Universities and other higher education institutions are under sustained financial pressure, juggling rising costs and constrained income while still expected to deliver on their educational mission.
Pensions are a significant and often volatile cost, but they are also a core element of the employment offer and a key factor in recruitment and retention.
Against this backdrop, it can be tempting to view pensions as a lever for cutting costs. But reducing the issue to a simple question of lowering contribution rates risks missing the bigger picture. Legal obligations, long‑term strategic implications and the impact on staff experience can all outweigh the headline savings – and these broader factors need to sit at the heart of the discussion when designing a pension strategy.
A patchwork of schemes
The higher education pensions landscape wasn’t designed as a single system. Instead, it emerged over time – shaped by historic institutions, public sector policy and legislative change.
Pre-1992 universities have typically participated in sector-specific arrangements such as the Universities Superannuation Scheme (“USS”) alongside their own trust-based pension schemes, while post-1992 institutions are obliged to provide access to the Teachers’ Pension Scheme (“TPS”) and the Local Government Pension Scheme (“LGPS”).
Wider reforms to public sector pension schemes have added further layers of complexity, with schemes moving away from traditional “final salary” designs to career-average (“CARE”) structures.
The result is a patchwork of pension schemes across higher education, with different cost structures, levels of employer commitment, risk profiles and degrees of flexibility.
A patchwork of schemes: how the main schemes differ
| Scheme | HE participants | Benefit type | Benefit structure | Current employer contributions (%) | Key points |
| USS | Mainly pre-1992 universities – academic and related staff | Hybrid: defined benefit (“DB”) and defined contribution (“DC”) | DB pension builds up at 1/75th of salary each year up to c.£74k, plus a lump sum; DC pot above £74k salary threshold | 14.5% of pensionable salary | Mix of DB security and DC flexibility; ongoing debate over cost, risk and benefit balance |
| TPS | Mainly post-1992 universities – academic staff in teaching roles | Unfunded DB CARE (government-backed) | Pension builds up at 1/57th of pensionable earnings each year, revalued annually in line with inflation (CPI + 1.6% for active members) | 28.68% of pensionable salary | Statutory for most teaching roles; relatively generous DB design but high employer cost |
| LGPS | Pre-1992 and post-1992 – professional services and some other staff | Funded DB CARE | Pension builds up at 1/49th of pensionable pay each year, with benefits revalued in line with inflation (CPI) | Set locally; often above 20% but varies | Locally administered scheme with significant variation; differences between “scheduled bodies” (e.g. post-1992 universities) and “admitted bodies” (e.g. pre-1992 universities) can affect contribution rates |
| Other DC schemes | Staff outside main DB schemes or with alternative/ top-up cover | DC only | Individual pots derived from contributions and investment returns | Typically lower employer rates and greater flexibility in scheme design | Lower cost for employers; greater degree of choice, but outcomes depend on investment performance |
What is SCAPE?
A key driver of costs in the TPS is the “SCAPE” discount rate (superannuation contributions adjusted for past experience). The SCAPE rate is an assumption used by the Government Actuaries Department (“GAD”) to help set employer contribution rates for unfunded public service pension schemes. It reflects expectations about long-term economic growth – in particular, future earnings growth which ultimately underpins the tax revenues used to pay pensions in schemes like the TPS.
The government recently announced an increase in the SCAPE rate from CPI plus 1.7 percentage points to CPI plus 2.0 percentage points, broadly reflecting updated expectations about long-term economic growth. This matters because a higher SCAPE rate reduces the estimated cost, today, of providing benefits in the future. In practical terms, this means that (all else being equal) employer contribution rates can fall, because the scheme is considered less expensive to provide. With reference to the 31 March 2020 TPS valuation report, and considering the SCAPE rate change in isolation, this change is expected to reduce the TPS employer contribution rate by around 8 per cent. That would imply a reduction in employer contribution rates from 28.6 per cent to around 20.6 per cent, with effect from April 2027.
However, it is important to stress that this is only one component of the overall valuation. Final contribution rates will depend on the full set of assumptions, as well as policy decisions taken by government, and therefore could differ materially in practice.
The result
Taken together, USS, TPS, LGPS (with different employer statuses) and institutional DC schemes create a genuinely patchwork system. Two universities competing for the same staff may face very different pension costs, risks and degrees of flexibility, largely driven by historic scheme participation and statutory status.
This helps explain why, for example, parts of the sector are questioning compulsory LGPS participation for certain employers and calling for a more consistent and transparent framework.
Tempting switches: The hidden strings of TPS vs USS
For academic staff, the headline numbers can make a move from the TPS to USS appear attractive. The current TPS employer contribution rate is 28.68 per cent of pensionable salary (potentially falling to around 20 per cent), while for the USS it is 14.5 per cent – almost half the rate of the TPS. For a TPS-heavy institution under cash pressure, moving eligible employees to the USS can therefore look like an easy win.
