Row over planned pension changes could lead to university strikes

Members of the University and College Union voted in favour of strike action after proposals to change the pension plans of university staff from a defined benefit scheme, to a defined contribution scheme.

The Universities Superannuation Scheme covers the pensions of staff from institutions which became universities before 1992. Ballots were held for staff at 68 different universities covered by the scheme. 61 universities, or 88 per cent of voters voted in favour of strike action, with an overall turnout of 58 per cent. At seven universities, the turnout was below the 50 per cent legally required for the ballot to be valid.

Talks will be held on Tuesday as a final attempt to solve the issue; if they fail, universities may face up to 14 days of strikes starting in February.

 What are the proposed changes?

Plans have been made to change the Universities Superannuation Scheme from a defined benefit pension scheme to a defined contributions scheme.

Last year, the Universities Superannuation Scheme was reported to have a deficit of £17.5 billion. The UCU argues that this figure is too critical and undervalues the scheme, however it is clear that the current defined benefit system is severely underfunded.

Defined benefit pension schemes are good for staff in the sense that it provides a guaranteed income during retirement, until death, and employers take on the risk that investments may fall in value, rather than individuals. The problem, however, is that as these schemes are significantly underfunded, it can be very expensive for employers. A Universities UK spokeswoman said that “without reform now, universities will likely be forced to divert funding allocated from research and teaching to fill a pensions funding gap.”

A change to a defined contributions scheme will mean universities save a lot more money, however income for university staff will not be guaranteed during retirement and staff will have to take on the risk that investments may fall in value. Some estimates suggest that these proposed changes could cost a lecturer as much as £200,000 over retirement.

This dispute is difficult to solve as both sides have legitimate arguments. For employers, costs of the current scheme are getting out of control, but the next best alternative means that many university staff will receive much less in retirement than previously expected.

A system needs to be put in place where decent pensions can be paid, but without universities having to make promises that they are unlikely going to be able to fulfil.

 Is there a better solution?

In the UK, workplace pension schemes are either defined benefit or defined contributions. There is however a third option which is used in the Netherlands, which could enable universities to provide pensions as good as those received from defined benefit schemes, at the cost of a defined contribution scheme.

These “collective defined contribution” pensions (CDCs), which are not yet implemented in the UK, are claimed to increase the value of pension pay-outs by about one third.

CDCs are much larger scale, industry-wide pension schemes, rather than a scheme for just one firm. Due to their greater scale, costs are much lower. In addition, the larger pools of capital open up additional investment options, such as investment in long-term assets which give greater returns, for example mortgages or transport infrastructure projects.

The employees and employers still contribute the same amounts, it’s just that there are better returns on investments giving retirees greater incomes. There is still however a chance that the value of investments may fall and therefore for the pension fund to lose money.

 Conclusion

The dispute over university staff pensions is complicated as both sides have valid justifications for their arguments. Whether it is solved by collective defined contribution pension schemes or some other method, it is vital that an agreement is reached as soon as possible to avoid strike action by staff.

If strikes were to occur, many universities including Cambridge, Oxford, Imperial College London, UCL and York will be affected to the detriment of fee-paying students. Students would miss out on lectures and assessment of coursework.

This story also highlights the problems with defined benefit pension schemes. It is not just the Universities Superannuation Scheme which is severely underfunded. We are gradually seeing a move from defined benefit schemes to defined contribution schemes, and so many more similar disputes will arise in the future.