Longer investment time horizons mean the sector can benefit from the Mansion House reforms encouraging run-on of DB schemes, and can use surpluses to subsidise pension costs
Running costs need looking at to ensure schemes provide value for money – current costs average £700,000 per annum
Costs could be cut by as much as 30% through simplifying governance and improved use of technology and automation
New research from Spence & Partners (Spence), one of the leading providers of pensions advisory and data services to pensions schemes in the UK, reveals the DB pension schemes for UK universities non-academic staff are potentially each spending as much as £200,000 more than they need to each year due to inefficiencies in running costs.
For the research, Spence has analysed the current running costs of 30 DB schemes for pre-1992 UK universities. These schemes have a combined total of £6.5bn in assets. Most pension provision in higher education is through large multi-employer schemes such as the Universities Superannuation Scheme (USS). However, many of the pre-1992 universities then have their own DB schemes for non-academic staff.
The research shows that funding levels for the pre-1992 university DB schemes have improved dramatically in the last two years with rising Gilt and investment grade corporate bond yields. This has also shrunk scheme liabilities, often by as much as 40%, meaning many schemes are now less of a risk to university balance sheets. As a result, a required employer contribution rate of 30% of salaries two years ago is now likely to be under 20%. Past service funding levels may also be ahead of plan, meaning the current level of deficit contributions may no longer be necessary.
The analysis also shows that the running costs for these DB schemes are often high, with average running costs of around £700,000 each year. Whilst some of this is justified with data work such as the need to equalise GMPs, it should be possible to rationalise this by using the latest systems and a simplified governance model. Options to consider include reviewing service providers, shrinking trustee boards, and considering consolidation or packaged solutions. Spence has projected that by taking these actions scheme running costs could be cut by as much as 30% generating an average saving of c.£200,000 per annum.
70% of these schemes are still open to future accrual, of which 27% are also open to new hires. This contrasts starkly with the broader position in the UK where 56% of DB schemes are now closed to future accrual (source: PPF Purple Book 2023). The sector therefore has a longer time horizon and can benefit from Mansion House reforms encouraging schemes to run-on, but needs to get the running costs under control to ensure schemes provide value-for-money.
Alistair Russell-Smith, Head of the Public Sector and Not-for-Profit Advisory Practice at Spence & Partners, comments: "With the big-ticket USS pension costs, risks and benefits stabilising in the last year, now is a good time for universities to focus on the running of their Self-Administered Trusts for non-academic staff pensions. Our research shows running costs have built up in these schemes, and there are substantial savings available through simplifying governance and updating operating models. 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.
“The good news is there are already a range of newer, more efficient operating models available. Options include using bundled services, switching to a sole professional trustee or using consolidation models to drive economies of scale. Most of these solutions have had significant investment, use technology effectively, and in some cases rely on just one system to manage all data flows. Our calculations show that a careful consideration and implementation of these solutions could generate £200,000 a year of savings.”
The full Spence DB Scheme Running Costs Report is available here
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