Teachers' pensions are to have their first major review for 25 years. Gerald Freeman explains what needs doing
The review of the Teachers' Superannuation Scheme (TSS), announced by the Department for Education and Employment last Friday, heralds the first major rethink for about 25 years.
The structure and levels of benefits have remained largely unchanged since 1972. The only major changes have been the introduction of widowers' pensions as of right, and the reform of the notional funding of teachers' pensions in 1991: the scheme under which pensions are paid for by the Treasury rather than from an investment fund build up from teachers' superannuation payments. The improvements for part-time teachers' pensions rencently agreed do no more than bring the TSS into line with other public service schemes.
The climate for this review is radically different from that of the last occasion. The vision then was of substantially improved pensions for all with none of the present emphasis on affordability.
It is certainly true that key areas of the TSS have fallen behind comparable pension schemes in the private sector. The TSS benefits for ill-health retirement and death in service are well below generally accepted levels elsewhere, particularly for those in the younger age groups.
The TSS has also failed to reflect the social changes arising from the decline of marriage. Unmarried partners, both heterosexual and homosexual, have no entitlement to a pension on the death of their teacher partner. Many private sector schemes have moved with the times.
The genesis of the present review is the changes to the premature retirement provisions, which over the past 20 years have seen about 190,000 teachers retiring in their fifties. The transfer of the costs of early retirement to individual employers from September 1 this year was specifically designed to halt that haemorrhage of experienced teachers from the profession as well as to cut the costs.
Broadly, a true match between contribution paid and pension benefit involves slightly above a 3 per cent reduction in pension benefits for every year before the normal retirement age of 60. Being allowed to take an early reduced pension is unlikely to appeal to teachers in their early fifties whose benefits would thereby be reduced by some 30 to 40 per cent. It needs to be considered in conjunction with greater flexibility to make extra contribution for extra benefits. It is significant also for the teachers' associations' objective of retirement as of right at 55 without any reduction in the current benefits.
Pension accrues at the rate of 180th of final salary for every year of reckonable service and the lump sum at the rate of 380ths; thus, after 40 years' service providing a half pay pension and a tax free lump sum of one and a half year's salary. Retirement at age 55 would require seventieths instead of eightieths. That improvement would require an additional contribution of 2.25 per cent or more.
Similar efforts in the local government scheme have produced a formula of 85 - where an employee's age and length of pensionable service add up to 85 or more, he or she can retire, subject to the employer's agreement, with no actuarial reduction in pension benefit. The different career pattern of teachers makes the 85 formula less beneficial.
Good pensions cost money. It seems more likely that changes to the TSS to make it more attractive to new entrants might in the Government's eyes mean greater flexibility to pay more to retire earlier.
It is questionable whether the pension benefits are a significant influence on the career choices of young graduates coming out of university. Salary levels are a much more potent influence.
The level of pension benefits depends upon the levels of salary. If salaries are depressed so are pensions. Even retirement at age 55 on seventieths is unlikely to be attractive if coupled with the prospect of working for 35 years on depressed salaries.
The issue of whether the TSS should remain as the scheme for schools, further education colleges and the universities which were formerly polytechnics, arises for differing reasons. The FE employers sought their own scheme. In the "new" universities both the TSS and the better, but more costly, Universities Superannuation Scheme can be applied.
Lastly, the local authority employers complained that the much greater proportionate use of early retirement by FE colleges paying the same employer's contribution meant that LEAs were subsidising the FE colleges. The last objection could be met by differential employer contributions.
The complaint about the earlier and long standing notional funding of the TSS was the less favourable rate of investment return to the TSS as compared with real funded schemes.
Since 1991 the level of notional investment return to the TSS will mirror that of other large real funded schemes. The first results of that will be evident from the currently awaited valuation of the TSS for the five years 1991 to 1996 and will be crucial to the review. Any change to real funding is unlikely to improve the rate of investment return and would bring with it all the costs of investment advice and management.
The outcome of the review will depend very largely on the Government's intentions. In the present pension and financial climate teachers will, at this stage, be wise to confine their cheers to one at the most.
RETIRE TO CONSIDER THE OPTIONS
The terms of reference for the reviews of teachers' pension scheme are to examine the current provisions of the Teachers' Pensions Scheme and consider whether changes are needed to meet the best interests of the education service consistent with affordability to the public purse. In particular, to consider:
* the development of a scheme which would make teaching more attractive as * profession for new entrants
* whether it is still appropriate to have a single undifferentiated scheme covering schools, further education and higher education
* whether it is still appropriate to have a notionally funded scheme for teachers
* whether modifications to the cur rent patterns of benefits for teach ers might better meet their needs and those of the service
* whether individual teachers might be given greater flexibility to make extra contributions for extra bene fits
* whether teachers should be allowed to take an early actuarially reduced pension at their request
* report to the Secretary of State for Education and Employment by November next year
The review will be advised and guided by a working group repre senting teachers, their employers and Government, drawing on the membership of the Teachers' Superannuation Working Party, serviced by the Department for Education and Employment. Other interested parties will be sent papers and asked to contribute ideas and comments.