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Academies Briefing Spring 2019

  • United Kingdom
  • Education - Briefings


In this issue:

TPS – increased contributions for academies confirmed

• Cap on public sector exit payment likely by end of year

• New Health and Safety Guidance for Schools – Your Responsibilities and Duties

• Academies Financial Handbook 2018


TPS – increased contributions for academies confirmed

What is the issue?

Chancellor Philip Hammond set out his Autumn budget on Monday 29 October 2018. In it he confirmed that public service employers of unfunded public service pension schemes would need to pay more towards the pensions of their employees. State-funded schools, academies, further education colleges and higher education colleges employing members of the Teachers’ Pension Scheme (“TPS”) will all need to pay higher contributions with effect from this year. Employer contributions under the TPS will increase from 16.48% to 23.68%.

At the same time, TPS employers face a situation where their employees’ benefits in the TPS may be increased because an assessment against the employer cost cap has notionally suggested that TPS is ‘over-funded’.

Why is this happening?

When career average re-valued earnings schemes replaced final salary scheme benefit structures for most public service employees in April 2015, a framework for four-yearly actuarial valuations was also established. The TPS is going through this valuation process to measure the cost of providing members with the benefits promised under the scheme. If the cost of the benefits is higher than anticipated, additional money will be needed to pay for those benefits.

The TPS valuation as at 31 March 2016 is informed by assumptions adopted from scheme data (e.g. pensioner mortality and ill-health retirement from service) as well as assumptions centrally directed by HM Treasury (e.g. earnings growth and post-retirement life expectancy).

Using these assumptions, the 2016 valuation will measure certain costs of the TPS against a target rate (the “employer cost cap”), and will set employer contribution rates payable from next year.

Discount rates – what are they?

In a ‘funded’ pension scheme, employer and employee contributions are paid into a fund. That fund is invested in order to generate returns, and is used to meet future benefit payments. Any shortfall between the fund value and the cost of providing benefits is covered by contribution increases or future benefit changes.

The TPS is an unfunded public service pension scheme, so it does not have a fund of assets from which pension benefits are paid. The TPS must still be valued and contributions must be paid by employers and employees. Government uses a method to set contributions called the Superannuation Contributions Adjusted for Past Experience (SCAPE).

The SCAPE methodology essentially values the TPS by reference to a notional fund. Discounting is the method used to calculate the amount of money that needs to be invested in the notional fund today in order to meet the cost of providing the benefits in the future, and it reflects the fact that taxation revenue is expected to grow over time.

Discount rates – 2016 valuation

The Chief Secretary to the Treasury issued a draft set of centrally directed assumptions in September 2018, including a change to the discount rate (announced at Spring Budget 2016) from 3% to 2.8% above CPI.

In addition, the Autumn Budget 2018 announced that the discount rate for unfunded public service pension schemes (including the TPS) will be reduced further from 2.8% to 2.4% above CPI with effect from 1 April 2019. Increases for education sector employers will be effective from September 2019.

The cost cap mechanism – what is it?

The employer cost cap mechanism was introduced in 2015. It is used to measure the overall cost of the scheme, and is intended to act as a balancing mechanism to ensure that scheme costs do not escalate, that the value members receive from the scheme does not decline, and ultimately unexpected costs are shared between members and taxpayers.

If a valuation indicates that the cost has moved significantly away from the employer cost cap (two percentage points either above or below) the scheme must take action to bring the cost of the scheme back to the employer cost cap. Steps to return the cost of the scheme to the cap could take the form of an amendment to scheme benefits for future accruals or altering the level of member contributions so that a higher or lower level of employer contributions is required.

Employer cost cap – 2016 valuation

The TPS employer cost cap was set at 10.9% of pensionable pay in the 2012 valuation. The Government Actuary Department suggests that the initial 2016 valuation results show falling longevity and lower than forecast pay mean that pensions are worth less to members. As the TPS costs measured by the cost cap will have decreased by more than the 2% pensionable pay threshold, scheme costs will need to be returned to their target value (10.9% of pensionable pay).

