Last year, the education unions alerted the Department for Education (DfE) to the potential impact the pay freeze could have on how some final salary pensions are calculated, due to a 'quirk' in the regulations.
This 'quirk' means that certain calculations need to be triggered by a change in the rate of pay, which wouldn't occur for some members affected by the pay freeze in 2021/22.
July 2022 update
Through our work on the teachers’ pension scheme advisory board, NAHT, alongside the other represented unions, wrote to the DfE requesting an urgent update on its work to resolve the issues arising from flat indexation for the ‘best three in 10’ average salary method during pay freezes.
The DfE has confirmed that it is currently exploring policy options that could mitigate this impact in future years, and is currently working with the Government Actuaries Department (GAD) on modelling different scenarios. The proposal that the DfE is considering is to allow for the increase of the annual average rate of relevant salary each April in line with the rate of the Treasury order (used as part of the career average scheme indexation) in the previous financial year.
If taken forward, the proposal would be subject to public consultation and HM Treasury approval, if regulations were to be changed.
The DfE has confirmed that it does not intend to pursue any retrospective changes if an amendment is made. This means that if any change is implemented it will not have effect for those who retire from the final salary section of the TPS before the regulations come into force.
NAHT continues to engage in conversations with the DfE, and will review any proposals through our representation on the Scheme Advisory Board.
The final salary scheme uses two methods to work out average salary and the pension calculation, then uses the best of those two.
- Method A: The last 365 days of salary.
- Method B: The average of the best three consecutive years from the last 10 years, where the salaries are revalued to account for inflation.
The calculation for a member's pension in the final salary section of the Teachers' Pension Scheme England and Wales uses the best of these two methods.
TPS scheme regulations mean for revaluation to be credited in method B, the salary rate has to change. The only circumstance which does not trigger revaluation is a salary freeze. The Department for Education accepts that this is the position.
Non-revaluation therefore cuts the pensions members get in retirement if a period of pay freeze is part of the 'best consecutive three in ten'. Therefore 2021/22 may lead to losses for members at the top of their pay range/those who do not achieve progression but who retire or leave teaching in the next 10 years with their pension being calculated using Method B (‘best consecutive three in 10’).
This issue does not apply in the career average scheme, nor to colleagues in Wales who were not subject to the pay freeze in 2021/22.
In November 2021 NAHT, NASUWT, NEU, ASCL and Voice wrote to all employers in England to highlight the problem and the action needed. The joint correspondence sets out a practical way of ensuring the regulations work as intended by asking employers to create a change in the pay rate (suggested as small a change as £1 increase per annum) to engage regulation 37 (9) and (10), which will in turn trigger the revaluation of method B.
We encouraged members to discuss this with their governing bodies, to consider the implications for their schools. NAHT was also in touch with the National Governance Association (NGA) to raise this issue through its channels.
First published 18 July 2022