On a day when eleven thousand BHS employees have discovered that their jobs are at risk and pensions will likely be cut, the true value of having a government guaranteed pension is apparent. Those employees – and others working in the private sector struggling to save or with small pension pots – may be surprised to know that thousands of private sector employees get a public sector pension, guaranteed by the government.
The vast majority of teachers at private schools benefit from the same very generous Teachers Pension Scheme that state school teachers get.
Why does this matter for social mobility?
Firstly, it exacerbates the teacher recruitment crisis. Over 2,000 teachers (net) leave state schools to work at independent schools each year1. While many teachers are committed to the state sector, it’s no surprise that thousands leave when independent schools often offer a higher salary, longer holidays, smaller classes, less behaviour problems to deal with and reduced bureaucracy due to being outside the state system.
Secondly, at a time of austerity, the pension guarantee amounts to a £500m government subsidy to private schools2. When those who are educated at these schools continue to have a stranglehold on top jobs, this is inconsistent with the government’s stated commitment to improving social mobility.
In the March Budget, the Chancellor pencilled in increases in public sector pension contributions to better reflect the higher cost of providing pensions when interest rates are at record lows. In fact, to buy the same pension in the private sector costs far more than schools/teachers (or indeed hospitals/doctors) themselves pay. Estimates put the cost of buying this privately at 49% or more of pay3, yet schools and teachers currently contribute only 26%. In total, private school teachers benefit from a £500m subsidy each year.
Indeed, a 2011 Report4 on public sector pensions by Lord Hutton, the former Labour cabinet minister, said it was “undesirable for future non-public service workers to have access to public service pension schemes.”
Last month, I asked Nick Gibb, Minister for Schools, why this subsidy exists, and was amazed when he told me this was to enable “fluidity between the sectors5.” I would welcome “fluidity” if it meant state schools were gaining teachers, but when it is virtually a one way street in the other direction, encouraging fluidity with a £500m government subsidy is completely inconsistent with government efforts to improve state schools, social mobility and the life chances of the less well off.
A survey of private school teachers by a union suggested that 22% of them would be more likely to return to state schools if they no longer benefited from the public sector pension6. This would imply over 13,000 teachers wanting to return to state schools7 – helping to solve their teacher recruitment crisis at a stroke.
Fluidity is actually a flawed argument anyhow. Private sector workers can move between firms without membership of a pension scheme being any barrier. Indeed, Budget documents released last month showed that a typical worker may have 11 different pensions in their lifetime. Why should teacher “fluidity” be harmed by the need to be a member of a different pension scheme, especially now their scheme is career-average rather than final-salary based?
However, since scrapping private school teacher eligibility would have negative cashflow implications for the government8 it is unlikely to happen in practice.
One alternative idea that could help the government transform social mobility, is the introduction of an Independent School Pension Levy. This would gradually add to the total pension contributions that private schools have to pay, by 2% per annum, until it reaches a total of 40% rather than 26%, steadily removing most of the government subsidy. If they don’t think this is good value, independent schools could offer their own pension arrangement instead, like any other private company already does. Some schools do that already, but few would leave the generous Teachers Pension Scheme. Most senior leaders and decision makers would personally be significantly worse off financially if they left this government-backed scheme.
This levy could ultimately raise £300m per year9, which could be used to fund measures that help transform social mobility. An immediate priority might be focusing on ensuring undergraduates develop the soft skills that employers prize, while laying the foundation for longer term change through improving provision of extracurricular activities and high quality careers advice at schools. Large employers should also be required to publish data on social diversity across the firm and in senior positions.
While private schools could partly pass on their higher costs to parents in the form of slightly higher fees, they might also be forced to reduce the premium that they pay their teachers compared to those in the state sector. This would help teacher retention in the state sector, as well as encouraging many thousands in the private sector to return.
At present, those from fee-paying schools dominate senior positions across society. Those from independent schools represent only 7% of the population yet according to a recent Sutton Trust Report10 account for:
This situation is projected to get even worse, with 70% of entrants into some top graduate schemes being from fee-paying or selective schools11.
Many of those from less-privileged backgrounds often:
While more students from less-privileged backgrounds are now getting into university, IFS research12 published this month showed that university is not the leveller it might be, confirming a pay gap of 10% or more. In top jobs, those from more privileged backgrounds earn as much as 17% more than peers on the same course at the same university.
Social mobility in the UK is worse than most developed countries, partly due to inequities in a polarised education system. The government should remove this implicit pension subsidy, using the proceeds to take positive steps to create a level playing field for all.
Chief Executive, upReach Charitable Company
Notes to editors:
upReach are the social mobility charity that supports students from less-privileged backgrounds to reach their potential, helping them secure top jobs in the graduate labour market. The charity partners with employers and universities to deliver a tailored programme of employability support to students at thirty six universities.
John Craven joined upReach in January 2016 after an eleven year career in investment banking and three years teaching Maths and Economics at state and independent schools.
1 Based on linear extrapolation (x1.25) from ISC data which represents 80% of privately educated pupils. http://www.isc.co.uk/media/2661/isc_census_2015_final.pdf (See Table 15)
2 In 2010, 62,439 teachers were in the TPS, which on an average salary of £35,000 and a 23% subsidy suggests a £502m subsidy each year.
3 Calculations suggest that the cost of buying similar pension public sector provision can be 49% or more of income, compared to a 26% total contribution by schools, hence a subsidy of 23%. For example, Table 1 of the below report estimates NHS CARE pension costs to be worth 49% of income.
The subsidy can be estimated by determining what it would cost to purchase the same pension provision in the private sector by buying index-linked government bond yields and annuities. It is equivalent to using a market-based discount rate rather than the CPI + 3% discount rate chosen arbitrarily by the government.
5 Answer given by Nick Gibb MP to question asked at Sutton Trust “Best in Class – Improving Social Mobility” conference.
7 22% of 62,439 teachers = 13,736 teachers
8 Since the Teachers Pension Scheme is a “pay as you go scheme” the government receive cash contributions from employees and employers. If private schools were blocked from the scheme, the government wouldn’t receive these contributions, but would still have to pay existing pensions.
9 Based on a levy of 14%, eliminating most of the 23% subsidy, raising 14/23 * £502m = £305m
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