Increased pension costs could take modern universities to the precipice

Increased contributions to the Teachers’ Pensions Scheme will require cuts to student support services, warns Graham Baldwin

May 19, 2023
A man hangs from a precipice
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It is no secret that, like millions of households across the country, UK universities are being forced to tighten their belts to stay within budgets.

The cost-of-living crisis, so closely following a once-in-a-century pandemic and in the midst of a decade-long freeze in tuition fees, has made it imperative to do more with less. And the higher staff costs arising out of the latest round of national pay negotiations have only increased the pressure.

In this environment, the ramifications of a recent consultation by HM Treasury on how public service pensions are calculated are potentially another hammer blow to the dozens of modern universities in England and Scotland that use the Teachers’ Pensions Scheme (TPS).

The consultation, carried out in 2021, was on whether to retain the current methodology for calculating the likely future cost of public sector pension obligations, based on predicted long-term growth in GDP. In its response, finally published last month, the government announced that the existing methodology will be retained, but the cost to employers will go up from next April because of lower official growth forecasts since the previous valuation.

Many university budgets for next year are being finalised at present and senior staff will have been carefully planning to account for the already difficult circumstances. However, this unexpected additional cost will put university finances under significant strain. The government has confirmed that it will cover the additional costs for schools and further education colleges in 2023-24. Universities, however, will receive no help, so they will have to find the extra money by cutting back elsewhere.

Across higher education, we have already begun to see course closures at some institutions as a result of the declining real-terms value of domestic tuition fees. There is a significant danger that this trend will be worsened. And even if courses can be maintained, other areas will have to be cut back, risking things such as student support services, including mental health provision.

This is something no university leader wants to see. Modern universities like mine pride themselves on delivering an excellent experience for all our students, many of whom are local and many of whom fit into the “non-traditional” category: mature students, those with caring responsibilities and those from disadvantaged backgrounds. However, we unavoidably face hard choices about what to cut.

The full extent of any increase in employer pension contributions will not be known until final valuation directions are available from HM Treasury and the Government Actuary’s Department has been able to work through the necessary calculations. This is unlikely to be completed until the summer, long after budgets for the next academic year are usually set. It is estimated that costs will rise by between 5 and 10 per cent of pay, which could take employer contributions as high as an extra 30 per cent. For my institution, the University of Central Lancashire, this could equate to anything up to £7 million a year.

In the short term, we would call on the government to extend to universities the help it has already promised schools and further education colleges. In the longer term, quite simply, something has to give when it comes to higher education funding.

With every year of frozen tuition fees, inflation further erodes the income that institutions have at their disposal. With the current inflation rate at 10 per cent, that erosion is occurring faster than ever. At the same time, we are entering a boom period in terms of the number of 18-year-olds in the population. For the next few years, many thousands more of them will want a university education. Yet we are likely to lose money on each one we enrol. The numbers simply do not add up.

As ever, MillionPlus and its member universities stand ready to engage with the government to find solutions that work for all parties. Perhaps fees should be allowed to rise in line with inflation so that the unit of resource for universities is at least maintained year-on-year. Or perhaps we need more wholesale reform on how universities are funded. The decisions are not easy ones, financially or politically. But the time is coming when those decisions must be made.

Graham Baldwin is chair of MillionPlus and vice-chancellor of the University of Central Lancashire.

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Reader's comments (1)

Though I appreciate someone has to take on the great burden of balancing budgets and make difficult decisions, I am not confident with how the first place this VCs mind went to when considering cuts was student mental health provision. And during mental health awareness week.