From a cash perspective, however, there are two other major considerations. Participation in a multi-employer DB scheme can also trigger a “Section 75 debt” in certain circumstances – effectively an exit debt that requires an employer leaving the scheme to pay its share of any shortfall, which can become a substantial amount over time. In addition, USS operates a debt monitoring framework, meaning that institutions must engage with the USS Trustees where additional borrowing or corporate activity could pose a risk to the employer covenant.
The decision is further complicated by contractual constraints. USS operates an exclusivity clause which restricts institutions from offering alternative pension arrangements to eligible staff. This can significantly reduce flexibility if a university later wants to introduce a parallel DC option, explore newly emerging Collective Defined Contribution (CDC) solutions, or change the design of their pension offerings at a later point.
Factoring in these considerations, moving to USS to reduce employer rates can mean trading short-term cash savings for immediate limitations and longer-term constraints and liabilities. The impact on members is equally nuanced: contribution levels, hybrid benefits, accrual rates, differing security regimes and retirement flexibility all need to be weighed up, not just the employer’s short-term cash position.
Balancing statutory duties and strategic flexibility: LGPS vs DC
For most non-academic staff, employers typically offer either the LGPS or a DC pension scheme. On the surface, this might look like a simple choice between two types of provision – but the reality for LGPS employers is far more uneven.
Employer contribution rates in the LGPS are set by local fund actuaries rather than at a single national rate. As a result, higher education employers can find themselves on very different footing with extreme disparity in rates. For institutions competing in the same student and staff markets, this “postcode lottery” creates real inequalities in employment costs.
The variation does not stop at contributions. Exit debts and cessation liabilities – the amounts payable if an employer seeks to leave the scheme or ceases future accrual – are also assessed differently by each fund. For a university considering moving new starters to a DC scheme, closing LGPS to future accrual, or in the longer-term exploring alternatives such as CDC, the potential cessation debt can present a significant practical barrier.
Redundancy programmes add further complications. For staff over 55, early retirement via redundancy can generate substantial strain costs within LGPS. Employers may look to use funding surpluses to help manage these costs, but remain dependent on the agreement of their local fund.
The statutory duties attached to scheduled body status in the LGPS means that post-1992 universities are in a weaker position than pre-1992 universities, with less ability to offer low-cost DC schemes.
As a result, the rules and local practices of LGPS can shape pension strategy in ways that are not always visible from the headline contribution rate alone.
Member choice and optionality: what if staff could choose?
So far, much of the sector discussion has focused on how universities can reduce pension costs. A different question is whether greater flexibility for staff could achieve a better balance between affordability and value, aligning employer constraints with member lifestyle priorities.
An emerging trend – influenced in part by the approach taken in the independent schools’ sector on TPS – is to explore structured pension choices for staff. In some cases, this means giving eligible staff the option to remain in a higher-cost DB scheme such as TPS, LGPS or USS, or to move instead to a lower-cost, more flexible DC arrangement. Independent schools have often presented this as a trade-off: stay in TPS on existing terms or move to an alternative (typically DC) scheme paired with a different salary or contribution structure.
Handled carefully, offering choice recognises that staff needs differ by career stage. Early-career staff may prioritise take-home pay, debt repayment or saving for a deposit, and may therefore value lower contributions. Those closer to retirement may prefer to maximise guaranteed pension income, driven by accrual rates and inflation-linking, and place a higher value on security.
These are, however, real challenges. USS exclusivity rules can limit the scope for parallel options. Trade unions may see “choice” as a step towards DC-provision only, and there are significant legal and consultation requirements where changes to terms and conditions are involved. Questions also arise around equity and communication – particularly how to ensure staff properly understand the risks and rewards of each option. The point here is not to argue that more choice is always better, but to ask whether a one-size-fits-all model serves institutions and staff well, and whether future innovations such as CDC might offer a different balance between risk, cost and member outcomes.
Offering more choice to members requires careful consideration, design and implementation. To be effective, it must be supported by clear, targeted communication and engagement so that staff can make informed decisions and genuinely value the optionality.
What should universities be asking themselves?
There is no universal “best” pension solution for higher education. The options available to any given university are shaped by regulation, workforce profile, appetite for risk, and future strategy.
Headline employer contribution rates are only one piece of the puzzle. Legal obligations such as Section 75 exit debts, scheduled body status in the LGPS, and USS exclusivity can be just as significant as immediate cash savings in determining what is genuinely sustainable.
Equally important are staff preferences and needs at different career stages. In a competitive labour market, pensions remain a core part of the overall employment offer. The critical questions for universities are not only “what does this cost today?”, but also “what constraints does it create tomorrow – and how well does it serve the staff we are trying to attract, retain and support?”. Developing a pensions strategy that is fit for purpose, serves its staff and allows the university to deliver on its educational mission is therefore critical.
This article is published as part of a partnership with KPMG.
