Contacts: Head of Education Personnel [email protected] (01962-876223)

and the Chief Pensions Officer [email protected] (01962-847506)

1. Introduction

1.1 The Department for Education and Skills (DfES) issued a Consultation Paper entitled "Modernisation of the Teachers' Pension Scheme (TPS)" in October. DfES asked for responses from teachers and employers by 10 December 2004. A copy of the Consultation Paper is attached, with a response form at the back.

1.2 The County Council currently employs about 11,000 teachers who contribute to the TPS: nearly 7,500 full time; 1,500 part time and over 2,000 supply staff. Teachers pay 6% of their salaries to the TPS. The County Council pays 13.5%. In 2003/04 the County Council's contribution to the TPS was £ 38.8 million.

1.3 This report gives the County Council's proposed response to the DfES on their Consultation Paper, "Modernisation of the Teachers' Pension Scheme (TPS)".

2. Implementation

2.1 The Government intends to increase the normal pension age in public service pension schemes from 60 to 65. The minimum age for early retirement, except for ill-health retirements, is to be raised from 50 to 55 for all pension schemes.

2.2 DfES also suggests modernisation of TPS provisions for new entrants from 2006. Comparisons of current and alternative provisions are set out on pages 6 and 7 of the Consultation Paper. Some proposals raise the overall scheme contribution rate (SCR), shown as a percentage of teachers' pay. DfES proposes that the new arrangements would apply to all teachers from 2013, but benefit accrual for existing contributors would not alter until September 2013.

2.3 DfES say these changes will keep the TPS "affordable and justifiable to taxpayers", despite pensioners living longer, and enable the employee's contribution rate to remain at 6% of salary. Some other options are also canvassed, provided that there is a demand for them and employees pay more.

2.4 Therefore several changes are proposed for phasing in over the next nine years :-

· Currently : normal retirement age is 60; minimum early retirement age is 50;

· 2006: for new entrants, normal retirement at 65; early retirement from 55; with an unchanged employee contribution rate and new benefits provisions;

· 2010: for earlier entrants, normal retirement at 60; early retirement from 55;

· 2013: for all teachers, normal retirement at 65; early retirement from 55; the new benefit accrual provisions will apply to teachers who entered the TPS before 2006, but benefits they had accrued up to 2013 would be safeguarded

2.5 These changes would operate from 1 September in each of the years stated.

3. Financial implications

3.1 Compared to the current employer contribution rate, which is 13.5% of pay, the projected rate for employers suggested by DfES could increase by 1.5%.

3.2 This implies school and County Council costs increase by £ 4.3 million annually.

4. Human Resources implications

4.1 The availability of a reasonably attractive occupational pension scheme is an aid to recruitment and retention of teachers and DfES's proposals can be seen as keeping this important aspect of their terms and conditions of employment.

4.2 Equally important from an employer's point of view is the ability to manage the retirement of teachers, especially where ill health situations occur or if the need to restructure the teaching service arises or where pupil numbers decline.

4.3 Some of DfES's proposals may not be helpful and may be unwelcome to teachers. For example, a teacher facing ill health retirement before age 55 with ten years service currently gets a pension of 25% of salary and a lump sum of three times annual pension. Under DfES's proposals, the pension would be 17% of salary, unless the teacher was incapable of any other work, and no lump sum.

4.4 A teacher who became incapacitated for any work would get automatic service enhancement of half their prospective service to age 65, but this would be rare.

5. Coincidental changes

5.1 Other changes could be made to the TPS for other reasons. However, rather than consider these on their own merits, DfES has chosen to present them as parts of a modernised TPS. This may help to make less attractive proposals more palatable to stakeholders and help to induce teachers to change to a new scheme.

· From 6 April 2006, the Finance Act 2004 allows all pension schemes to pay up to 25% of benefits as a tax-free lump sum. TPS falls short of this now.

· Similarly, from 2006 schemes can offer flexible retirement, which would enable teachers to draw a pension if they wish to and work part time as well.

· The Civil Partnership Bill requires registered partners to get survivor pensions. This applies to all schemes, based on service from 6 April 1988.

· Similarly, TPS survivor pensions could be paid to opposite-sex partners, if teachers favour this and are prepared to meet the additional costs themselves.

5.2 Age discrimination legislation is expected to come into force by October 2006. This would require changes to the provisions for compensation payments to teachers who retire early on grounds of redundancy or efficiency. DfES offers more flexibility to employers, within limits, to compensate such teachers.

6. Non-teaching staff

6.1 Alongside the DfES's consultation, the Office of the Deputy Prime Minister (ODPM) has published a consultation paper about modernising the Local Government Pension Scheme (LGPS), which applies to non-teaching staff. ODPM wants responses before April and envisages a "new look" LGPS in 2008.

6.2 ODPM's proposals for non-teaching staff are virtually identical to the DfES's proposals for teachers and lecturers, but with some noticeable differences. For the same retirement conditions, ages and benefits package proposed for the TPS, the LGPS has a projected SCR of 21%, compared to 19.5% for TPS. This disparity seems unusual as the demographic factors should be similar, but the LGPS is a funded scheme whilst TPS is predicated on "notional funding". SCR also depends on how "hard" or "soft" are the financial assumptions used. It seems more likely than not that the DfES underestimates the SCR for TPS. Employees would contribute 7% of salary to the LGPS, compared to 6% now. ODPM proposes full service enhancement to age 65 for an employee who is incapable of any work and so teachers are likely to demand such enhancement.

6.3 Considering that the DfES's proposals for teachers and the ODPM's proposals for non-teaching staff are virtually identical, there does not seem to be any sound reason for employees' contribution rates in the TPS and LGPS to be so different.

6.4 The County Council has already endorsed the increase in the employees' rate from 6% to 7% of salary in the LGPS and it is logical to do so for teachers too. This could mitigate most of the likely TPS cost increases falling on employers.

6.5 Changes are also being introduced much earlier for non-teaching staff. The minimum age for early retirement is due to be raised from 50 to 55 from 1 April 2005 and ODPM proposes that their new scheme will apply to all non-teaching staff by 2008 rather than 2013 and there will be less protection for existing staff.

Recommendation

That the County Council's response to the DfES's Consultation Paper entitled "Modernisation of the Teachers' Pension Scheme (TPS)" should be approved.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report. NB : the list excludes published works or documents which disclose exempt or confidential information as defined in the Act : NIL.