While discussions will need to take place between the TPS, the Scheme Advisory Board and the Government Actuary Department as to how this might be achieved, HM Treasury have set out a process in the 2016 valuation direction by which the Government Actuary Department may propose changes to member benefits in order to rectify the breach of the employer cost cap floor. It is anticipated that this will result in an improvement to member benefits. However, discussion in respect of this is on hold following age discrimination cases which may impact on this area.

What does this all mean for academies?

Assuming all other assumptions in the 2016 valuation remain unchanged, a reduction in the TPS discount rate from 3% - 2.4% will result in higher contribution rates for employers. The increase in TPS employer contributions is greater than was originally proposed in the Spring Budget 2016, and employer contributions will increase from 16.48% of pensionable pay to 23.6% of pensionable pay in the TPS with effect from September 2019 (with other unfunded schemes being required to pay increased employer contributions in respect of those schemes with effect from 1 April 2019). There will however be an increase in the employer rate for TPS to deal with the backdated period between April and September.

However, in a bizarre twist, because the employer cost cap mechanism doesn’t take account of changes in actuarial assumptions or discharge rates, TPS is considered to be notionally ‘over funded’ under the cost cap mechanism, and members are likely to have their benefits increased (subject to further discussions). This at a time when TPS employers are asked to contribute more towards pensions because TPS costs are increasing.

If the Government Actuary Department proposes benefit improvements, without additional funding from the Government, TPS employers will need to pay for these benefit improvements by using budgets which would otherwise be available for staff pay.

On 15 January 2019, the Department for Education launched a consultation on the proposal to support certain education institutions with the increase in employer contributions to the TPS in Financial Year 2019-20. It has just published its response to the consultation ‘Funding increases to teachers’ pensions employer contributions - Government consultation response, April 2019’. Please find this here.

In this response document it has confirmed that it will provide £830m to fund the increase to employer contributions in financial year 2019-20 to state-funded schools (including academies). As academies receive funding on an Academic Year basis, therefore they will receive funding to August 2020. As is standard Government practice, future funding decisions will be taken as part of the next Government Spending Review process.

For further information please contact:

Cat Ellis

Senior Associate

0113 200 4943

Cap on public sector exit payments likely by end of year

Placing a financial limit on the amount public sector employees are able to receive on leaving employment has been a long-held objective of the Government, to reduce public expenditure. Provision for imposing a cap of £95,000 on public exit payments was added to the Small Business, Enterprise and Employment Act 2015 but was never brought into force. Even so, this issue has remained on the Government agenda.

The Government has now published a Consultation (with Draft Regulations - The Restriction of Public Sector Exit Payments Regulations 2019 - and Guidance) regarding implementation of a cap, finally confirming it is no longer a matter of if public sector exit payments will be restricted but when.

The draft regulations apply to payments made by a public sector authority as defined in the schedule to the regulations. In deciding who should fall within the scope of the regulations the Government has ben guided by the Office for National Statistics classification of bodies within central and local government. This means that the cap will apply to academies and maintained schools.

Phased introduction

An implementation date is not yet confirmed but the Consultation closes on 3 July 2019 and refers to the reforms being introduced “without further delay”. The Chief Secretary to the Treasury has also alluded to the cap being brought in later this year, meaning it could therefore apply to some public sector employees as early as October 2019.

Currently, the Consultation refers to a two-stage introduction. From the draft regulations, it would appear that the majority of public bodies will be included in the first phase.

What payments?

The Consultation once more proposes a cap of £95,000.

If the Consultation proposals are applied without change, the type of payments to which the cap will apply are identified in the draft regulations but will include any non-exempt termination payments which represent a cost to the employer, including ex gratia sums, contractual payments in lieu of notice (though see below) redundancy payments, settlement payments made as a result of an ACAS or settlement agreement and pension contributions (including any “pension strain” payments to provide unreduced pension before normal pension age.

