All existing members of the Teachers' Pension Scheme (TPS) who joined the scheme after 31st May 1989 are subject to the Earnings Cap. This 'caps' the pensionable remuneration you can use to count towards calculating your pension benefits (and death in service benefits, ill health benefits and dependents' pension benefits). The cap for this tax year 2008 - 2009 is £117,600.

For many Heads this will not be a problem. Either they were members of the scheme before 31st May 1989 or their earnings are well below £117,600, or so they might think!

Many Heads receive the additional pensionable benefit, the Residential Emolument, which can add up to 16.7% to the pensionable salary, plus additional costs of providing Council Tax and Utilities within the Emolument can take its value to around 20%. Consequently, a Head earning £100,000 per year could, in fact, have a pensionable remuneration of £120,000 per year, which is above the Earnings Cap. What should happen is that TP should restrict the pensionable remuneration to the Earnings Cap figure of £117,600 and as a result lower pension contributions should be taken. In all cases I have come across, however, TP has NOT restricted the remuneration so members have continued to pay the higher TP contributions even though there can be no benefit derived from the excess above the cap.

TP has invited all those members it thinks may have been affected by the Earnings Cap to waive this ongoing restriction on pensionable earnings. It has therefore sent you a letter explaining your options and forms to complete if you wish to have the Earnings Cap removed. The question is, what should you do?

Should You Remove The Earnings Cap ?
If you remove the Earnings Cap, Teachers' Pensions will adjust your accumulated service downwards to take account of the increased remuneration that can now be used to calculate your pension benefits. All future service, however, will not be restricted and will count in full against the new unrestricted salary. In effect, they are drawing a line in the sand by restricting the pension benefits you have accrued thus far to the Earnings Cap of £117,600, even though future service can then be counted in full against your unrestricted final pensionable remuneration.

If you don't remove the Earnings Cap then none of your additional pensionable remuneration will count towards your pension if you stay in the same job. If you leave your current position and take another Headship that is paid at a rate higher than the Earnings Cap, then at that point a calculation will be done, your service to that point will be restricted and all future earnings will qualify for pension purposes. So you will automatically have the cap removed if you change jobs which (presumably) will be paid at a higher rate than the previous position!

The letter from Teachers' Pensions does give a calculation to show by how much your past service will be reduced to counter the impact of the Earnings Cap removal, but it isn't very clear. Basically, the higher your pensionable remuneration within this current academic year, the greater the restriction to your past service.

In effect, you have to take one step backwards (restriction of past service) to go 3 steps forward (unrestricted future pensionable remuneration).

You should ask your employer to remove the Earnings Cap if any of the points below apply to you:

• You are earning more than £117,600 in the current academic year;
• You receive a Residential Emolument in addition to your pensionable salary that will take your combined pensionable remuneration over £117,600;
• You earn less than £117,600 (including the Residential Emolument) but feel it is likely that your earnings will exceed the Earnings Cap (which is adjusted by inflation each year) by the time you retire; or
• You earn less that the Earnings Cap but feel you might move to another higher paid job before you retire.

Implications
By removing the Earnings Cap

• your service in the Teachers' Pension Scheme up to 2008 will be restricted by the percentage by which your salary exceeds the Earnings Cap

so, if your salary plus any Residential Emolument is, say, £125,000 and the Earnings Cap is £117,600 and you have accrued 15 years in the Scheme to date then all your accrued service post May 1989 will be reduced by 5.92%

• which will then allow all your future years of service in the Teachers' Pension Scheme to count for pensionable purposes, based upon the unrestricted salary
• you and your employer will pay higher Teachers' Pension contributions (your own will still qualify for tax relief at your highest rate)
• you will receive a full refund of all excess contributions paid to Teachers' Pensions if it transpires that contributions have been deducted on your unrestricted pensionable remuneration rather than on the capped salary, backdated over all previous tax years where this anomaly has applied

What Happens Next?
If having read this bulletin and the letter from Teachers' Pensions relating to the Earnings Cap you feel it is in your interests to have the cap removed, you must ask your employer for their permission. This should be granted as virtually all employers will already have been paying employer contributions to Teachers' Pensions based upon the unrestricted salary. You both need to sign the form enclosed with the letter from Teachers' Pensions and return it to them

PLEASE NOTE: You need to make the election no later than 31st December 2008

Other Considerations
In all likelihood, none of your teaching staff will be earning more than £117,500, however, if you know that you have staff who are likely to become Heads in the future and who joined the teaching profession after May 1989 then it would be in their interests to have the earnings cap lifted sooner rather than later.

If you are saving via the Added Years facility within Teachers' Pensions an apportionment will apply to this election in a similar way to the restriction on past service
Clearly, you will not be able to precisely determine your future remuneration but in all likelihood you will receive pay awards each year that exceed the Retail Price Indexation awarded to teachers each year.

In summary, if your salary is very close to the Earnings Cap of £117,600 or you have at least 5 more years before you retire then your should definitely make the election to remove the Earnings Cap. If you are within a year or so of retirement and you do not feel your salary will improve by more than inflation then you should probably not make the election.

If you have any questions or need a specific consultation then please contact us.