by John Ingoe
Amid increasing financial pressures, a number of universities are considering a move from the Teachers’ Pension Scheme (TPS) to the Universities Superannuation Scheme (USS) for their teaching staff. In this blog post, I take a deep dive into each scheme to explore whether this makes sense.
On the surface, moving university teaching staff from the TPS to the USS seems rational. USS employer contributions are currently 14.5% of salaries, compared with a TPS employer rate of 28.68% of salaries. Even if we also allow for differing benefit structures, we can say that both offer valuable Defined Benefit (DB) pensions. But is cost the only consideration? In this blog post I will argue that it is not…
How USS and TPS work
Let’s take a step back and consider how each scheme operates. While both are DB in nature, they are fundamentally different beasts.
USS – an overview
USS is a multi-employer, private sector, funded hybrid scheme – meaning that it offers both DB and Defined Contribution (DC) benefits – and is managed by trustees. It currently provides members with a DB pension of 1/75th of salary (plus a lump sum of 3/75th) up to the salary threshold, as well as DC benefits on salary above that level.
The contributions paid by both employers and employees are invested, and pensions are paid out of the assets held. Under funding regulations that apply to the scheme, the trustee carries out a funding valuation every three years, or more quickly if needed, with the next one due as at 31 March 2026.
The results of those funding valuations determine the employer and employee contribution rates that will be paid between each valuation cycle – although the process isn’t quite as straightforward as that suggests. The 2026 valuation will determine the contribution rates payable from 2027; these will be reviewed again following completion of the 2029 valuation.
TPS – an overview
TPS is a public service, unfunded, pay-as-you-go DB scheme. It offers members a DB pension of 1/57th of salary. Contributions paid by employers and employees are used to pay current pensioners, with HM Treasury meeting the balance.
TPS isn’t governed by the same funding regulations as USS, but a funding valuation is carried out every four years, in a similar way to USS.
These valuations determine the employer contribution rate. The next valuation is due with an effective date of 31 March 2024 (yes you read that right), with the results of that valuation likely (but not certain) to result in changes to the employer contribution rate from 1 April 2027.
A brief history of the USS
Volatile contribution rates, benefit changes and industrial action
Since April 2016, USS has experienced repeated shifts in contribution rates and benefit design, with the latter often used as a lever to mitigate the former. Employer and member contribution rates rose between 2016 and 2023, before falling significantly in 2024, as shown below:
| Effective date | Employer rate | Member rate | Total |
| April 2016 | 18.0% | 8.0% | 26.0% |
| April 2019 | 19.5% | 8.8% | 28.3% |
| October 2019 | 21.1% | 9.6% | 30.7% |
| October 2021 | 21.4% | 9.8% | 31.2% |
| April 2022 | 21.6% | 9.8% | 31.4% |
| January 2024 | 14.5% | 6.1% | 20.6% |
However, the above table somewhat downplays both the impact of the 2020 valuation and the contribution rate increases that would have occurred had significant changes to benefits and the valuation methodology not been made. The schedule of contributions dated September 2021 would have seen contribution rates increases to 38.2% of salaries for employers and 18.8% of salaries for employees.
In the end, benefits were reduced to avoid this. From April 2022, this resulted in:
- A lower rate of future pension build-up
- A reduced salary threshold, which determines the split of DB and DC benefits earned
- Capped inflation protection.
The outcome of the 2020 valuation was not particularly well received by either members or employers. The majority of these changes were reversed in 2024.
Impact of financial markets on USS
The USS employer rate is essentially determined by the size of any funding shortfall or surplus, and the cost of future benefit accrual. Changes in the value of pension scheme liabilities and the cost of future benefits are driven by changes in financial markets, and in particular bond yields. Changes in asset values depend on the actual assets held, and these will often move in different ways from the liability value. There can be significant swings in the funding position as a result of this mismatch.
This volatility was demonstrated in the valuations carried out between 2018 and 2023. A funding shortfall of £3.6bn in 2018 increased to £18.4bn in 2020 but then flipped to a surplus of £7.4bn in 2023. These changes were predominantly driven by unprecedented changes in bond yields, which went from c1.7% (2018) down to c0.7% (2020), and then up to c3.8% (2023).
While there were several second order changes (changes to demographic assumptions; changes to the funding target; member experience; asset performance), these tended to be drowned out by the impact of changing bond yields.
A brief history of the TPS
Sharply increasing contribution rates
TPS employer rates have risen sharply since 2019, as shown below:
| Effective date | Employer contribution rate |
| September 2015 | 16.48% |
| September 2019 | 23.68% |
| April 2024 | 28.68% |
| April 2027 | Next scheduled change |
Since 2019, the TPS employer rate has increased by almost 75%. For many employers (including local authority-maintained schools and academies), grant mechanisms have largely cushioned these increases. Our understanding is that post-1992 universities have not been insulated, prompting difficult strategic choices.
While the employer rate has risen significantly, member rates have remained broadly stable over that period, increasing by around 0.3% of salaries.
Impact of lower expectations of economic growth on the TPS
Pension valuations estimate the size and timing of future pension payments using financial and demographic assumptions. Those future payments are then converted to a present value using a discount rate – which can be thought of as an advance allowance for expected long‑term investment returns.
