Managing the strain: Pension costs for Further Education Colleges

Last year, following changes in the Skills and Post-16 Education Act 2022, the Office for National Statistics (ONS) reclassified Further Education Corporations, Sixth Form College Corporations, and some other institutions as Central Government public sector bodies. This reclassification from the private to the public sector brought financial constraints because they must now comply with guidance applicable to public sector bodies, particularly around the Managing Public Money (MPM) framework.

Special Payments

Under the MPM framework approval from the DfE is now required for “special payments”. A subsequent set of guidelines issued by the Education Skills Funding Agency warned against “ex -gratia” settlements including on pension terms. Any ex-gratia arrangements would need central clearance the guidelines stated.

Is a "pension strain charge" a Special Payment?

The Teachers’ Pension Scheme (TPS) and the Local Government Pension Scheme (LGPS) each offer a pension based on pay with that promise becoming payable in the future on retirement. While participation in the LGPS and / or the TPS (both public service pension schemes) and most of the liabilities and obligations to pay contributions do not create any immediate practical challenges, the reclassification has raised questions around discretionary payments, the associated “funding strain” and whether a pension strain charge is a “special payment” and an appropriate use of public money. It also feeds into the wider debate about “pay-offs” from the public sector.

How does this affect an ll-health or redundancy situation?

Specific areas of concern are early retirement payments on ill-health grounds or redundancy because these each involve a pension being paid earlier than anticipated in funding assumptions. Consequently, a funding deficit – a cost strain – might result. Both the TPS and the LGPS contain provisions which do in fact grant an increased rate of pension and early payment in a number of instances which often cause a funding strain. This includes redundancy, employer reorganisation, staff early retirement and ill health. Although some level of the incidence of each of these is built into the funding assumptions, a higher than anticipated level will result in a strain. For example, a pension which comes into payment just five years earlier than anticipated would require a 50% increase in funding to meet the extra cost - hence the strain.

What about contractual entitlements?

Where the rights relate to a contractual entitlement, it may be that the pension strain charge is still likely to avoid classification as a “special payment”. However, advice is recommended as the facts of each particular situation will vary. By way of an example, if the beneficiary had been responsible for drafting the contractual entitlements (e.g., as College Principal or CFO/COO) then it may raise questions.

Our view

The cost of an early pension is such a significant funding strain in many cases that there is no question of a settlement being regarded as “ex- gratia”. Far from it. The settlement is a necessary and legally binding method of controlling a significant college cost. Again, the policy of the courts in recognising the rights of parties in free and clear negotiation to enter a legally binding settlement is a helpful and necessary recognition of the economic reality.

How Irwin Mitchell can help

As pensions specialists, we frequently work as part of a multi-disciplinary team, alongside our specialist employment law colleagues. A pensions strain payment can be significant financial outlay, so we recommend seeking early advice on the pensions implications of redundancy exercises, reorganisations and ill-health situations.