Use of subsidiaries to avoid pension costs ‘fragmenting sector’

High pension costs are increasing the risk of a UK university going out of business, according to employers, with the government being urged to intervene to stop the “sector fragmentation” being caused by institutions seeking ways around the issue.

A report published on 19 January by the Universities and Colleges Employers Association (Ucea) highlights the growing use of subsidiary firms at post-92 universities to avoid having to offer staff membership of the Teachers’ Pension Scheme.

Post-92 universities are required by law to offer staff the TPS, which has an employer contribution of 28.68 per cent, compared with employer contributions of 14.5 per cent on the Universities Superannuation Scheme (USS), more commonly offered to staff at older institutions.

But a growing number of universities, including Coventry, Worcester and Portsmouth, are transferring staff to subsidiary firms offering private pension schemes instead.

The Ucea paper argues that the current pension arrangements are “a significant contributor to the financial distress in the post-92 sector”.

It notes that seven of the 21 post-92 institutions in deficit in 2023-24 would have been in surplus if TPS contribution rates had remained at 2019 levels, at a similar level to USS, or if the government had provided support to offset the increase, when employer contributions rose in April 2024.

Post-92 universities, the report argues, are “seeking their own solutions” to combat the pension contributions, and said change is “inevitable and is already happening”.

But it argues that this change is “best delivered through regulatory reform which retains sector cohesion, rather than action at the level of individual HEIs [higher education institutions] to establish subsidiary companies purely for the purpose of pension provision affordability and value”, and said the government needs to offer universities “full flexibility” over what pension arrangements they offer their staff.

Regulatory action “reduces” the likelihood of further redundancies and course closures, “and increases the resilience of the HE sector for the future”.

It continues: “Without full flexibility, in order to achieve financial efficiencies and sustainability HEIs will continue to be forced down the more complex and convoluted route of setting up subsidiary companies to recruit new staff and potentially transfer existing staff. Fragmentation and the negative impact on education and research will continue.”

If the government does not take action, then the report says there is an “increased likelihood” that a university will have to close.

“Closure of an HEI results not just in a change in employee pensions, but loss of HE jobs, including loss of pensions and other benefits, as well as significant economic loss of jobs in and around the areas where HEIs are located. Nobody wants this outcome, but it looks increasingly likely,” it says.

Ucea also highlights how the HE sector has been the only one that has been made to bear the full cost of employer contribution rates, unlike further education institutions which have received government support for pension costs. Independent schools, which also did not receive support towards the increased employer TPS contributions, were able to choose whether to offer the TPS to their teaching staff.

Raj Jethwa, Ucea chief executive, said there was “no logical reason why institutions should continue to be compelled to participate in the TPS when the costs are so high and the sector is being treated so unfairly”.

He argued there needs to be a “sustainable approach to pensions”, allowing institutions “flexibility” to choose arrangements that offer value for money.

Vivienne Stern, chief executive of Universities UK, added that the government can help post-92 universities be “as efficient as possible” by giving them the flexibility over the TPS.

“Universities have to be able to control their costs. Half of our members have no choice about offering the TPS in England and Wales, due to an accident of their history, while the other half have the freedom to offer other schemes. This has to change, especially since the TPS requires one of the highest employer contributions of any UK pension scheme,” she said.

juliette.rowsell@timeshighereducation.com