Pension costs identified as largest source of financial risk for universities

Pension costs are “by far” the largest source of financial risk for UK universities, according to a report on education spending from the Institute for Fiscal Studies (IFS).

The report highlighted new figures which suggest that the additional cost to universities of meeting existing pension promises may be as much as £8bn, double the previous estimate of £4bn.

Furthermore, it warned that, absent favourable movements in financial markets, universities can only reduce this risk by taking on more risk, making further reductions in the pensions provided by the scheme, rises in employees’ contributions, or some combination of these measures.

IFS research economist and co-author of the report, Ben Waltmann, commented: “By far the biggest source of risk now appears to be the large deficit on the main university pension scheme, which has increased from £3.6bn in March 2018 to a monumental £21.5bn in August 2020 according to the latest preliminary estimate.

“With contributions already at more than 30 per cent of earnings, it is hard to see how a deficit on this scale, if confirmed, could be evened out without further cuts in the generosity of the scheme."

The Universities Superannuation Scheme (USS), which is the principal pension scheme for UK Universities, previously warned that contributions could potentially double in an effort to repair the scheme’s deficit, with estimations for future contributions ranging from 40.8 per cent to 67.9 per cent of payroll.

The scheme recently consulted on the proposed methodology and assumptions to be used in setting its technical provisions, which will in turn determine the contributions required, emphasising that the employers could keep the deficit at approximately £10bn if they agreed to measures to support the scheme.

Whilst this initial consultation closed on 30 October, the USS is still expected to undertake further consultations on contribution levels, the schedule of constrictions, recovery plans and statement of funding principles.

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