The fall in employer contribution rates for the Teachers’ Pension Scheme makes establishing subsidiary firms for staff recruitment “harder to justify”, pensions experts have said, as unions argue that the reduced costs should prompt a pause in job cuts.

It was announced last week that employer contribution rates to the TPS would fall from a high of 28.68 per cent to 17.68 per cent from April 2027, which the Universities and Colleges Employers Association estimated could save universities £900 million by the end of the decade.

But the news has come too late for some institutions, which have already made drastic changes to their staffing arrangements to account for the pensions costs.

Universities including Coventry, Chichester, Southampton Solent, Staffordshire and Winchester have moved staff on to subsidiary firms to take them off the TPS, offering bespoke schemes or the Universities Superannuation Scheme (USS) as an alternative, which has an employer contribution rate of 14.5 per cent.

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John Ingoe, head of employer actuarial services at First Actuarial, said that the announcement “fundamentally changes the economics” for universities, and that institutions should think carefully before considering switching pensions.

“The difference between the contribution rates [for the TPS and the USS] is expected to fall to close to 3 per cent of pay from April next year, compared with more than 14 per cent of pay today,” he said, while noting that the USS valuation is currently under way, meaning that employer contribution rates for this scheme could change next year.

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“So if a university was considering a move from TPS to USS that was driven by a need to make immediate savings, or indeed any other pension change, I would expect them to pause and reassess.”

However, he continued, the drastic fall in contribution rates “highlights how sensitive future employer costs remain to economic, demographic and policy factors that are outside of universities’ control”, and some institutions might “still need to make changes to their pension arrangements” to mitigate the instability of the TPS and “improve financial resilience”.

Tim Williams, principal senior consulting actuary at Barnett Waddingham, said that if decisions to move staff on to subsidiary firms were being taken solely because of the current rates, “then that argument has fallen away somewhat”.

The announcement means that a university’s TPS costs will be “coming down by a third”, so establishing subsidiary firms “will certainly be a tougher sell”.

“So while I think there are still reasons why it could make sense for institutions to [go down the subsidiary firm route], it’s going to be much harder to sell and much harder to justify to the workforce.”

But like Ingoe, he said the valuation proves that the TPS is “volatile”, which might make financial planning difficult at some universities because the new rates will remain in place for only four years.

Meanwhile, Jo Grady, the general secretary of the University and College Union, has written to all post-92 vice-chancellors asking them to reassess any planned job cuts in light of the substantial savings they are expected to make from the TPS falls.

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She writes that “the financial benefits arising from this change” should be clearly reflected in decisions affecting the workforce.

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“Staff should see tangible benefits from these savings through greater job security, protection of existing terms and conditions, continued access to high-quality pension provision and investment in teaching, research and professional services.

“We therefore encourage your institution to make a clear commitment that the savings arising from the reduction in employer TPS contributions will be used to support staff and students, rather than simply being absorbed into general budgets or used to facilitate further reductions in staffing or employment conditions.”

Institutions that have already made major staffing cuts might miss out on the anticipated savings, union members argue.

Northumbria University announced earlier this year that it was offering staff one-off payments of up to £12,000 to transfer from their TPS pension to the USS. Adam Hansen, the UCU branch chair, said the university would have saved about £9 million from the TPS falls, but the cost of changing its pension system outweighs any savings.

“The vice-chancellor back in November said ‘doing nothing is not an option’, but it turns out actually doing nothing was an option. The university has spent, we estimate, about £8-9 million in effecting this change…so they’ve spent more than they’re going to save.”

A spokesperson for Northumbria said it has “no plans to change” its approach.

They said: “While the reduction in the TPS employer contribution rate is significant and welcome, a key consideration of our approach has also been the volatility of the scheme and lack of employer control over future contribution rates.

“As the USS scheme is designed by and operated for the higher education sector, institutions and trade unions have a voice and can influence contribution rates, which provides us with more financial certainty for the future. Any costs incurred whilst introducing the option for colleagues to switch to USS at Northumbria will provide future benefit due to increased certainty.”

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juliette.rowsell@timeshighereducation.com