The Department for Education has announced that the Teachers’ Pension Scheme (TPS) employer contribution rate will rise by 5% from 1 April next year “to ensure that the scheme continues to meet present and future obligations”.

The costs for employers to remain in the scheme will increase to 28.6% – a relative increase of 21% from the current rate of 23.6%. While the government has committed to funding the rise for state schools and colleges for one year, private schools are exempt.

Almost 340 independent schools have left the TPS since 2019 due to increasing employer contributions, and more than 120 have implemented ‘phased withdrawal’ (the withdrawal of the TPS to new members of staff only) since the provision was introduced in 2021.

The Department for Education stated that it “appreciates that the result means Independent Schools that participate in the Scheme will be faced with additional costs that aren’t funded. It’s hoped that the information shared previously, on the likely final result, will have helped them in planning for the change.”

Martin Willis, a partner at advisory consultancy Barnett Waddingham, said: “While this isn’t as large an increase as some commentators had initially suggested was possible, it is in line with the most recent expectations and the level that many independent schools had been considering in their strategic discussions. It’s fair to say this increase will be an unwelcome further cost for independent schools to weather in a challenging economic background, including inflation, energy costs and potential VAT changes, and will mean many schools, which had been considering their pension and benefit options, will now need to take action to manage their costs.”

“The key driver for the increase in costs is the reduction in the Office for Budget Responsibility’s expectations for GDP growth, which has led to an increase in the amount of money that would need to be set aside today to meet the expected costs of pensions paid in the future.

“Upward pressure on the school contribution rate has been expected since the government announced the outcome of the 2021 ‘Superannuation Contributions Adjusted for Past Experience’ discount rate consultation.

“There are many options open to schools to mitigate this cost increase, from cost sharing and phased withdrawal to the use of parallel options – it isn’t just TPS exit. The right option for any given school is very much dependent on its unique circumstances and we encourage schools to consider their overall total reward package of pension, pay and benefits.

“It is also critical that schools understand the impact that this change will have on their finances, both now and in the future. This will enable schools to make the right decisions at this challenging time and then engage with staff in relation to any proposals. Failure to do either successfully, may pose a significant threat to a school’s long-term future.”

Neil Barton, head of business development at employee benefits and actuarial consultancy Broadstone, commented: “The rate rise will come as a shock to the diminishing number of independent schools that remain in the TPS. It comes at a time when many schools in the sector are battling financial challenges. In September, Labour announced that it will add VAT to private school fees within its first year of government if it wins the next general election.

“We know from recent conversations with our independent school clients that they fear this will affect pupil numbers, so the additional 5% needed for the TPS is a crushing blow and is likely to force even more schools to review their position regarding the TPS.

“We expect significant numbers of independent school operators and governing bodies will consider whether changes should be made. Many schools that have fully exited the TPS have introduced defined contribution schemes with a higher-than-average employer contribution, but other alternatives like phased withdrawal, cost sharing and parallel schemes are worth exploring.

“Broadstone has significant experience in this sector and stands ready to support schools that may want to consider their options.”

Nigel Jones, head of consulting and actuarial at Broadstone, added: “This announcement looks to be the death knell for the participation of many independent schools in the TPS. The seemingly ever-increasing contribution burden coupled with the debate around whether the extra outlay actually derives any additional value will see many either fully exit or consider alternative approaches. We expect a busy market helping independent schools consider their options throughout the next few years.”