The Hidden Pension Change That Could Cost UK Universities £125m
UK universities are facing a significant reduction in their budgets due to pension contributions that have been little-publicized, according to recent reports. Around 80 universities and colleges, members of the “post-92” group of new institutes, employing more than 110,000 staff, will be among those affected by the changes, which impact the teachers’ pension scheme. This issue is just the latest pensions problem to impact UK universities in recent years, with the Universities Superannuation Scheme (USS), the largest higher education superannuation fund, cutting staff benefits last year to plug a hole in its finances, resulting in protests and strikes by academics.
New Changes in Pensions
The changes affecting the teacher’s pension scheme were announced by the government in March and will impact several publicly funded organizations from April 2024. The government will reduce the discount rate used to estimate the pension costs for over five million public sector workers in “unfunded” pension schemes. As the discount rate decreases, the costs of “defined benefit” pension promises increase, typically resulting in higher pension costs for employers.
Impacts on Universities
With the reduced budgets, some universities will be forced into deficits or have to cut jobs, according to university leaders, which comes at a time when many institutions are already grappling with the cost-of-living crisis and facing calls for higher wages by striking staff. The change means that many universities have already had to adjust their budgets to respond to the increase, with Universities UK, which represents the higher education sector, revealing their ability is “very limited.”
One example of the implications of the change is that the University of Central Lancashire, where Graham Baldwin is a Vice-Chancellor, currently contributes 23.6% of salary to pensions, but this is expected to rise by 5-10 percentage points following the change. The estimated increase would add between £3.5m and £7m to its annual costs. Steve West, Vice-Chancellor of the University of the West of England, stated that they expect costs to rise by around £5m next year.
Government Compensation
The Treasury has pledged to compensate for increased costs in centrally funded entities like schools, but other employers, such as universities, will need to fund the increase themselves. National museums and charities that offer cancer treatments could also be excluded from this compensation, according to Prospect, the public sector union.
Well-informed Engaging Piece summarizing UK Universities’ Pensions
This little-discussed and recent change in pensions in the UK is impacting several publicly funded organizations, including UK universities. It is estimated that 80 universities and colleges that are members of the “post-92” group of new institutes, employing more than 110,000 staff, will be among those affected by the changes, which impact the teachers’ pension scheme.
A reduction in the discount rate utilized will result in a rise in employer contributions of 5-10% for “unfunded” pension schemes, leading to budget cuts and job losses for some universities. The University of Central Lancashire, for example, will need to increase their contributions by 5-10% or £3.5m if potentially £7m. The inability of universities to adjust to the increase remains limited, according to Universities UK, which represents the higher education sector.
Furthermore, staff is already suffering from strikes as a result of the Universities Superannuation Scheme (USS), the leading superannuation program for higher education, lowering employee benefits last year. With universities grappling with the cost-of-living crisis, this new situation will further burden them financially.
UK universities have been through a lot of financial hardship recently, and despite being promised by the Treasury that centrally funded entities like schools would receive compensation for the increased costs resulting from changes in the pension system, other employers, like universities, will need to finance the increase themselves. It demonstrates how the inability of leaders to make crucial decisions to ensure there are financial resources could have a ripple effect that impacts staff and students alike.
The implications of the pensions system in the UK are becoming increasingly apparent, with higher education institutions suffering the brunt of these issues. Many questions remain, such as how long can institutions balance their budgets amidst rising costs and how long before this starts to impact the quality of higher education? Finally, what additional solutions are available that would provide long-term financial stability to the universities and protect staff from losing their jobs? These are essential considerations that must be made in the future to ensure the continued success of higher education institutions in the UK.
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Universities in England are facing a £125m drop in their budgets next academic year due to little-publicized changes to the way pension contributions will be calculated.
About 80 universities and colleges, members of the so-called “post-92” group of new institutions employing around 110,000 staff, will be affected by the changes that apply to the teachers’ pension scheme.
The issue is the latest pensions problem to hit UK universities in recent years. The Universities Superannuation Scheme (USS), the largest higher education superannuation fund, cut staff benefits last year to plug a hole in its finances, sparking protests and strikes by academics.
“It will strain institutions,” said Graham Baldwin, president of Million Plus, an organization that represents new universities. “Universities are setting their budgets and they are already tight.”
Million Plus estimates that the combined cost of the major grants for the universities concerned for the 2024-25 academic year would be around £125m.
A change in the actuarial assumptions used to calculate employer contributions for TPS and other unfunded pension schemes will increase the cost to employers by 5-10% in the next academic year, according to industry unions.
With budgets already slashed, some universities will be forced into deficits or cut jobs, university leaders said. The change comes at a time when many institutions are already grappling with the cost-of-living crisis and calls for higher wages by striking staff.
The change affecting the teachers’ pension scheme was announced by the government in March and will impact a number of publicly funded organizations from April 2024.
The government will reduce the discount rate used to estimate the cost of pensions for more than 5 million public sector workers in ‘unfunded’ pension schemes. As the discount rate decreases, the costs of “defined benefit” pension promises increase, typically resulting in higher pension costs for employers.
Those working in higher or higher education in England and Wales will usually be in the TPS or USS. They may also be offered a pension under a local government pension scheme.
Baldwin said the University of Central Lancashire, where he is vice-chancellor, currently contributes 23.6% of pay to pensions, but this is expected to rise by 5-10 percentage points following the change. The increase would add between £3.5m and £7m to its annual costs.
Universities UK, which represents the higher education sector, said universities’ ability to adjust their budgets in response to the increase had been “very limited”.
Steve West, vice-chancellor of the University of the West of England, said its costs would rise by around £5m next year. “This means that we will have no choice but to take some pretty significant steps within our payroll and within our non-payment [budget] to stabilize the institutions,” he said.
The Institute for Fiscal Studies think tank estimated that the change would add “billions” to public sector employer pension costs.
The Treasury has pledged to compensate centrally funded institutions like schools for the extra costs, but other employers, like universities, will have to fund the increase themselves.
Prospect, the public sector union, said the impact of the discount rate change would be “very significant” for some employers, who could see their costs rise up to 10% of pay.
National museums and charities that offer cancer treatments could also be excluded from the Treasury’s bid to repay higher retirement costs, Prospect said.
The Department of Education was contacted for comment.
https://www.ft.com/content/e23f7b19-26e0-460d-b6a1-32a94774e855
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