Importantly, whilst payments in lieu of notice are included in principle, those which amount to less than ¼ of an individual’s contractual entitlement will not be included in the sums subjected to the cap. As a general rule, accrued pension rights (including rights to pension commutation) fall outside this category, not being payable by the employer, so will also not be included.

Payments which are not “exit payments”, such as death in service, injury compensation and pay in lieu of untaken holiday, are expressly exempted from the cap.

Multiple exit payments

When calculating whether an individual’s exit payment should be subject to the £95,000 cap, employers must take into account all payments related to public sector exits received by the individual within a 28 day period.

In the case of more than one exit within 28 days the draft regulations prescribe the sequence in which exit payments will have to be paid when applying the cap, as follows:

• in chronological order if the payments are not made on the same day but otherwise,

• in descending order of salary;

• (where the salaries are equal) in the descending order of hours worked;

• (where the salaries and hours worked are equal), in descending order of the person’s length of the service in the employment or as holder of the office; or

• (where the salaries, hours worked and length of service in the employment or as holder of the office are equal), in the order determined by the relevant Minister

Can the restrictions be relaxed?

The draft regulations identify various situations where public bodies will be obliged to relax the application of the cap. These include where a payment is a liability acquired as a result of the TUPE regulations or to settle whistleblowing or discrimination claims.

The guidance states that it is expected that an employer will make legal advice available to the person exercising the power to relax the restrictions that demonstrates that, on the balance of probabilities, the individual has made a disclosure covered by whistleblowing legislation and that an employment tribunal would find that they had been dismissed (or subjected to a detriment) as a result of that disclosure. And similarly, in discrimination cases that, on the balance of probabilities, an employment tribunal would find that they had been a victim of discrimination.

Deviation from the cap may also be permitted on hardship grounds or grounds related to urgent workplace reforms. Any such step will be tightly controlled and monitored and must conform to Treasury requirements.

Disclosure obligations

The current proposals oblige a public sector worker who has two or more public sector employments in scope of the exit payment cap they must inform all other public sector employers:

• that they are entitled to receive an exit payment

• the amount and type of that exit payment

• the date that they left employment or office

• the identity of the relevant authority that made the exit payment


Despite reference to a phased introduction of these reforms, pending conclusion of the Consultation and final regulations, it is not yet certain how this will operate in practice. Further clarification on this and precisely which public bodies will be caught in first phase will be needed.

The draft regulations also reveal a complex framework of principles and exemptions which academies and schools will need to plan for but, also, to work through carefully for each future, highly-paid departure. Although Government resolve to implement this change is indisputable, whether every proposal in the Consultation is carried forwards into final regulations as a realistic legal or practical solution, remains to be seen.

For further information please contact:

Ben Wood


07876 780 298

New Health and Safety Guidance for Schools – Your Responsibilities and Duties

In November 2018 the Department for Education published updated guidance on “Health and safety: responsibilities and duties for schools”. This guidance is expressed to be for school employers; proprietors; headteachers and school staff and to apply to academies and free schools; maintained schools; local authorities; independent schools and non-maintained schools.

The guidance (which was first published on 3 June 2013 and previously updated on 13 February 2014) provides an overview for those managing schools and school related activities, on their key duties under health and safety legislation.

Academies must make themselves aware of the contents of the guidance and ensure they implement reasonably practicable measures to ensure the health and safety of their pupils and staff.

The guidance is focused on practical steps academies can take in managing the risks and links to other more detailed information from the Health and Safety Executive. In particular, the guidance considers:

1. Understanding who is responsible and accountable

2. Leadership commitment

3. The requirements of a health and safety policy

4. Assessment and management of risk

5. Security and emergency arrangements

6. Factors relating to the powers of the local authority as an employer

7. Staff training

8. Employee responsibilities

9. Duties in recording and reporting injuries

This guidance acts as a reminder that academies must be proactive in their health and safety management. This updated guidance will assist academies in meeting the particular challenges of keeping pupils and staff safe in school and when undertaking out of school activities.

