Cue heads exploding in education circles…. Let me explain why this is a mathematical certainty and why salaries and pensions are the major factor.
Many readers will know that I have long obsessed about the England and Wales Teachers’ Pension Scheme (TPS). In the 1990s I worked in funds management for two major Australian banks and gained a mandatory certification from the Securities Institute of Australia (now part of Financial Services Institute of Australasia). This was to give us a working understanding of the 1992 Australian Superannuation Guarantee system. This system, known as ‘super’, has become one of the most successful pension schemes in the world with over A$4.2tn/£2.01tn, making Australia the fifth-largest holder of pension fund assets worldwide. Over 90% is held in ‘Defined Contribution’ schemes based on what an employee and their employer have paid in. There are also ‘Defined Benefit’ schemes where what you get out is a specific (and increasing) amount based on your length of service and average of your career earnings. In the private sector the latter were seen as unaffordable years ago and by 2024 in the UK over 72% of these had closed according to the The Pensions Regulator. The TPS is like many public service pensions, is a Defined Benefits scheme, and it’s a very generous one indeed.
I have written about how unaffordable and unfair to private sector workers no-fund schemes like the TPS are. What teachers and their employers pay in, plus cash from central government, goes straight out again to pay existing retirees and their dependents. This is the opposite of Defined Contribution schemes where the money paid in by members and their employers is invested in an ecosystem of financial instruments, (cash, bonds and shares being basic examples.I won’t try to explain derivatives, private equity, venture capital, SPACs, etc, as it confuses me and changes almost daily.
The basics of the TPS are:
- Teachers pay in on a sliding scale starting at 7.4% (earning up to £34,873) and up to 12% (over £100,591)1
- Employers (schools = taxpayers) pay in 28.68% (0.08% is an admin fee paid to TATA Consultancy Services)2
- Teachers and employers therefore make a total contribution per year of between 36.08% and 40.68%, a huge amount compared to the current minimum total pension contribution in the private sector of 8%, of which employees pay 5% and employers 3%.
I was reminded of this disparity when reading a report published in March by the Education Policy Institute (EPI), titled, What Pensions Do Teachers Want?
I read a lot of reports including complex company accounts and many of these are examples of my favourite quote, ‘terminological inexactitude’. EPI claim a lack of funding restricted their research; yet their report gets some basic facts wrong (which they have promised to correct) and ignores important examples of successful schemes elsewhere. It relies too much on interpreting data from a survey done via Teacher Tapp, assuming that teachers have a good level of financial literacy. Remember, most teachers don’t have to file tax returns.
In 2024, the Financial Times reported that 51% of employees were embarrassed about their level of financial literacy. The original survey quoted in the FT was done by employment engagement services company Pluxy and showed where employees go for financial advice – friends/family 43%, search engines 29%,with 12% turning to their employers for advice.
So without taking a benchmark of financial literacy, the analysis from EPI’s survey is dubious. Even more so when the only other international system they reference in terms of teacher pensions is research done in two small US states (one in Wisconsin and two from the Annenberg Institute at Brown University, Rhode Island). It fails to look at one of the most successful US schemes (where all are state-based); the California Teachers’ Retirement System (CalSTRS). This scheme is so successful that it allows teachers not to avoid paying 6.2% of their salary towards Federal Social Security and is seen to have had a big impact on teacher recruitment and retention, as detailed in this peer-reviewed, scholarly monograph.
The EPI failed to even consider two successful retirement saving systems; Australia’s super system as above and the Ontario Teachers Pension Plan (OTPP). Founded in 1990 after the provincial government realised their existing Defined Benefits scheme would go broke, OTPP has become one of the most successful investors in the world with C$266.3bn/£143.53bn in net assets for its 343,000 members and pensioners. Their success means this private investment entity, who invest in a highly sophisticated way globally, has for the last 13 years had a fully-funded system (i.e. they can pay every member and their dependents what is due). Their teachers pay in less than in the UK, contributing 10.4% to a standard limit and then 12% beyond that, matched by employers. So in total OTPP members get a maximum contribution of 24% compared to the TPS minimum of 36.08% and maximum of 40.68%. EPI’s report says that workers probably need to save about put 12% of their salary for a comfortable retirement, less than a third of what TPS members contribute.
