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07 May, 2020

By Rebecca Dodd

With around half a million employees, universities are incredibly important to the UK. Covid-19 is having a huge impact across the sector, including on pensions and benefits.

 

The Higher Education sector is unique.  With around half a million employees, Universities are really important in the UK and COVID-19 is having a massive impact – and it’s going to have a big impact on pensions and benefits for employees.

 

There is a mixture of public and private sector pension schemes in universities.  There is the Local Government Pension Scheme and Teachers Pension scheme which are public sector.  Then a number of local private schemes at individual universities and then there is the Universities Superannuation Scheme or USS which is a sector wide scheme for academics across many universities and is actually the UK’s largest private sector pension scheme.

 

But what’s different for Universities is that most of their pensions are still defined benefit.  There are around 11 million people in the private sector building up pensions.  Less than 10% of these people are in defined benefit schemes – more than 90% being in Defined Contribution schemes.

 

But it’s completely the reverse in universities with less than 10% of members in Defined Contribution schemes.

 

The Higher Education sector itself is unique but the long-term issues faced from defined benefit schemes are the same as any others.  Worsening funding positions and volatile markets have caused increased and uncertain costs.  And that’s not just confined to the private sector schemes.  In fact, the Teachers Pensions Scheme in England last year saw employer contributions rise from around 16% to nearly 24%.

 

Before COVID-19, universities had already started thinking about pension benefits for their staff.  Whilst the Higher Education sector isn’t private in the sense of profit making, universities have to generate income to cover their costs and stand on their own two feet.  Staffing accounts for well over half of all costs in universities and therefore changes in pension scheme contributions can have a massive effect on the cost base.  Most income comes from tuition fees.  So, having faced the pressures of drastically reduced Government funding over the years and the threat of cuts in tuition fees, together with rises in pension scheme costs, universities have been looking for ways to control those pension scheme costs. 

 

In particular, USS itself is proving to be one of the major issues faced by the universities.  With generous hybrid benefits, USS has seen worsening funding positions at recent valuations; rising employer and employee contributions; disputes about the method of calculating the liabilities and union strike action to keep Defined Benefits and keep lower contributions. 

 

But now COVID-19 has brought with it a new wave of issues for universities – issues that are very likely to change the future of the Sector forever.

 

Universities have had to adapt very quickly in the short-term.  Lectures are taking place virtually and exams are being undertaken online.  But halls of residences are empty, conferences and events have been cancelled and some staff in support roles have been furloughed.  Cash reserves and continuing income from tuition fees for the end of this year may be able to cover costs in the short-term, but what about next year?

 

Absolutely, universities will be able to adapt to a digital, virtual world of learning while it has to – but will universities still be able to attract the students that they need? International students may not be able to come to the UK to start university – and many may not return for their second or third years.  And will the same number of domestic students still want to go to university?  University is about the life experience as well as the academic learning – and the university experience could look very different next year.

 

Student numbers plus a move to a more digital world will affect universities’ income and it will affect the job market in the sector – things could look very different going forwards.

 

Seeking to maintain defined benefit pension provision may become lower down on the priority order for employees.  Flexibility and choice may become much more important to them and cost control is going to be vital for employers.  Change is coming, but change doesn’t have to mean bad.  We are all facing a new normal – universities will face a new normal.  Pensions and benefits will need to evolve in the sector – perhaps sooner rather than later.

 

If you would like to talk to someone about any of these issues, contact Rebecca Dodd on 0113 394 7675


 

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