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University pension funding issues 'cannot be avoided', expert warns

Out-Law News | 21 Nov 2017 | 3:47 pm | 2 min. read

Affordability issues around the defined benefit (DB) section of the Universities Superannuation Scheme (USS) "cannot be avoided", despite the threat of industrial action over proposed changes to the scheme, an expert has warned.

Universities whose employees are enrolled in the USS have proposed closing the DB section of the scheme to future accrual, instead moving employees to the scheme's "market-leading" defined contribution (DC) section. Employers would continue to contribute 18% of members' salaries to their pensions, but any future investment risk would be borne by scheme members instead of their employers.

The changes have been proposed to address the growing deficit of the USS and increased costs of delivering future pension promises, and reflect similar measures introduced by private sector employers with historic DB schemes in recent years. However, the University and College Union (UCU) intends to begin balloting its members next week on potential strike action in the new year, citing research indicating that the plans would lead to final pensions worth only around 20% of that available through the best DB schemes.

The USS was established in 1974 and is the principal pension scheme for academic and senior administrative staff at UK universities and other higher education and research institutions. The scheme, which manages more than £60 billion worth of pension assets on behalf of around 350 employers, is currently operating at a deficit of around £7.5bn.

The changes proposed by the USS would only apply to future benefits, with all existing rights accrued under the DB arrangements remaining the same. Alistair Jarvis, the chief executive of Universities UK, said that changes were needed urgently to "ensure the scheme remains sustainable and secure for the long-term", without requiring employers to divert money from other areas to fund pension arrangements.

Pensions expert Nick Stones of Pinsent Masons, the law firm behind Out-Law.com, said that the structure of the USS, with its many participating employers, made it more difficult for employers to make the same "challenging decisions" around DB pension affordability as employers in the private sector.

"Nevertheless, the issues cannot be avoided," he said. "Employers within the education sector are not insulated from the basic funding issues facing DB accrual – in most cases, the problem is the historic deficit."

"But there is also an inbuilt distortion in the post-18 education sector. The question then becomes how to achieve equilibrium between employers in a competitive marketplace? If the USS does close to DB accrual, how would a USS university compete with those universities that do not use USS and instead offer Teachers Pension Scheme (TPS) or Local Government Pension Scheme (LGPS), which both provide DB and arguably enjoy better security? Would employees move to these institutions?" he said.

The challenge for the USS was determining how best to remain "competitive but affordable", Stones said.

Helen Corden, an employment law expert focused on the education sector, added that the TPS and LGPS were facing similar affordability issues. As a result, some employers were "considering setting up subsidiary companies for certain staff, so that they can instead offer a DC scheme", she said.

"Although there are potentially equal pay considerations in doing this, provided it is done for commercial reasons and no one group of staff, male or female, is disproportionately impacted this is a realistic option," she said.

In a statement, UCU said that the proposed changes had come as "a bolt from the blue". It intends to ballot members on possible industrial action, including a series of strikes during February as well as other measures, such as refusing to cover or reschedule classes or to cover for sick colleagues.

"Two rounds of cuts in USS benefits since 2011 have already left these staff in receipt of pensions which are worth less than those of school teachers and academics in non-USS universities," it said in its statement. "UCU is currently seeking actuarial advice on what exactly the changes would mean for different types of scheme members."