Congratulations to Mary McDougall of the FT for an interesting and incisive article on university pension costs.
This is the germ of the dispute between the old posh universities which were established before 1992 and the new universities (we used to call them polys) which got “uni” status after 1992.
“Post-1992 universities“, also known as “new universities” or “modern universities”, refer to the former polytechnics, central institutions or colleges of higher education that were given university status by John Major’s government in 1992.
If your’e established you can put your staff into the University Superannuation Scheme (USS) and if you are new kids on the block you go into the Teachers Pension Scheme (TPS). The Government works out the rate you pay to the unfunded TPS and USS actuaries work out what you pay into USS. And very different the costs are. The problem (at the moment) is with TPS. Here’s Mary’s article
About 80 higher education institutions that converted from polytechnics 33 years ago paid roughly £700mn in pension contributions into the Teachers’ Pension Scheme in 2024-25, according to estimates from the Universities & Colleges Employers Association.
The figure compares with roughly £300mn in 2017-18, with universities warning that a surge in contribution rates to the public sector scheme has made it harder to compete with other institutions that are not obliged to offer their academic staff membership of the TPS.
Why the surge in costs (you may ask)?
Contribution rates into unfunded public sector schemes like TPS, are based on a measure known as Scape, which sets the discount rate for valuing public sector pension obligations.
It reflects expectations for long-term UK economic growth as forecast by the Office for Budget Responsibility, the fiscal watchdog, which have weakened in recent years.
USS contribution rates are partly determined by the funding level of the scheme, which has improved dramatically after a surge in government borrowing costs improved the expected returns of its holdings.
Overall, falling liabilities and positive (though see below not that positive) investment returns, have made USS a lot cheaper to be in which is not helping the former polys.
The difficulty is obvious and well reported
Andy Long, vice-chancellor, said if all of Northumbria’s academic staff belonged to USS, the university would save £11mn a year. “It [TPS] puts us at a severe competitive disadvantage . . . how do we justify that extra cost to our students?” he said. Employee contribution rates into TPS are also higher at an average of 9.6 per cent of salary, compared with 6.1 per cent for USS.
The USS had a right old battle at the end of last decade over its long term capacity to pay long-term pensions. This was at a time when the cost of funding was deemed much higher due to the depression in gilt yields resulting from “quantitative easing”. The UCU (the union for Uni staff) argued that QE was irrelevant to long-term costs and in the end they were proved right. When QE was reversed the cost of funding went down and so did contributions.
In my opinion, the Scape rate is also a Government contrivance but reflects the cost of unfunded pensions to tax-payers. So long as the OBR and the Treasury are of the opinion that the economy won’t grow, the Scape rate will mean TPS contributions will be high. If the opinion that Britain is growing again, then we will see the kind of turnaround we saw for USS.
The trouble for people like Andy Long is that he can’t afford the quality of staff that the Uni’s can because of pension rates. Mary’s article is bang-on , it’s not just expensive to the employers, it’s the post 1992 universities that are deducting more in pension contributions from lecturers and professors.
Scape is not unique to the Teachers Pension Scheme, it drives costs to NHS , the Civil Service and other unfunded public schemes. It also drives the liability calculations for the the LGPS (though LGPS has a fund that offsets some of the current costs).
There is a lot of politics at play here and if I was Rachel Reeves I’d be very interested in what is going on with the Scape rate and public sector pension funding rates. It’s not just former Poly Vice Chancellors who are feeling the pain right now!
A note on USS
Before we congratulate USS for offering better value than the Teachers Pension, a word on the USS scheme itself.
You can read the report and accounts for USS here I could write a blog on them , they were published at the end of July and came with a Value for Money from USS which is an impressive piece of marketing. It doesn’t however hide the fact that USS is not making much money from its investment. Overall its earned minus 1.4% last year – the five year rate of investment return is just 1.7% pa and the ten – 3.9% pa. (thanks Con Keating).
I wouldn’t be too impressed if I learned that my indexation was going to be conditional on investment performance . I wouldn’t be jumping with joy if I was set to pay contributions on these numbers