“I thought the TPS held no assets,” you say. Well, you’d be right. But there is a notional pot of assets, as well as a notional shortfall to be made good. That may be one for another blog, but it does underline that the discount rate remains a key assumption.
A lower discount rate means more money must be set aside today, making pension costs more expensive. Even relatively small movements in the discount rate can have a big impact on contributions. For unfunded public service schemes such as the TPS, the discount rate is the SCAPE rate (Superannuation Contributions Adjusted for Past Experience) – which is linked to long‑term UK GDP growth, as forecast by the Office for Budgetary Responsibility (OBR).
As long‑term GDP forecasts fell over the past decade, the SCAPE rate also fell. This has been the principal driver of higher TPS employer contribution rates, outweighing the impact of other valuation assumptions.
How costs might change in the future
In both schemes, contribution rates are determined by factors beyond the control of sponsoring employers. The table below sets out the key influences on the costs of each scheme:
| Driver | TPS | USS |
| Economic assumptions | Costs are driven by the SCAPE discount rate, which is linked to long-term UK GDP forecasts. | Liability values can be sensitive to long-term bond yields and inflation expectations. |
| Investment performance | No impact as TPS holds no assets. Its notional pot of assets increases in a prescribed way. | USS investment performance directly affects funding position. It can move differently from liabilities. |
| Benefit design | Benefits are set out in legislation. Short-term changes are unlikely. | Benefit structure directly affects cost of accrual. Changes have been made to avoid large contribution increases. |
| Demographic trends | Longevity and other member behaviours influence valuations. | Longevity and other member behaviours influence valuations. |
| Regulation and governance | Key valuation assumptions are set by HM Treasury, and are potentially subject to political influence. | Valuations must reflect regulatory expectations and employer covenant considerations. |
Key drivers of the TPS
The key driver of the TPS contribution rate is the SCAPE discount rate. The current SCAPE methodology based on the GDP approach was introduced in 2011 and reviewed ten years later, as scheduled, during the last completed valuation cycle. This framework remains in place unless HM Treasury directs otherwise.
While recent headline GDP growth has been modest, it’s the long‑term GDP forecasts that determine the SCAPE rate. The OBR’s long‑term projections (published in July 2025) show a material improvement compared with those underpinning the current 28.68% TPS employer rate.
If this improved outlook persists, the SCAPE discount rate will rise (potentially materially) and, all else being equal, from April 2027, the TPS employer rate will go down (potentially materially).
So, all else being equal, we might expect the TPS employer rate to fall from its current rate in 2027. But that’s not guaranteed – “all else being equal” is doing a lot of heavy lifting here, and almost never turns out to be the case.
Other valuation assumptions – including salary growth, inflation, longevity and scheme member behaviour – will also influence the result. Perhaps more importantly, long-term GDP forecasts can change – reflecting changing views due to macroeconomic factors or political pressures. And finally, there is still scope for HM Treasury to tweak the SCAPE rate methodology.
Until the HM Treasury valuation direction is published, nothing is set in stone
Key drivers of the USS
There are more moving parts driving the USS employer rate than there are in the case of TPS. Asset performance, changes in long-term bond yields, covenant strength and benefit changes can all alter employee and employer rates. And while past performance is not an indication of the future, we only have to look back to the 2020 valuation to see the possibility of the employer rate exceeding 30% of salaries.
While we don’t expect to see material changes following the 2026 valuation, there are no guarantees that this will continue to be the case after the 2029 valuation. USS continues to invest heavily in growth assets, so some volatility is to be expected. While the expectation is that these assets will provide higher returns in the long term, a valuation is a snapshot of a moment in time, and a 31 March valuation date often coincides with some financial shock or other.
USS also operates in a regulatory environment that pushes DB schemes to link liability measurements to bond prices. This can result in a funding position (assets v liability value) that can move materially, and any deficit arising from that is likely to result in increased contributions. UCU and UUK are working with USS to put in place a valuation methodology which looks to mitigate this volatility, but this may only soften, rather than remove, future swings in position due to changes in financial markets.
Finally, the higher education sector is facing more financial pressures than ever before. All else being equal, this could lead to a stronger funding target (and therefore increased contribution rates).
Which is better – TPS or USS?
It depends.
Each employer faces a unique set of challenges, and appropriate pension strategies will vary. As with any decision about pensions, it’s about balancing risk and reward. There’s a definite short-term gain for employers from moving to USS (all else being equal), but scheme costs will vary over time. USS may be more cost-effective now, but that may not always be the case. There are signs that the TPS employer rate could fall from 2027 (potentially materially), while costs and benefits in the USS are intrinsically more volatile due to the different funding approach.
In any case, it’s not enough to simply compare the cost of the two schemes. Each offers a different level of benefits for members, at a different cost to members, and with a different perceived value for members.
All in all, not a straightforward decision and one that requires a lot of consideration.
John Ingoe is an Associate Partner and Head of Employer Actuarial Services at First Actuarial, a Gallagher Company. He has over 18 years’ experience working with employers such as higher education institutions and other not‑for‑profit organisations. He helps them meet strategic pension challenges including defined benefit scheme funding, multi‑employer pension arrangements and complex pension change projects. www.firstactuarial.co.uk. john.ingoe@firstactuarial.co.uk

















