Government changes to the Teachers’ Pension Scheme in 2015 mean that teachers are paying more towards their pensions, working longer and receiving a smaller pension when they retire. The NEU does not consider that the Government ever satisfactorily made the case for changing teachers’ pensions.
The average employee contribution rate is now 9.6 per cent – an increase of 50 per cent since April 2012. This was a thinly disguised tax on teachers. The changes were made to the scheme to save on costs, not to improve the terms of teachers’ pensions.
From April 2015 most teachers were moved into a new career average pension which is less generous than previous final salary-based arrangements.
The Government linked the age at which teachers can access their teachers’ pension in the career average section to the state pension age (SPA) – for some teachers that will be at age 68! Most teachers will not be able to work successfully in the classroom to 68 so they will have to retire earlier on substantially reduced pensions.
Under the Pensions Act 2014, there must be a review of the state pension age at least every six years. The first review was undertaken by Sir John Cridland, former Director-General of the CBI. It recommended that the move of the state pension age to 68 be accelerated by eight years so that it affects those born from 6 April 1970 onwards. However this change has not been legislated for yet.
Ministers said that the previous pension scheme cost too much but they failed to prove that public sector pensions weren’t affordable. The 2011 Hutton Commission report found that the cost of the former structure of public sector pensions would fall from 1.9 per cent of GDP in 2011 to 1.4 per cent by 2060.
Since the TPS was set up in 1923, over £56 billion more in contributions has been paid into the scheme than has been paid out in pensions. The Government has had a long cheap loan from teachers, but now baulks at paying the pensions due.
The Government also changed annual pension indexation from Retail Prices Index (RPI) inflation to Consumer Prices Index (CPI) inflation. RPI inflation is normally higher - The NEU estimates that a teacher retiring with a £10,000 pension will lose over £30,000 during the course of a 25-year retirement.
Government changes to the discount rate (a rate of interest used to value the Teachers’ Pension Scheme) meant that even though the scheme benefits have been cut and employee contributions increased, employer contributions rose from 14.1 per cent to 16.4 per cent from September 2015.
National Insurance Contributions (NICs) increased due to the abolition of ‘contracting out’ in April 2016. Previously teachers ‘contracted out’ of the state second pension, which meant they paid a lower rate of NICs but had no right to the state second pension. The basic state pension and state second pension were merged into a new ‘single tier’ pension from April 2016. As there is nothing to contract out from, teachers and employers now pay a higher rate of NICs.
Teachers pay an extra 1.4 per cent on earnings between the NI ‘primary threshold’ and upper earnings limit (broadly £8,000 to £46,500 from April 2018). Employers pay an extra 3.4 per cent on all earnings. The increase in employer pension contributions and employer NICs added around 4.8 per cent to the salaries bill, which is having a knock-on effect on pay and jobs.
The real pension problem is in the private sector. Employer contributions to newer “defined contribution” schemes are often very low and therefore do not provide an adequate retirement income. The burden is passed back to the state and future taxpayers. We need to encourage levelling up not a race to the bottom.