I hear that the recently endowed universities are suffering from the pinch of fixed revenues and increasing costs. Revenues for tuition fees have been pegged for a decade while inflation has hit running costs, especially staff costs. To make things worth, the cost or maintaining staff in the Government’s teacher’s pension scheme (TPS) is going up, while the costs of participating in other schemes (USS and LGPS) are coming down.
From April 2024, institutions that are TPS members will be required to increase employer contributions by five percentage points from 23.6 per cent to 28.6 per cent. The Government says they finance TPS out of general taxation and work out how tricky that will be by considering how tax revenues will grow. Tax revenues are considered to be linked with GDP so when GDP grows fast then TPS looks cheap and contributions are set low.
The trouble is that GDP isn’t growing fast.
Funded pension schemes are doing very nicely at the moment. This may be down to interest rates being rather higher than planned (by Government) but so long as interest rates remain high, the task of paying pensions from these funded schemes is easy. So contribution rates for schemes like the USS and LGPS are coming down.
Which is even more galling for recently endowed universities. Not only are revenues falling (in real terms), but the cost of pensions is going through the roof , while the posher older unis are seeing costs fall.
So what’s the answer?
One answer that the university employers are suggesting is that USS consider finding opening up to these impoverished new universities,. My guess is that would go down like a lead balloon with the posh universities who’d rather stick needles in their eyes than share USS with a bunch of overgrown polytechnics.
Surely there is an opportunity for the well funded LGPS and USS to consider offering participation in their well funded schemes on an innovative basis.
USS is already flirting with CDC as it discusses conditional indexation to float the pension increases to match the level of market increases (or decreases). This could offer opportunity to open the scheme to a wider group of universities. If the law can be adapted through secondary legislation and if TPR’s CDC Code can reflect such changes, then perhaps USS could even open a CDC section. LGPS may not feel the need, with its stronger covenant.
Other players may well provide competition. The Pensions Trust have made it plain that it is exploring the opportunity of creating a CDC section to attract employers for whom conventional guarantees of DB are over-onerous.
Why does this matter?
We have quite enough problems in education without pensions adding to them. Pensions have a temporary opportunity to take advantage of current (notional) funding levels. While the fundamental do not change, the mood music in pension is a lot more cheerful than it has been for a time.
The Government is keen to see more DB schemes fund themselves on a “run on” basis. Moving unfunded DB pensions into funded pensions would tick a number of boxes.
Not just could it see more investment into productive capital, but it could prime a new market for CDC which could be a door for more.
If the Government is serious about the Mansion House agenda, it is going to have to take a lead. A conversation with employers currently participating in the teachers scheme – principally the universities but also a lot of private schools, could well be in order. That could mean delivering on the legislation and regulation that allows “risk-sharing”, a key strategy in keeping pension schemes open to future accrual.