When it comes to pensions, even UCEA’s infographics aren’t easy on the eye

Emelda Nicholroy is UCEA’s Head of Pensions Policy

UCEA has recently updated one its most ‘popular’ infographics, entitled Pensions: how much do employers contribute? The purpose of the infographic is clear: to set out just how much employer contributions to each of the main HE sector pension schemes have increased over the past decade. This latest iteration reflects recent headline hitting changes in the USS employer contribution rate as well as upcoming increases in employer contributions to SAUL, the scheme for professional services staff working in HEIs across London and the South East.

Following the 31 March 2020 valuation, the USS employer contribution rate increased to 21.4% of pensionable salaries in October 2021 while member contributions increased to 9.8%. This is the price of the benefits set by the USS Trustee assuming that the current proposals to change the scheme benefits go through. If the proposals are not implemented by USS from 1 April 2022 and the benefits remain the same, then the cost of the scheme will automatically increase even further. The USS Trustee will phase in contribution increases for employers and employees as set out in the latest Schedule of Contributions.

The current USS employee contribution rate of 9.8% would increase in phases to an eye-watering 18.9% within four years, with the employer contribution rate escalating from the current 21.4% to a financially crippling 38.2%. This would rapidly mean that USS becomes the most expensive pension scheme in the HE sector, with the second most expensive scheme, the Northern Irish Teachers’ Pension Scheme, not even coming close at 25.1%. To put this in context, the most recent ONS figures for CARE scheme contributions in the private sector, from 2018, give an average employer contribution rate of 17.7%. 

Many UCEA employers will remember that the unfunded public service schemes also went through a painful set of employer contribution increases in 2019 when the results of the 2016 valuations were implemented. In England and Wales TPS employer contributions increased by around 40% from 16.48% to 23.68%. The NHSPS also increased by a similar amount from 14.38% to 20.68%. Scotland and Northern Ireland employers also saw similar increases. While HEIs managed to fund these additional costs at very short notice, decisions taken at a local level to find the extra cash have not been easy. 

The unfunded public service pension schemes continue to have cost challenges with the implementation of the McCloud remedy and reviews of the cost control mechanism and SCAPE discount rate to name but a few, which will play out through the results of the 2020 valuations. However, there are forces potentially pulling the contribution rate in each direction - for example changes in life expectancy might reduce the cost of the public schemes - so it is even more difficult to predict where the final valuation results for the TPS and NHSPS will land. We are hoping that indicative results will be available by the end of 2022.

SAUL will increase employer contributions from 16% to 19% from April 2022 and then 21% from January 2023, to address a contribution strain (1) which has slowly increased over recent years. 

The LGPS in England & Wales will conduct its next cycle of valuations as at 31 March 2022. Many HEIs found that their employer contributions didn’t change significantly following the 2019 valuations, and at this point predictions for the 2022 valuations suggest a similar outcome. However, this is not guaranteed, particularly as many funds will be increasing their focus on employer covenant strength in light of the Covid-19 pandemic.  

UCEA’s pensions infographic is an important reminder that employer contribution increases have applied across the board for many years now. However, it should also be noted that most HEIs offer more than one pension scheme so have been affected by several different contribution increases over the past decade affecting all categories of staff. 

Of course this is only part of the story. What really attracts the attention is the significant increases in employee contributions. The cost of defined benefits has historically been split 1/3rd employee to 2/3rd employer. This is still the basis of the USS cost sharing rule in force today and is a transparent way of sharing some of the risk between employers and members. For example, even before the significant increases in employer contributions to the TPS in 2019, the average TPS member contribution in England and Wales had already increased from 6.4% to 9.6% (2). 

At the time of writing, the NHSPS is reviewing its member contribution structure with a view to changing the salary tiers and member contributions payable. Part of the proposed reforms are because of the wholesale move away from final salary to CARE benefits from April 2022, as a result of the outcome of the McCloud case. Up until now, there has been a stronger argument for higher earners to pay more into the NHSPS because of the final salary link meaning that they received proportionately higher pensions for every pound they contribute. This argument is much weaker where all members build up CARE benefits on the salary they earn in that year. With higher earners paying lower contributions, lower to mid-earning members of the NHSPS face paying higher contributions into the NHSPS, albeit calculated on actual pay, with increases phased in over 2022 and 2023 under current proposals. It remains to be seen whether the proposed contribution reforms will be implemented as drafted and also whether the other public service schemes follow suit.

As well as costing the average member hundreds of pounds every year, increasing employee contributions has consequences for the schemes. USS has seen an increase in member opt outs, with 15% of eligible new employees not joining. This is the driver behind the current review of options for a lower cost section of the USS, however as this is aimed at lower paid employees it may do little for those further up the salary scale. Similarly, there are significant concerns that members of the NHSPS will simply opt-out of the scheme if the current proposed changes to the employee contribution structure are introduced. We also know that the other main schemes in the HE sector, including SAUL and TPS, have experienced changes in member behaviours including opt-out during the Covid-19 pandemic.

So we currently have a situation where contributions are increasing for both employees and employers. While employers are unable or unwilling to exit from the sector’s multi-employer schemes, employees may find it easier to vote with their feet. Both employer and employee representatives acknowledge that employees have a limit when it comes to the affordability of pension contributions, but reducing employee contributions will only mean an even greater burden falling on the employers at a time when most HE employers have said they can afford no more. It is difficult to square this circle and we will have to wait and see what the next round of valuations brings. 

Finally, it is important to end this blog and year on the positive note. I remind you that my colleague Richard Paul’s blog published a year ago, Challenging common pensions misconceptions in a sector that offers great options, remains true. We must remember that HE staff have access to some of the best pension schemes of any worker in the UK. Please remember to ask us if you have pensions queries as an employer – never has pensions been more exciting! 

(1) The strain resulted from the combined employer and member contributions paid into SAUL being less than the cost of the scheme. 
(2) The public service schemes are different as they often use tiered contributions so a member’s contribution rate is based on their salary but the aim is that the overall contribution “yield” across the entire membership meets the funding requirements.