Will universities need to charge higher fees to curb their pension deficit?

David Kingman reports on the black hole in the Universities Superannuation Scheme, and the negative consequences this could have for future studentsPensions Folder

According to recently released figures, the Universities Superannuation Scheme, the pension scheme which academic staff at most of Britain’s pre-1992 universities belong to, has a deficit of  £10.5 billion.

This raises the worrying prospect that these universities (which include many of the UK’s most prestigious institutions, such as Oxford and Cambridge) could need to hike the tuition fees they charge to students in order to plug this gap.

How big is the deficit?

The Universities Superannuation Scheme is now the largest pension fund in the UK, having overtaken the company pension scheme run by BT. Its membership consists of around 300,000 current and former academics, as well as senior administrative staff, mostly at pre-1992 universities (most of the staff at the former polytechnics which were upgraded to full university status in 1992 belong to the teachers’ pension scheme instead).

Officially, the scheme has assets worth £37.9 billion in the article and liabilities which are worth £50.1 billion, giving it a deficit of £11.5 billion. However, some pensions experts think that the situation is even less favourable than these figures would suggest.

According to pensions expert John Ralfe, the Universities Superannuation Scheme has arrived at this valuation of its future liabilities using a novel accounting approach. If it used the method of accounting future pension liabilities which is standard for private sector pension schemes – a formula known as FS17 – then the deficit would still be worth £10.5 billion, rather than having fallen to £7.9 billion this June as the scheme claims it has.

He estimates that in order to clear this deficit the universities that belong to the scheme would need to make additional contributions worth £600 million, increasing in line with inflation, every year for the next 20 years. Universities are already paying around £1 billion per year into the scheme, mostly in the form of employer contributions towards the final salary pensions of existing members.

Could the deficit lead to higher fees?

The fact that universities will need to increase their contributions towards the scheme at some point in order to clear this deficit means they will need to find the money from somewhere. Raising more revenue from tuition fees would be an obvious target. Some commentators have even suggested that the cap on tuition fees may need to rise by as much as £1,000 in order to pay for the pension fund black hole (see BBC article, above).

Obviously, this would be bad for students, who would be facing the prospect of having to borrow even more money from the government in order to attend university. This could have the impact of putting off more potential applicants who are deterred by the cost, while also leaving students with even more years of student loan repayments after they’ve graduated.

This also looks like a clear misallocation of resources. Clearing the deficit in a pension scheme above all represents the need to invest today’s money patching up the mistakes of the past. Students could also justifiably argue that it would be unfair for them to have to pay more when clearing the deficit in the pension fund would not directly lead to better teaching or improved facilities for them while they are studying.

Fortunately for students, an increase in basic tuition fees seems unlikely. For one thing, the politicians (especially the Lib Dems) are still bruised from the move to the new system of £9,000 per year maximum fees, and probably wouldn’t relish going through all the same political battles again. For another, there is a serious practical barrier to increasing fees: it costs the government a lot of money, which they have to lend to the students upfront in the form of student loans, so the Treasury would probably resist another fees hike on the grounds that there is a shortage of spare money to go around. For the time being, UK and EU students appear to be safe with £9,000 a year fees, for whatever that’s worth (although some voices within the higher education sector have argued that fees need to be increased again in the near future).

If they can’t rely on higher tuition fees then universities may well be forced to find additional funding from other sources  – especially postgraduate students and those from overseas, who are usually charged far more than “Home” undergraduates because fees for them are not capped. Pension scheme members are also likely to be asked to contribute more in the future, which brings with it the prospect of another round of strikes.

One way or another universities are going to have to do something about the enormous hole in their pension fund – and students should be watching closely to make sure they are not the ones who lose out.