Universities participating in TPS and LGPS - Are pensions still “No. 1” this Christmas?
December 18, 2019
2019 hasn’t been an easy year for universities and developments in their multi-employer pension schemes. And there seems to be no let up as 2019 draws to a close.
How did pensions make it to a “No. 1” risk on their risk registers this year?
According to our 2019 universities’ survey on managing risks, pensions were in fact a chart (risk register) mover, up one place from 2018: arguably with justification. So in this seasonal blog I’d like to recall just a few of the developments 2019 has heralded and also look ahead at some challenges worth tracking into 2020, focusing on the newer (“post 1992”) universities.
Teaching staff and the Teachers Pension Scheme (TPS)
From September an extra 7% of pay is due to the TPS. The employer rate is now 23.68% due to a change in discount rate methodology mandated by HM Treasury. This is in line with the USS rate due from October 2021 of 23.7% (after a step up from 21.1%). So, in one sense, a (temporary) harmonisation of pension cash costs for teaching staff?
Looking further at TPS participation, only post 1992 universities and independent schools face the full increase, since maintained schools can claim it back from the government and so too can FE colleges (up to March 2021). However, unlike independent schools, hundreds of which have responded by planning TPS exits, universities don’t have a direct option to do this due to regulations.
So what impact might be seen? The Department for Education is consulting on revising independent schools’ voluntary participation in TPS to allow partial exit in respect of new employees only. But nothing similar is being proposed for universities. This contrasts to a recent policy proposal on the equivalent Local Government Pension Scheme enrolment regulations (see below). Some shift to university teaching staff being employed by subsidiary companies, previously observed for the employment of support staff, is not inconceivable. If so, we expect it to be done within the context of broader changes to reward policies that would be focused on flexibility and personal choice for the affected staff.
Those considering action are mindful of the fact that the story on increasing TPS pension costs need not stop at the recent 7% increase and there is more to come. There remain a number of known issues affecting TPS which are still to be played out e.g. the McCloud judgment, GMP indexation and the recommencement of the HMT cost management process for public service pensions.
Support staff and the Local Government Pension Scheme (LGPS)
And so to the LGPS for support staff. On accounting, the bad tidings have already been delivered i.e. increased FRS 102 accounting deficits have recently been signed off. We observed good news on investment performance and mortality assumptions more than offset by bond yields plummeting over FY19.
But one key outcome is only arriving as 2019 ends: the draft results of the 2019 LGPS funding valuations (England & Wales).
Could there be any comfort and joy in terms of cash required from April 2020? We understand that contribution impacts for local authorities are expected to be limited. But it’s worth noting that some LGPS Funds won’t necessarily apply the same actuarial assumptions and contribution smoothing to all. Perceived employer risk may be a distinguishing feature. Hopefully most employers will consider their own results with care and make use of any available channels into early 2020 to query and challenge the methodology and risk allowances.
Even if, as is to be hoped, reasonably stable contributions emerge, universities do need to be alert to the complicated prospective landscape for LGPS employers. Here’s a roundup of some of the unresolved legal issues and policies under development:
- legal: McCloud judgment, GMP indexation.
- actuarial: further developments on two cost management processes for the LGPS as well as the outcome of a consultation to change funding valuation frequency to four years and introduce potential revised treatments for employers reaching a position of no active members.
- policy: the consultation also proposes discretion for education employers to choose whether to enrol new staff and we understand this has provoked strong views. Universities might also monitor two ongoing reviews: “Third tier” addressing wide ranging participation issues by non-tax raising employers and “Good governance” covering conflict management, role of Administering Authorities and representation. And lastly, there will be potential divergence between LGPS employers on how redundancy pensions are calculated and financed (if the Government’s public sector exit cost caps are finally implemented).
So a time to make your bets...
In conclusion, a convincing case for the post 1992 universities to keep pensions risk high up on agendas? If you are a FD or an HRD, will pensions be your risk chart topper this Christmas (and New Year)?
Find out more about our insights on these schemes and how we’re helping clients tackle associated issues.