This is the second in a series of three blogs that HEPI is running yesterday, today and tomorrow on the state of university pensions and particularly the Universities Superannuation Scheme (USS).
Salary costs already make up 59% of the higher education sector’s operating expenditure. If USS contributions were to rise further to the newly-quoted 45.2% (with around 30% from employers and 15% from employees), it could start to put the operating model of many UK universities under severe strain.
The current deficit of the USS, which covers under half (205,000) of the 440,000 higher education staff in the UK, is £24 billion. That is roughly the same as one year’s staffing bill for the entire higher education sector.
As Rosie Bennett, the former Education Editor of The Times suggests in a forthcoming HEPI paper on the greater interest shown by the media in higher education issues in recent years, ‘the bigger the deficit the less teaching time there may be in future’.
And, remember, that £24 billion is nothing like the entirety of the pension deficits facing the sector, given all the other pension schemes (collective and at individual institutions) that cover higher education staff.
Years ago, the V&A Museum advertised itself as ‘An ace caff, with quite a nice museum attached’. If things continue as they are, and pensions come to absorb an ever increasing proportion of universities’ income, then there is a risk that some universities may come to look like institutions with ‘An ace pension, with quite good teaching attached’.
I have often argued that the traditional model of higher education is more robust, more sustainable and more popular than some futurologists predict (based at least on the way tech has changed education in the past) – see here, here and here, for example.
But I am not so confident that I think the sector and its staff can reasonably afford to pay around half as much again as is paid in salaries as pension contributions and not expect competition from new institutions and institutions in other countries with lower cost bases.
Indeed, one of the reasons recent Conservative policymakers have been keen to promote ‘alternative providers’ is that the USS does not come under their direct control. By stimulating competition from other institutions with less costly obligations, they can put indirect pressure on older providers to reduce their costs.
The main lesson from Lowenstein’s book When America Aged, which prompted this series of blogs, is that areas that look like they are the only provider of something often turn out not to be. The big three US motorcar manufacturers, General Motors, Ford and Chrysler, found that consumers ‘could buy cars with pensions from GM, Ford and Chrysler––or cars without them from Toyota.’
In New York, similarly, the transport workers found that people did not have to use their deteriorating services; they could move out to the suburbs and live and work there instead.
So expecting ever more in the way of contributions from employers is tough and the alternative approach of reducing benefits is not much easier for numerous reasons.
- For one thing, changes are banned by law: in general, if you have promised to pay X, you cannot retrospectively cut X. So any reductions must be for future service only and pension reforms are often limited to new members, meaning a very big time lag.
- For another thing, USS entitlement has already been reduced in the past – more than once (for example, in 2011 and 2016). It is easy to see why people baulk when changes that seem significant become the thin end of the wedge for further reforms.
- For a third thing, a secure pension has been one attraction of working in higher education that has partially made up for the lower salary that the same talented people might have been able to achieve elsewhere. So there is a recruitment and retention aspect.
- A fourth problem is that pension changes invariably lead to industrial action. People who have worked their socks off to deliver for their students during the pandemic are not going to take kindly to worse terms and conditions.
If people were willing to take industrial action over pensions before the crisis, they will be willing to do so afterwards as well – though they may find a more united and robust response from managers and governors this time around.