The full text of the guidance can be accessed here:

Health and safety: responsibilities and duties for schools

For further information please contact:

Surekha Gollapudi

Senior Associate

0113 200 4247

Academies Financial Handbook 2018

From September 2018, academy have been obliged to comply with the 2018 edition of the ‘Academies Financial Handbook’ (the “AFH”). Issued by the ESFA, the AFH describes the financial requirements for academy trusts. It is crucial that all trusts ensure that they are compliant with the AFH, as failure can lead to ESFA intervention and/or breach of the trust’s funding agreements.

We have set out below a reminder of the main changes in the 2018 edition:

Highlighting directions the Secretary of State may make in relation to members, trustees and other individuals (paragraphs 1.2.7 and 1.2.8)

There are provisions in the more recent DfE funding agreements that allow the Secretary of State to remove a member or trustee. The Secretary of State can also make directions under s128 Education and Skills Act 2008 to prevent individuals acting as a member, trustee or executive leader of a Trust where, for example, an individual is subject to a caution or conviction or who has engaged in “relevant conduct.” Relevant conduct is defined by statute but includes conduct which is aimed at undermining the fundamental British values of democracy, the rule of law, individual liberty and mutual respect and tolerance of those with different faiths and beliefs.

Referring to the Charity Commission’s role in addressing non-compliance (paragraph 1.2.9)

An academy trust is an exempt charity, meaning that it is not required to register as a charity with the Charity Commission. It is, however, still a charity in law and the Department for Education has been appointed by the Charity Commission to ensure that trusts comply with their charitable obligations. In practice this role has been delegated to the ESFA. The AFH makes it clear that if ESFA has a concern about a trust’s compliance with charity law, it may refer the trust to the Charity Commission for its view.

Greater emphasis on trustees applying high standards of governance, the role of the chair, working with ESFA, and updated references to church academies (paragraphs 1.3.1 to 1.3.5)

These paragraphs provide greater clarity on the three core functions of governance and the fact that trustees must ensure that they apply the highest standards of governance, take full ownership of their duties and comply with the trust’s charitable objectives, company law, charity law and their funding agreements. Trustees must also ensure regularity and propriety in the use of the trust’s funds and achieve economy, efficiency and effectiveness to achieve value for money. The three core functions of governance are stated to be:

• ensuring clarity of vision, ethos and strategic direction;

• holding executive leaders to account for the educational performance of the organisation and its pupils, and the performance management of staff; and

• overseeing and ensuring effective financial performance.

Updating the description of the role of members to align with the Governance Handbook (paragraphs 1.4.1 to 1.4.5)

Removing the term ‘ex-officio’ to avoid suggesting an academy trust’s senior executive leader would automatically act as a trustee (paragraph 1.5.1)

Previous iterations of the DfE model Articles of Association allow the CEO’s/Principal’s appointment to the board of trustees to be “ex-offico” (i.e. the appointment as a trustee is automatically linked to that individual’s appointment as CEO/Principal). Newer model DfE Articles of Association have removed this ex officio right of appointment so that the CEO/Principal must now agree to be appointed as a trustee and that appointment is only effective where the members pass an ordinary resolution to appoint them as a member.

 Explaining reporting requirements if the board meets less than six times a year (paragraph 2.1.2)

The changes to the AFH are, amongst others, designed to ensure that boards offer effective oversight and robust challenge. The AFH states that a board and its committees must meet regularly enough to discharge their responsibilities and ensure robust governance and effective financial management. Board meetings must take place at least three times a year and larger trusts should meet more frequently. If the board meets less than six times a year, it must describe in its governance statement (that accompanies its annual accounts) how it maintained effective oversight of funds with fewer meetings.

