Universities and the Teachers Pension Scheme: the time for change is now

Welcome back. The HEPI blog is now up and running again on a daily basis, landing in your inbox at 6:30am. (The pieces we ran over the break are available here.) If you are not already subscribed, you can sign up at the bottom of this page.

Spaces are still open for our in-person Symposium with CBDU on Thursday 16th January: you can register here.

Today’s piece is by Jane Embley, Chief People Officer, Northumbria University and Professor Tom Lawson, Deputy Vice-Chancellor and Provost, Northumbria University.

The end of the Universities Superannuation Scheme (USS) pensions dispute in the summer of 2023 was the source of much relief in the sector. University employees in the scheme saw both their pension benefits restored to the levels they had been before the USS valuation of 2017 and a reduction in their contributions (from January 2024) from 9.8% to 6.1%. Employers could reverse the significant liabilities that had previously been skewing their financial statements and their contributions to USS were reduced from 21.6% to 14.5%. The Financial Times declared that ‘the cost to UK universities of providing pensions for employees is poised to fall by hundreds of millions of pounds after the sector’s main retirement plan swung into surplus after more than a decade of being in deficit’.

But for many institutions the great pensions crisis was not over: indeed it had only just begun. For at least 80 universities, USS is not their main pension scheme, because those that gained university status through the 1992 Higher Education Act are required to offer Teachers Pension Scheme (TPS) to their academic staff. This includes institutions like Northumbria University, which has significantly developed its research intensity over the last decade and seeks to compete with other research intensives. The disparity in the costs of TPS and USS means that competition is no longer on a level playing field.

Northumbria has more than 200 staff who are members of USS, but all of those have joined the university as existing members of that scheme. All other academic colleagues must be enrolled in TPS and cannot, at present, voluntarily become members of USS. Indeed those who join as members of USS also retain a right to be enrolled in TPS if they wish. Around 50 modern institutions employ some members of USS however the underlying requirement to make TPS available to university-employed academic staff is the same.

Since 2023 the cost of TPS to both employees and employers has significantly diverged from USS. While employers’ contributions to the two schemes tracked one another closely until October 2019, they then began to diverge radically when TPS employer contributions rose to 23.68% while USS was at 21.1%. But in April 2024 the gulf between the two schemes became a chasm – TPS contributions rose by 5% to 28.68% as USS employer contributions went down to 14.5%.

The difference in percentage terms is stark. But when you start to think about the financial cost for institutions it is all the more so. The pension cost (to employers) for a typical academic salary of £57,500 is £8,300 per annum for USS. For a TPS employee, it is £16,500. At an institutional level that means that for every 1000 staff earning this salary in TPS, the annual cost is £8.2 million greater than if those same employees were members of USS. For a professor earning £85,000 the difference is as much as £12,000 per full-time colleague. As Northumbria’s experience shows, these are additional costs being carried in one part of the sector for essentially the same staff.

The situation is compounded by the nature of TPS as a scheme. Unlike USS, employers have no say in how the TPS is run and have no levers to keep employer (and indeed employee) contributions down. This is simply a cost handed down to universities by the Treasury. But unlike schools, to which the Treasury through the Department for Education provides additional funding to cover TPS cost increases, universities receive no relief and simply have to absorb these costs into their already stretched budgets. And unlike schools in the independent sector, which were permitted to stop offering TPS to new staff, universities are obliged to continue to offer TPS – whatever alternatives they can develop for their staff.

The impact of this is extraordinary. It essentially means that in one part of the sector, it costs employers the same amount in on-costs to employ 503 staff as it costs to employ 1000 staff elsewhere. Quite apart from the burden this places on institutions, it is deeply anti-competitive.

What then is to be done? The path forward is beset by problems. Unless there is legislative change, modern universities will be required to continue to make TPS available to all academic colleagues and, it bears repeating, will continue to have no say at all in the running of the scheme.  

Of course, one option is to do nothing, but the finances of the sector mean the status quo is extraordinarily difficult to justify. Doing nothing embeds an unfairness that makes the government’s stated priorities for university reform more difficult to achieve. To put it crudely, it costs more for some institutions than others to employ academic staff, and as that resource is derived (at least in part) from student fee income then those institutions will require more students to fund the salaries of staff. For every 1000 staff earning £57,500 it would require all of the fees from 859 additional UK undergraduate students just to fund the difference in employer pension contributions.

Institutions can employ new colleagues via subsidiary companies in order to give themselves the freedom to offer more affordable pensions to new employees. But this approach has many potential pitfalls. It would not help to reduce the costs in relation to existing staff, so would be slow to have any impact, and in any case it remains unclear what the status of such employees is according to HESA – which could among other things impact the ability of individuals to make a contribution to future REF exercises with the attendant implications for future funding. Employment through a subsidiary, even with all terms and conditions being the same but being out of scope for recognition within the REF, is also likely to be a less attractive prospect for employees.

It seems likely that until solutions are found, many institutions might find themselves having to rethink their ability to participate in national collective pay bargaining. With higher pension costs and higher National Insurance contributions, it may be necessary, for now at least, for institutions to take control of salary increases to contain the total costs of employment. This is not an attractive option, but it is hard to think of any others that would be as swift and effective in containing cost increases, although of course it would come with its own industrial relations challenges.  

Ultimately all institutions value their academic staff immensely and we want to provide access to attractive pension schemes. However, the lack of institutional control over which pension scheme can be offered, and the high, fixed nature of the employer contribution to TPS (which is not directly linked to any improvement in benefits for the individual) cannot be sustained. The timing of the current challenge could also not be worse. Institutions are grappling with a whole range of financial pressures, and as a consequence dealing with TPS remains in the ‘too hard’ box for many, not least because we genuinely cannot find the solutions without some form of intervention. But as the sustainability of institutions becomes all the more scrutinised, and as the sector needs to find financial efficiencies to address the concerns expressed by the Secretary of State for Education earlier in 2024, we do urgently need to find a way forward.

Obliging institutions to continue to offer TPS places greater financial constraints on precisely those universities that might do the most to widen access and give greater opportunity to those from disadvantaged backgrounds as per the government’s priorities. It is an obvious unfairness that some of students will go to institutions where it is substantially more expensive to employ staff than in other institutions that are more traditionally regarded as elite. The time is now to remove this inbuilt, and presumably unintended, unfairness and end the obligation upon modern universities to offer TPS. If that happens individual institutions and the sector as a whole can begin to chart a path to a more sustainable position in the future.