To many, the world of higher education pensions and universities in general may seem protected from mainstream commercial and economic forces. That could not be further from the truth, and for pension schemes with higher education employers, troubling times could be around the corner, explain Tim Birkett and Gavin Hutchinson.
The challenges for higher education pensions
Employers in many sectors will be hit hard by the direct and indirect implications of the COVID-19 outbreak. Many HE employers will see significant challenges, including:
a financial income ‘gap’, coming as soon as this autumn, as many international students choose not to take their places, with many deferring enrolment until September 2021 or electing to study elsewhere
uncertainty over home and EU student numbers in the autumn 2020 intake, and the related short-term moratorium on making unconditional or changing existing offers
lost rental income from overseas students returning home before the recent lockdown was imposed, and no tourists to rent student accommodation over the summer
pressure to refund tuition fees in part or in full, in light of cancelled lectures and alternative, remote lectures being arranged
a possible threat to jobs and paid research positions, if public and private benefactors that face their own funding challenges withdraw grants.
The full impact of the pandemic on the sector is, of course, not yet known, and will likely hit some employers much harder than others.
The funding of universities’ own pension schemes rests on a balanced understanding of the strength of the university and of the pension risk it has to support. It is important to the university to present a considered view to the pension scheme trustees, and it is equally important to the trustees to understand and challenge that view. Informed dialogue is the best way to reach a funding structure that works for all parties.
The sector faces a number of pressures beyond the Covid-19 pandemic, including:
One of the recommendations of the Augar review of post-18 education and funding was that maximum fees for students should be reduced to £7,500 a year, with more funding from central grants directed to disadvantaged students and to high-value and high-cost subjects. For some courses, the additional grant may replace the lower fees, but over time there may be pressure on central funding, reducing income or re-prioritising it towards other subjects. Some institutions may receive less grant than the reduction in fee income. It should be said that much remains to be done before any of the Augar recommendations are potentially implemented.
Many universities are investing heavily to enhance their facilities, infrastructure and student experience, with a total sector spend of £5.2 billion in 2017/18. Is this sustainable when future income is becoming less certain?
The quality of UK higher education institutions is rightly recognised globally. Post-Brexit, there is a risk that EU students find the UK less attractive as a study destination, particularly if EU student fees rise and access to the Student Loans Company is removed. It may also become harder to recruit EU researchers and staff as the UK falls out of EU research programmes. The attraction of the UK to international students could also be damaged, impacting an important source of funding.
Projections from the Office of National Statistics show a rise in the number of 18 year-olds in the UK to 2030, then falling back and remaining stable. Eurostat projections for the EU (ex-UK) show long-term decline. Many universities are investing both to increase capacity and grow their ‘market share’, but not all can be successful in a zero-sum game.
Source: ONS and Eurostat
Pension scheme deficits
For those institutions participating in the Universities Superannuation Scheme, there is a substantial deficit to be addressed, even if the measurement of it is proving controversial. Contribution rates seem destined to go up. A significant increase in contributions has also been implemented recently for the Teachers’ Pension Scheme.
In response to higher contribution rates and/or changes to pension benefits, there have been a series of staff strikes.
For a university, there is real value in giving a thorough and transparent picture of how the institution assesses the above risks, and what contingency plans it has in place, what contingency plans it has in place including what management actions can be taken to mitigate the risks.
For a pension scheme, it all sounds a bit daunting, and could easily lead a trustee to feel that it's time to get very defensive, very quickly. However, the higher education sector is crucial to the UK economy, politically important and is therefore, as a whole, a vital element of our national fabric. Many universities are well-funded, with good reputations, generally predictable income and asset backing that many private sector undertakings would envy.
There are weaker institutions, there are challenges and issues, and there is plenty of room for difference of opinion around future prospects and security - but it largely boils down to the same thing: employers and pension scheme trustees should engage in constructive dialogue and be as open and transparent as possible; and there is plenty of room to find pension valuation and funding solutions that work for scheme and employer alike.
For help and support in navigating the challenges facing higher education pensions providers, get in touch with Tim Birkett.
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