Confirming that trusts must apply robust cash management (paragraphs 2.2.1, 2.3.3 and 2.3.5)

These paragraphs contain further detail on what the ESFA considers to be robust cash management and states that the trust may be required to report on its cash position to the ESFA where there are concerns about financial management.

Setting clearer requirements for budgeting (paragraphs 2.3.2 and 2.3.3)

Recommending the national deals for schools (paragraph 2.4.2)

The Schools Commercial Team within DfE has reviewed a wide range of deals, from the purchasing of audit services, to energy and utilities, to recruitment; information relating to which is on the .gov website. There is also guidance on running an efficient procurement process and trusts are expected to comply with the DfE guidance ‘Managing Public Funds’.

Strengthening expectations about the process for setting executive pay and highlighting gender pay gap reporting (paragraphs 2.4.4 and 2.4.5)

This update links to recent concerns in respect of the level of some executive pay within the sector. The AFH makes it clear that the board’s approach to pay must be transparent, proportionate and justifiable, including:

• there being a clear process for determining executive pay agreed and documented by the board;

• pay being defensible relative to the public sector;

• the rationale and decision making process being documented and retained (including whether the level of pay reflects value for money); and

• there being an understanding that inappropriate pay can be challenged by ESFA, particularly where there is poor financial management of the trust.

Clarifying the section on the risk protection arrangement (paragraphs 2.6.2 and 2.6.3)

The trust must have adequate insurance in place or be a member of the RPA. The AFH makes it clear that not all risks are covered by the RPA. Trusts should consider the RPA, however, a trust can purchase commercial insurance it if provides better value for money.

Emphasising the proper handling of whistleblowers (paragraph 2.7.1)

Trusts must have a whistleblowing procedure in place and must ensure that all concerns raised with them are responded to promptly and fairly. The ESFA has issued guidance on dealing with complaints.

Confirming reporting requirements in relation to internal scrutiny (paragraphs 2.9.7 to 2.9.9)

Trusts can decide how best to operate their internal audit function from the options set out at paragraph 2.9.6 of the AFH, but must confirm in its governance statement which of the options it has applied and why. Any finding arising from internal audit must be made promptly available to all trustees and the trust must provide them to ESFA on request.

Explaining new requirements for related party transactions (paragraphs 3.10.4, 3.10.6 and 3.10.7) and arrangements with dioceses (paragraph 3.10.20). We are also moving to the conventional term ‘related’ parties.

There is a new requirement that trusts must:

• report all transactions with related parties to ESFA in advice of the transaction taking place;

• obtain ESFA’s prior approval for contracts for the supply of goods or services to the trust by a related party where any of the following limits arise:

o a contact exceeding £20,000;

o a contract of any value that would take the total value of contracts with the related party beyond £20,000 in the same financial year ending 31 August; and

o a contract of any value if there have been contracts exceeding £20,000 individually or cumulatively with the related party in the same financial year ending 31 August.

These requirements apply to all transactions made on or after 1 April 2019 but do not include salaries or other payments under a contact of employment with the trust.

The AFH also confirms that where Church trusts make a contribution to a Diocese for services associated with securing the trust’s religious character and ethos which only the Diocese can provide, this would be regarded as meeting the “at cost” requirement.

Focussing on the importance of acting on audit advice (paragraph 4.3.1)

The board must ensure there is an appropriate, reasonable and timely response by the trust to any findings by auditors.

Highlighting how ESFA may take action where trusts do not comply with requirements for submitting financial information (paragraph 4.8.4)

This includes the ESFA:

• conducting investigations to collect information which is missing or not of acceptable quality;

• deducting the costs of the investigation from the trust’s recurrent funding; and/or

• taking further action as it deems necessary to enforce compliance, such as publication of the names of late returners.

Annex C now identifies some ‘musts’ that are particularly relevant to boards

For further information please contact:

Helen Cairns

Principal Associate

0161 831 8291