University pension disclosures: costs and funding trends

The results of our 14th survey on UK universities' pension liability assumptions for accounting purposes is here. This blog summarises the key insights provided in the full survey.  

Pension deficits have slightly reduced over the year to 31 July 2024, mainly due to modest asset value growth, though lower discount rates from falling yields offset these gains. Recent yield increases might impact future results. 

Our full survey focuses on Self-Administered Trusts (SATs) but notes significant attention on the Universities Superannuation Scheme (USS), which ended deficit recovery contributions from January 2024 after confirming a surplus. 

The analysis covers 36 universities' financial data and compares figures from 2021 to 2024. Market volatility, driven by factors like inflation expectations and US tariffs, continues to pose financial uncertainty for universities.

When considering wider investments, SATs pose investment and funding challenges that universities and scheme trustees can partially control, unlike industry-wide pension schemes. Universities are increasingly adopting sophisticated investment management strategies for property portfolios and endowment funds, often seeking specialist advice – please contact our team if you would like to know more.

Sector challenges

• Funding - The Higher Education (HE) funding environment remains challenging, with increasing financial deficits expected through 2024/25 and beyond. Rising inflation, declining student applications, capped tuition fees, and issues in the international student sector are key contributors. The Office for Students predicts many institutions could face deficits by 2025/26.
• Tuition fee income vs rising costs - while the tuition fee cap will rise in 2025, it remains well below inflationary increases. Additionally, higher employer National Insurance (NI) contributions will offset most of the potential benefit.
• Impact on student numbers - domestic student growth has been slow, with rising costs outpacing fee income. International student growth previously helped, but factors like Covid-19, Brexit, and visa changes have impacted numbers. 
• Cost mitigation - HE institutions are considering cost-cutting measures for defined benefit (DB) pensions through reducing benefit generosity, reviewing total reward packages and employing staff via subsidiary companies. These measures come amid sector-wide redundancies and course closures.

How much of a burden are these schemes? 

In our survey, the average pension deficit is 0.6% of universities' net assets (excluding SAT deficits), down from 1.0% last year. This decline continues a post-Covid-19 trend of reduced deficits, with many schemes now fully funded or in surplus.

For universities contributing to both SATs and USS, SAT contributions have decreased as a proportion of staff costs. Total staff costs also fell due to the end of USS deficit recovery contributions. 

USS contributions have decreased as a proportion of staff costs in 2024, but remain significantly higher than SAT contributions.

Surplus/deficit 

The average FRS102 funding level for surveyed universities increased by 31 July 2024, compared to 2023. Higher-than-expected asset returns and deficit contributions improved funding levels, though falling yields increased liabilities. Inflation and mortality assumptions remained largely unchanged, with recent data suggesting slower life expectancy improvements.

FRS102 assumptions

Discount rates 

Over the past five years, discount rates have generally aligned with index yields. Recently, universities have increasingly used a corporate bond yield curve based on liability terms or a full yield curve approach for more accurate rate derivation. While some outliers remain, most discount rates closely follow index yields.

Retail Prices Index (RPI) inflation

Market yields typically guide future inflation assumptions. As of 31 July 2024, the Bank of England estimated long-term RPI inflation was slightly higher than the average assumed by universities., likely accounting for an inflation risk premium. 

Despite high inflation in 2023, assumptions remained stable, reflecting long-term expectations. Reduced scheme durations due to higher bond yields and aging memberships may also influence assumptions. At a 15-year duration, market-implied RPI inflation was 3.5%, slightly above the 20-year estimate.

Consumer Prices Index (CPI) inflation

Historically, CPI averaged lower than RPI, with the gap widening further since 2010. From 2030, RPI will align with CPIH, likely narrowing the difference. In 2024, the average CPI deduction from RPI has been slightly lower than in 2023.

Salary increases

Some universities apply separate promotional and general salary growth assumptions, complicating comparisons, but most focused on long-term salary growth, with average real salary growth assumptions remaining stable from 2023 to 2024.

Life expectancy

On average, life expectancies decreased slightly in 2024, reflecting recent data showing slower improvements. Males saw a greater reduction in life expectancy than females, influenced by updates in actuarial models (CMI 2023).

Asset allocation

Average equity allocation fell in 2024 compared to 2023, reflecting scheme maturity and increased interest in alternative investments like LDI and infrastructure to mitigate market volatility. This continues a five-year trend of declining equity allocations.

Discover the full report

If you’d like to see the full report free of charge, which features deeper, richer insights, please email tim.williams@barnett-waddingham.co.uk or adam.poulson@barnett-waddingham.co.uk.