Almost 200,000 staff working in UK higher education may soon be required to pay more into their pensions after the sector’s main scheme announced it has a deficit of just over £5 billion.
In a message to members published on 1 September, the Universities Superannuation Scheme said its latest triennial valuation had put its deficit at around £5 billion.
Based on these results, the USS will need to increase the contribution rate by 6-7 percentage points, from the current level of 26 per cent of members’ salaries, to cover the cost of future pension promises, the USS explained.
Employers now pay 18 per cent of an individual’s salary to the USS in pension contributions, while USS members pay 8 per cent under a revised scheme which came into effect in March 2016, which saw the end of accrual towards final salary pensions.
Any increase in pension contributions is likely to be split between universities and staff - meaning an effective pay cut for USS members – if the current benefits package were to be maintained in the future for active members.
About 184,000 university staff – mainly at pre-1992 universities – currently contribute towards a USS pension, as do another 6,500 non-university staff working in the higher education sector.
The pension’s trustee has now begun a consultation with universities about its assumptions and how the deficit, as well as the cost of funding future pension benefits, will be covered.
The consultation runs until 29 September – with decisions on any changes to future benefits or contributions levels set to follow later in the valuation process following further staff consultation.
In its message to members, the USS states that the “increase proposed is a significant challenge for our stakeholders, UUK and University and College Union (UCU) to address.”
However, the deficit of around £5 billion – which is roughly the same as the £5.3 billion deficit measured in March 2014 – is significantly lower than the £12.6 billion reported in the provider’s annual report in July. Using a second more conservative methodology, the annual report also estimated the shortfall could be as large as £17.5 billion.
The latest valuation uses a different set of assumptions, which assume an average annual rate of return on assets equivalent to inflation plus 0.9 per cent over the next 20 years.
This would see the USS grow its assets by £30 billion over the next 20 years, up from their current value of £60 billion, the USS said.
John Ralfe, an independent pensions adviser, said changes to the USS were now inevitable.
“One way or another USS benefits for active members will become less generous, member contributions will go up and university contributions will also go up,” he said.
However, Dennis Leech, emeritus professor of economics at the University of Warwick, said the massive difference between the estimates in July's annual report and this month's consultation document raised questions about the existence of any deficit as it "illustrates just how arbitrary the figures actually are".
"The liabilities and deficit figures being bandied about are so volatile as to lack credibility," said Professor Leech, adding that "the real liabilities - as they reflect longevity, future salary and price inflation - change only very slowly - on a timescale measured in decades not weeks".
The consultation document should contain a range of assumptions, including the most optimistic estimate, which assumes the scheme remains open to new members indefinitely, added Professor Leech.
"That this summary document omits the best estimate - a surplus - makes me suspect it is biased [towards being too cautious]," he said, adding that members were told there was surplus on the "best estimate" basis at the last valuation in 2014 and must now be informed about the full range of assumptions being considered.