Why is the Teachers’ Pension Scheme (TPS) being reformed?

The Government commissioned former Work and Pensions Secretary, Lord Hutton, to make recommendations about how pensions could be made sustainable and affordable whilst remaining fair to the workforce and all taxpayers. His independent report, published this year, made it clear that the cost of pensions is rising rapidly because people are living longer.

The average 60-year-old can expect to live ten years longer now than 30 years ago. This increase in the length of people’s retirement is putting a strain on both public and private pensions.
In 2005-06 expenditure on teachers’ pensions was around £5 billion. By 2015-16, this cost is forecast to rise to almost £10 billion. This is not sustainable without affecting other areas of public spending.

Lord Hutton also highlighted other reasons for reform, such as the inherent unfairness of current final salary schemes, and the need for improvements in the governance and administration of public service pension schemes.

What changes is the Government proposing for the Teachers’ Pension Scheme?

The Government wants the Teachers’ Pension Scheme to be one of the best pensions available. The reformed scheme retains the high quality benefits that teachers work hard for and deserve whilst balancing the need for a more sustainable scheme that is fairer to taxpayers.

What will stay the same:

  • You will continue to receive a guaranteed income in your retirement, unlike the majority of people with private sector pensions.
  • You will keep the pension and lump sum you have already earned and this will remain linked to your final salary on retirement.
  • You will retain options to retire at any age between 55 and 75.
  • Those within 10 years of Normal Pension Age on 1 April 2012 will see no change to the age at which they can retire and no change in the amount of pension they will receive when they retire.

What is proposed to change:

  • Moving from a final salary pension to a career average pension scheme.
  • An accrual rate of 1/57th.  This represents the proportion of earnings that the scheme will pay as pension for each year of membership under the new scheme. This is more generous than the 1/60th accrual rate payable under the existing scheme for those who entered employment on or after 1 January 2007.
  • A phased increase to teachers’ Normal Pension Age in line with changes to the State Pension Age.
  • A rebalancing of employee and employer contributions to provide a fairer distribution between members and other taxpayers.

Why is Government proposing a move from a final salary scheme to a career average scheme?

A career average scheme is a fairer way of calculating pension benefits because everyone gets broadly the same amount of pension for every pound put in. Under final salary schemes, the most highly-paid employees take out more than is proportional to their contributions because their benefits are based on their last few, high-earning years.

Lord Hutton estimated that the most highly-paid employees can receive almost twice as much in pension payments as those with lower salary growth.

Why is more reform necessary when the Teachers’ Pension Scheme was reformed as recently as 2007?

In making his recommendations, Lord Hutton considered the reforms already made to the public service pension schemes - those in 2007 in the case of the Teachers’ Pension Scheme. While he acknowledged that savings had been achieved, he pointed out that these did not go far enough because the cost of public service pensions had increased by around a third because of longer life expectancy over the last 50 years.

As a result, cash expenditure on paying pensions to public service pensioners had increased to £32bn over the last decade.
In particular the previous reforms had not addressed the imbalance between employer and member contribution rates that had arisen from previous increases in life expectancy where the cost had fallen exclusively on employers.

Lord Hutton therefore concluded that there is a clear case for further reform, to ensure the long term fairness and sustainability of schemes.

Were these changes negotiated with the unions?

Yes. The Government has been engaged in detailed and intensive talks with teacher unions and employer representatives on the design of a reformed TPS.  The Government’s announcement reflects the main elements of a scheme design which the unions have agreed to take to their Executives as the best that can be achieved through the negotiations.  The Government has taken teachers’ views very seriously in its efforts to reach agreement on a scheme which reflects the needs of the profession and the value of the work that teachers do.

When will these changes be introduced?

The increase in employee contributions will be phased in from April 2012. The rest of the changes will not be introduced before 2015. The changes to the Normal Pension Age will be phased over a much longer period with a Normal Pension Age of 68 not expected until 2046.

Do these changes only affect teachers?

No, changes to pension schemes are being made right across the public sector to ensure pensions remain affordable in the future.
A number of different pension schemes are facing similar changes to the Teachers' Pension Scheme, including the Civil Service Pension Scheme, the Local Government Pension Scheme, the NHS Pension Scheme and the Police Pension Scheme.