REF-based recruitment’s effect on final salary pension schemes

High salaries paid to star researchers ahead of this year’s research excellence framework may have contributed to the demise of the sector’s main final-salary pension scheme, finance experts have claimed.

Under plans drawn up by Universities UK, about 105,000 higher education staff who now pay into the Universities Superannuation Scheme’s final salary pension arrangement will be moved to a less generous pension based on career average earnings.

The switch is needed to fill an estimated £7 billion deficit in the USS scheme, but academics at pre-1992 universities may strike over the proposals. University staff at 67 pre-1992 universities, in which 95 per cent of USS members work, are to be balloted by the University and College Union over potential industrial action, with the survey of members due to run from 1 to 20 October.

Ian Tonks, professor of finance at the University of Bath, believes that questions must be asked about why the USS deficit has soared in recent years, despite the introduction of a recovery plan in 2011 to eliminate what was then a £2.9 billion funding gap. “My guess is that in the run-up to the deadline for the latest REF in December 2013, universities appointed top researchers on relatively high salaries,” said Professor Tonks.

This had implications for the scheme since such staff could expect large pensions because of the link with their now-higher final salaries - a perk effectively subsidised by lower-earners, said Professor Tonks.

It was “rough justice” on most USS members that “they were asked to accept a closure of the final salary scheme for which universities are responsible by giving salary increases to a few superstars”, he said.

Edmund Cannon, reader in economics at the University of Bristol, also said that the costs associated with the REF had a “significant impact” on the USS’ funding position.

“Universities have effectively loaded a very high burden on the USS,” said Dr Cannon.

“It may have been the straw that broke the camel’s back,” he added.

The USS has blamed its poor balance sheet on the post-2007 economic crisis, namely quantitative easing, which has depressed gilt yields and increased liabilities, thereby increasing the deficit.

Reduced expectations for future investment returns and economic growth rates, as evidenced by lower yields on government and other fixed income securities, has added more than £7 billion to the scheme’s liabilities between 2011 and 2014, while a potential change to the longevity assumption - currently under consideration - would add approximately £900 million, the USS said.

“Changes in economic conditions represent by far the most significant factor to affect the funding of the USS,” a spokeswoman said.

There was no evidence to suggest that salary increase trends have changed across the scheme, and they would be “entirely immaterial” when compared with the changes in the economic climate, she added.

Bernard Casey, principal research fellow at the University of Warwick’s Institute for Employment Research, also dismissed the REF explanation, calling it “daft”.

“It has to do with [the USS] underestimating longevity and betting on equities…rather than trying to match liabilities,” said Mr Casey.

Accounting rules that kept pension deficits off the balance sheets of individual universities also meant that there was little incentive for institutions to ensure that the USS was sustainable, he added.

jack.grove@tesglobal.com