Steep fall in teacher pension payments ‘highly likely’

Employer contributions to the Teachers’ Pension Scheme are “highly likely” to fall significantly from 2027, a minister has stated.

Skills minister Baroness Smith of Malvern said there was likely to be a “considerable reduction” in the average employer contribution rate following the latest public sector pension valuation.

If the Treasury allowed schools to keep the savings, this would provide significant financial relief: the Teachers’ Pension Scheme (TPS) employer contribution rate has risen from 16 per cent in 2019 to nearly 29 per cent in 2026.

However, a Whitehall source suggested that school funding may be reduced in line with the reduction in pension contributions. They said: “Yes, contributions are coming down - but I’d point out government has always adjusted funding in line with contributions.

“In the context of wider [government] spending pressures - not least defence - it would be fair to say the chances of a break with precedent are slim to none.”

The TPS is a “defined benefit” scheme, meaning teachers pay a fixed monthly amount in return for a guaranteed annual income for life in retirement.

The fixed amount they pay into the scheme ranges from around 9 per cent to 12 per cent of their salary. Employers currently contribute the equivalent of 28.6 per cent of a teacher’s salary into the scheme.

This pension arrangement is similar to that of other public sector roles, such as the civil service, but the employer rate is well above the 3 to 5 per cent that private sector employees typically get.

Employer contributions to the Local Government Pension Scheme for non-teaching staff in schools have already come down since April by around 4 per cent.

Pension contributions to fall ‘significantly’

Speaking in the House of Lords, Baroness Smith said the government actuary’s department had written to the Treasury stating that the average employer contribution rate across unfunded public service pension schemes, of which TPS is one, was expected to “fall significantly”.

This is due to an increase in the SCAPE discount rate, which the government uses to value unfunded public sector pension schemes.

The Treasury uses this rate to determine the present-day value of future expected pension payments.

Baroness Smith said: “It is highly likely, as I have suggested from the letter sent by the government actuary’s department to the Treasury, that there will be a considerable reduction in the average employer contribution rate as a result of that revaluation.”

Rate to be set from 2027

A report from the government actuary’s department says the 2024 pension scheme valuations will inform employer contribution rates payable from 1 April 2027.

Provisional results for the four largest public sector pension schemes suggest aggregate employer contributions will be more than £12 billion lower in 2027-28 than in 2026-27, the report says.

However, the final TPS-specific employer contribution rate has not been published, meaning the exact impact on school budgets is unclear.

Any reduction in the TPS contribution rate could also affect future government funding decisions for schools.

Lower employer contributions in unfunded schemes would be expected to be offset by higher government funding to meet benefit costs, and the Treasury is considering how to adjust funding settlements, the actuary report says.

Employers participating in public service pension schemes that do not receive government funding, including independent schools in the TPS, would see lower costs with no corresponding change in income, the report adds.

Tes recently revealed that nearly 60,000 teachers have opted out of the sector’s pension scheme since 2020, with most withdrawing for “personal financial reasons”.