Universities should act to control the running costs of their DB pension schemes, according to a new report from Spence & Partners.
The consultancy estimated that older universities could be spending significantly more than necessary to run DB schemes for non-teaching staff.
Spence analysed data from 30 DB schemes attached to universities that existed prior to 1992 education reforms. It found that these schemes were more likely to be open to future accrual and have lower funding levels than schemes in other sectors.
In a report, published this week, Spence detailed that 21 of the 30 schemes were still open to future accruals, while eight were still accepting new members. This compares to just 9% of all private sector DB schemes that remain open to new members, and a further 36% that are open to future accrual, according to the Pension Protection Fund’s Purple Book.
The university schemes in the report had an average funding level of 93% on an FRS102 basis – lower than the wider DB sector. This is despite strong improvements in funding over the past two years.
Spence’s analysis also showed that average running costs were approximately £700,000 a scheme, a figure it said could be reduced significantly by reviewing objectives, revisiting contribution schedules, and interrogating processes and costs.
While some of the costs reflect work such as guaranteed minimum pension equalisation, Spence claimed schemes could reduce overheads through streamlined governance processes, new systems, and even consolidation. It estimated that schemes could cut costs by as much as 30% a year.
Alistair Russell-Smith, head of Spence's Public Sector and Not-for-Profit Advisory Practice, said recent improvements to the fundings position of the sector-wide Universities Superannuation Scheme (USS) meant it was a suitable time for institutions to focus on their individual schemes.
USS cut contribution rates at the start of the year after its funding level improved and following years of disputes between employers and employees.
“Our research shows running costs have built up in these schemes, and there are substantial savings available through simplifying governance and updating operating models,” Russell-Smith said.
“The long-time horizons of these schemes, with 70% still open to future accrual, means these changes should be looked at to ensure the schemes are delivering value for money for the long term.”
Spence said these schemes could be well placed to invest in growth assets in line with the Mansion House Compact, given their longer time horizons.
Further reading
Private market allocation helps USS shrug off rising inflation and market volatility (26 July 2023)
UCU declares ‘historic victory’ over recovery of ‘stolen pensions’ (17 April 2023)