Compare that to the TPS with 1.3m members and dependents, where there are zero real assets and the entire scheme relies on what teachers pay (the minority) and what taxpayers fund both directly via the taxes that fund schools and the extra that the Treasury tops up from outside this (£2bn in 2023/24). The EPI report notes the TPS’s Net Pension liability stood at a massive £278.8bn at 31/03/2024! I think it’s far more, as the amount owed can be driven down by by calculating the cost against a discount rate. In 2024 this was 5.1%, (£278.8bn), 2023 4.15% (£303.3bn), both a massive jump from 2022 when the rate was 1.5% and the unfunded liability was £532.3bn! Given that interest rates have fallen since 2024 and teachers’ pension payments and hence liabilities will increase, my guess is the next report will show a much larger deficit.
The EPI document highlights that teachers love the certainty of their Defined Benefits scheme and don’t like the risk of what they describe as ‘stock market’ Defined Contribution schemes. This shows how superficial their research is. OTPP’s, success in fully funding their members retirement needs is totally down to its success in investing in ‘the ‘stock market’. Perhaps it is the wider lack of success of British retirement funds that puts off teachers and others? In a report by the Thinking Ahead Institute (well worth looking at) I found a report about the 300 top-performing worldwide pension funds in 2024. What worries me is their analysis on p34 which shows the Net Change in the number of these top 300 funds since 2018. The most new funds in this index came from Switzerland (4), Mexico and the US (3 each) then Israel, Norway, India, Denmark, Italy and Australia. Over the same period the UK lost 7 funds from the list. The only UK fund in the top 100 is the Universities Superannuation Scheme which came in at 47th, a long way behind California State Teachers at 10th, OTPP at 18th, Texas Teachers at 19th and New York Teachers at 28th.
One thing the EPI document gets right is that the public sector, with their generous, taxpayer- funded pensions, also earn more than the private sector. They refer to a 2020 study from the Office of National Statistics, which shows that while public sector pay is 3% behind the private sector, when pensions are added the ‘total remuneration in the public sector was 7% greater’. I estimate that this disparity is probably greater now, especially for teachers who have had several pay and pension rise since then and the employer contribution (now 28.68%) was just 16.4% in 2019.
From my discourse above, what I’d like to highlight is how research and policy recommendations from groups like EPI and many others often don’t hold up to hard scrutiny. If we want better and fairer pensions in the UK we need to stop listening to every lobby group who thinks they are experts in every area of policy and to start, like Ontario did, listening to real experts and build financially secure long-term funded models that don’t sell workers (in any sector) false hopes or unfair benefits. Australia and Canada did it 30 years ago real pension reform in education (and elsewhere) is long overdue in the UK.
Do I think we will get it with a government whose combined financial literacy would see them unable to organise a pissup in a brewery, no I don’t! The current government are too beholden to the education unions and mired into paralysis by the self-interested public service blob. However, the maths is too compelling. With teachers’ salaries and pensions already eating up 80%+ of education spending, we are now seeing schools lay off experienced teachers, school closures (caused by the economically-illiterate policy of VAT on private schools) all on the back of a Schools bill before parliamentary that’s going to lead to a worse recruitment and retention crisis. Forget about the myth of £1.7bn from VAT funding 6500 teachers, the reality is that the current system is already making teachers too expensive and let’s not even get into SEND or that the bulk of ECHP funding comes unsustainably from our council rates.
This is the perfect financial storm where the government and unions are making teachers too expensive. This financial void will inevitably be filled not just with more edtech, but with AI edtech. We already have some of the best AI edtech in the world in the form of Alia from Oak National Academy and from (at a very reasonable price) the evidence-based AI tutoring products coming out of companies like Third Space Learning.
So yes, AI is already starting to replace teachers and while I don’t think this is pedagogically a good thing, it’s driven by the economics that underpin all nations; the balance between wealth creation, tax and government spending. We have it very wrong, the current government can’t tax their way to growth nor can they maintain and expand the disparity in total earnings without suffering the inevitable consequences. Yes, Reform may be kicking down Labour’s political doors, but do they actually have any policies for education or to reform retirement savings? Not that I can see, but hopefully I won’t have any dogs in this economic race by the time a new government is in Westminster.
- The number of senior educators on over £150k has doubled to 775 since 2018 ↩︎
- TCS who who are part of Tata Group India’s largest multinational business group, are currently facing serious discrimination allegations in the UK. They also went to court with their client the Disclosure and Barring Service, a system all schools rely upon. ↩︎
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