Struggle to balance the pension books

March 18, 2005

"I bet when MPs debated top-up fees last winter they never imagined that so much would be going on staff pension funds," said Richard Allanach, finance director of the University of East London.

Perhaps they should have. The warnings have been there for a number of years. Pension funds have been whittled away by longer lifespans, the poor performance of the stock market and the decision by Gordon Brown, the Chancellor, to scrap the dividend tax relief in 1997 have all whittled away at pension funds.

Pension liabilities across the public sector are now put at £700 billion - almost twice the amount of the national debt. As final salary schemes - which pay workers a proportion of their final salary, with the employer bearing the risk - disappear from the private sector, public-sector employers face growing pressure to cut pensions costs.

A report in 2003 on pensions in higher education, from the Higher Education Funding Council for England, was prescient. It identified two problems: the huge deficits in pension funds that showed up as serious liabilities on balance sheets, and the increased contributions that employers faced to fund these deficits. The report referred particularly to local government schemes, which cover support workers in new universities, but it also noted that many individual pension schemes covering support workers in old universities were in deficit.

At that time, it said that universities and colleges had to contribute an extra £67 million a year as the overall deficit reached £810 million. It also noted that new accounting regulations would require pensions deficits to be included on balance sheets. If this had been the case in 2003, 15 institutions would have seen their discretionary reserves eliminated and would have reported net deficits. The new regulations are expected to take effect from the end of the next financial year.

The report said: "During the discussion, the board commented that the situation on institutions' pension liabilities, and their likely deterioration during 2002-03, was very worrying and needed to be looked at in more detail."

It added: "So far, we are aware of only one higher education institution closing its own pension scheme to new entrants, but others are known to be considering this option."

Hefce said this week that it was not aware of any further closures. It plans to assess the risk to the sector soon.

Pension scheme deficits are not paper exercises - they affect a university's ability to raise capital and they make mergers less attractive, making restructuring more difficult.

In 2003, Standard & Poor's, the corporate credit rating and risk-evaluation company, produced a report on the credit implications of unfunded pensions liability in the university sector. It said: "Many UK universities have underfunded pension plans. Their credit quality will necessarily be affected because staff costs typically account for about 60 per cent of a university's total cost base."

What is particularly galling for universities is that much of the problem is out of their hands.

The Hefce report said: "An HEI can pay a different contribution rate according to the different membership profile of its local (government pension) scheme.

"This is something over which the HEI has no influence, since the majority of institutions are not represented on the board of their local pension scheme."

Mr Allanach said: "We have no direct say in our local government scheme, although it is difficult to imagine that we would have achieved a much better performance."

The Hefce report was based on a survey by the British Universities Finance Directors Group. Latest estimates from the group for local government schemes are that, on average, contribution rates are rising from 10 to 20 per cent.

Solutions are hard to fine. Extracting universities from local government schemes and placing them in one unified scheme would be a huge undertaking and Hefce was non-committal about the idea this week.


Old universities

* Academic and academic-related staff are in the Universities Superannuation Scheme

* It is a defined benefit scheme - meaning that employees receive a specific amount based on salary history and years of service

* As a private sector scheme, it has no formal government support

* It is a multi-employer scheme, meaning that any increase in contributions is spread evenly across all participating universities.

* Support staff tend to be in individual retirement schemes. These are defined benefit funds. Individual universities bear the risk of any shortfall.

New universities

* Academic and academic-related staff are in the Teachers' Pension Scheme

* TPS is an unfunded defined-benefit scheme, where contributions payable are credited to the Exchequer and a notional set of investments is maintained. This is assessed every five years by the government actuary

* Support staff in new universities are in local government pension schemes. These are defined-benefit schemes. Assets are held in separate trustee-administered funds

* Under this system, unlike the USS, it is possible to allocate assets and liabilities to individual universities.

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