The NEU has become aware of the increasing use of the phrase ‘salary sacrifice’ in the Teachers’ Pension Scheme (TPS). The NEU is concerned that this is being misrepresented and members will not understand the implications for their pensions.
The TPS now operates on a career average basis. Having pension calculated on a lower salary means a lower pension in retirement.
Independent sector
Employer contributions have been rising in the TPS and will increase to 28.6 per cent from April 2024. Independent schools are not automatically members of the TPS. They can choose to join, and also choose to leave.
Some independent schools are now offering the choice of a defined contribution scheme, or continued membership of the TPS with a lower salary. Employers can do this. However, this is not salary sacrifice as usually understood in pension schemes.
Conventional salary sacrifice
In a classical salary sacrifice arrangement common in private sector schemes, an employee agrees to give up part of their earnings which reduces their overall salary. The employer agrees to pay these ‘sacrificed’ earnings directly into the employee’s workplace pension. By reducing salaries, both employees and employers are subject to lower National Insurance contributions. This means they pay less tax and get to keep more of what they earn overall.
In a defined benefit scheme where this operates, pensionable salary is based on the higher salary prior to the salary sacrifice.
Salary sacrifice in the TPS
Conventional salary sacrifice to reduce National Insurance is not available in the TPS. Only salary sacrifice arrangements specifically included in the School Teachers' Pay and Conditions Document can be included as pensionable earnings (and on which contributions must be paid).
A member can choose to give up part of their gross salary, which enables the following benefits to remain pensionable within the Teachers’ Pension Scheme:
(i) child care voucher or other child care benefit scheme;
(ii) a cycle or cyclist's safety equipment scheme; or
(iii) a mobile telephone scheme entered into on or before 5 April 2017 (except that a salary sacrifice arrangement for a mobile telephone scheme will only be covered by the provisions of this paragraph up until 6 April 2018).
Everything else is ‘unapproved’. For unapproved salary sacrifice schemes the pensionable salary used to calculate pensions is the lower salary after salary sacrifice.
Implications
Operating two pay scales (one for teachers in the TPS, and one for teachers in a defined contribution scheme) is not an approved salary sacrifice arrangement and leads to lower pension accrual. Members may or may not consider this to be a reasonable trade-off on a case-by-case basis in return for a higher salary, but they should be aware of the implications.
Example
In the TPS, pensions are now built up on a career average basis, so every month’s salary counts towards the pension.
If a member was previously paid £40,000 a year, but is offered continued membership in return for a salary cut to £36,000 then the amount of pension built up each year is cut. The TPS builds up pension at 1/57 of salary so the differing amounts accrued in a year are as follows:
£40,000*1/57 = £701.75
£36,000*1/57 = £631.58
For more information on the TPS career average scheme see our guide.
Impact on final salary pension
Having a lower pensionable salary going forward may have an impact on a member’s final salary pension. The final salary pension is based on the better of two measures:
a) salary in the last 365 days
b) salary over the best three consecutive years in the last ten years revalued with CPI inflation
This is all based on the teacher's salary when they leave teaching (or the period leading up to it), rather than when the member entered the career average scheme. A prolonged period on a lower pensionable salary is likely to have an impact on a member’s final salary pension.
For more information on the TPS final salary scheme see our guide