who are more likely to be female. Older teachers and the highest paid are also likely to be disproportionately adversely affected DfE Position An equality analysis has been undertaken in accordance with the public sector equality duty to have due regard to the potential equality issues arising as a result of the proposals. The equality analysis indicates that there is no disproportionate impact on members by reference to their protected characteristics. The proposals for 2013-14 provide even greater protection for the lowest paid, part time members who are disproportionately female and newly qualified teachers. Disabled and minority ethnic groups feature more heavily in lower paid teaching roles and therefore also benefit from the increased protection. Tiered contribution rates based on fulltime equivalent (FTE) salary will have a disproportionate impact on part-time members who are predominantly This issue has been considered carefully as part of our equality analysis. The approach to use FTE is consistent with the 12
female. principle that pension benefits are calculated on FTE salaries and therefore contributions tiers should also be calculated on a FTE basis. In addition, FTE salaries are used in both the Local Government Scheme and the NHS scheme, which have had tiered contributions for some time. Members on lower pay scales are offered the most protection from contribution increases as increases are tiered. So in designing how increases are to operate this does offer mitigation against some of the impact of contribution increases. The contribution increases tiers do not take account of increased salaries in London. The proposals will unfairly impact on teachers in senior posts because they are being asked to pay more but don t get higher benefits in return. The DfE position is shown in response to Question 2. The contribution rates are reasonable and proportionate, consistent with the Government s objective to ensure the increase is progressive and protects the lower paid. More senior teachers will be advantaged from the way that significant salary progression is more beneficial in a final salary scheme. Conclusion 39. The Department has completed an equality analysis in accordance with the public sector equality duty placed on the department to have due regard to the potential equality issues arising as a result of the proposals, which included careful consideration of the feedback from the consultation exercise. 40. The Department s analysis indicates that there is no disproportionate impact on members by reference to their protected characteristics. The Department therefore concludes that the proposals represent a reasonable and proportionate means of achieving the Government s objectives. 13
Question 4: The proposed tiering structure above proposes moving from seven tiers to eight, to accommodate the additional tier at 40,000-45,000. From an administration perspective, do you anticipate issues in implementing the revised tiering structures by April 2013? Summary of responses 41. There were 33 responses to this question. 42. More than half of the respondents said the proposals to move from a seven tier structure to an eight tier structure would potentially create administration burdens for their organisations. The majority of respondents said potential issues would only arise from late notification of the proposed changes. 43. Other respondents (including unions and employer representatives) said the changes in 2012-13 were administered satisfactorily and did not anticipate any administrative issues implementing the proposals for 2013-14. 44. Lessons learnt from last year were that the changes were announced too late. For successful implementation by April 13, early confirmation of the proposed changes, as well as comprehensive guidance needs to be issued in a timely manner, in order for software providers and employers to build and test the new tiers into their payroll system and communicate the changes to members. Conclusion 45. The potential administrative impact has been considered carefully as part of the policy decision-making process. The Department recognises that this could be administratively more complex for some employers depending on the payroll systems they use. With that in mind, we have aimed to finalise the proposed tiering structure as soon as possible in order to ensure that employers have adequate time to make any necessary changes to their payroll systems and communicate the changes to employees in advance of implementation in April 2013. 46. In addition, nearly all employers will have experience in dealing with the Local Government Pension Scheme (LGPS), which has employed a system of tiered contributions for some time. The recently agreed reformed LGPS will have 9 tiers so there is no obvious reason why employers will be able to administer that system and not a system with 8 tiers. The Department therefore concludes that the proposed eight tier structure is appropriate. 14
47. It is clear that comprehensive guidance must be provided to ensure that employers are able to implement these proposals effectively. High quality information must also be provided to ensure that members are kept fully informed. Question 5: Do you think that the proposed change to dealing with retrospective pay awards and mid-month changes is necessary? If not, what alternative would you propose? Summary of responses 48. There were 29 responses to this question. 49. Respondents, including unions and employer representatives, agreed that provided scheme members are in no way disadvantaged, the proposed change to dealing with retrospective pay awards and mid-month changes are necessary as it will simplify the current process and will save a significant amount of administrative time. 50. Those respondents that thought the proposals for dealing with retrospective pay awards and mid-month changes were unnecessary, felt they did not think retrospective deductions should be made and teacher tiers should be fixed for the year. Some respondents expressed concern that the amount of work involved outweighed the small amount that may be collected. 51. Of the respondents that were unsure about the proposals, several commented that they could not think of another fairer approach. Conclusion 52. The majority view in response last s consultation exercise was that contribution tiers are set based on a member s monthly pay. The proposed change to dealing with retrospective pay awards and mid-month changes was in response to a number of employer concerns about the administrative burden caused by calculating the contributions to be deducted following the application of retrospective pay awards. 53. No evidence was presented that the proposals will have an adverse impact on members. The Department therefore concludes that the proposed change to dealing with retrospective pay awards and mid-month represents a fairer approach. 15
Question 6: Are the proposed amendments to the Teachers Pensions Regulations 2010 appropriate? Summary of responses 54. There were 26 responses to this question. 55. The majority of respondents, including unions and employers, disagreed that the proposed amendments to the Teachers Pensions Regulations 2010 were appropriate. Many felt that until the Government carried out a valuation of the scheme that demonstrated the need to increase member contributions, the proposals are unjustified. 56. Those who agreed with the proposals thought they were reasonable and appropriate given the decision to move ahead without carrying out a valuation. 57. There was also a suggestion that with the increase in employee contributions plus the employer contribution currently at 14.1% could buy greater benefits elsewhere, far in excess of anything offered by the TPS. Conclusion 58. The scope of the consultation was on the way in which contribution increases might be implemented, as opposed to Government s decision to increase contributions, which was taken in response to Lord Hutton s interim report. 59. As previously stated, in light of the new arrangements for setting contribution rates, which will come into effect in 2015, there is no need to carry out the currently suspended actuarial review or the cap and share processes. The Government considers that the money and resource used to conduct such processes is better served focusing on the actuarial valuation which will be needed in order to set up the new TPS. After all, the true costs of the scheme going forward can only be determined in the full light of the reforms being introduced. 60. The TPS compares very favourably to private sector pension schemes. The TPS is a defined benefit scheme, which means teachers receive a guaranteed amount in retirement. In the private sector defined benefit schemes are typically in decline; most people in the private sector are in pension schemes where they will receive an uncertain amount based on the value of an investment fund or cash pot. Members would also lose the contribution the employer makes to their pension (currently 14.1%). The Department therefore concludes that the proposals are appropriate. 16
Summary of conclusions and next steps 61. The majority of responses, including those from unions, employers and members provided opposition to the policy of increasing pension contributions and the proposed amendments to the TPS regulations. 62. However, from the responses received, and the reduction in opt-outs compared to the previous year, the Department has concluded that the proposals represent a reasonable and proportionate means of achieving a legitimate aim. Where concerns have been raised, the Department has provided responses. On the basis of the various arguments put forward, officials believe the Department s proposals represent the maximum degree of protection it is reasonable to provide to lower paid teachers, when balanced against the consequential impact for the highest paid. 63. The Department will continue to monitor the position when considering the proposals for the tiering structure and distributional approach for 2014-15 and beyond. 64. A comprehensive communications strategy is being implemented to ensure that all members, and employers, are clear on the benefits that the scheme provides. This will ensure that employees make fully informed decisions about participation in the scheme, with the aim of mitigating against the risk of significant increases in optout rates. 65. Appropriate amendments will be made to the Teachers Pensions Regulations 2010 to give the proposed changes legal effect on 1 April 2013. 17
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