by John Ingoe
It’s been a period of good news for university pensions: Teachers’ Pension Scheme (TPS) costs are set to fall from next year, the USS preliminary valuation results show a sizeable surplus and the aggregate funding position of self-administered trust (SAT) schemes sponsored by universities improved materially over the year to 31 July 2025. But beneath the headline improvement there are stark gaps between institutions with a SAT defined benefit (DB) scheme. Some universities may soon be considering how best to use a pension surplus, while others could face higher contribution demands under the Pensions Regulator’s new funding regime. I should note that for trust-based schemes, it is the trustees who are the legal owners of the pension scheme assets. They must act “in line with the pension scheme trust deed and rules, in the best interests of the pension scheme members [and] impartially, prudently, responsibly and honestly.” As such, decisions on both use of surplus and making up shortfalls do not rest solely in the hands of the universities involved.
We reviewed the 2024/25 pension disclosures of 29 universities that sponsor their own SAT DB scheme for some groups of staff. We looked at how their funding positions have changed, how much universities are contributing, what their schemes cost to run and how these arrangements compare with the wider DB universe and USS. Five findings stood out.
Finding 1: Things are looking up
Balance sheet positions improved and contributions paid by universities fell over the year. Driven by a combination of higher bond yields, strong returns from growth assets, and employer contributions, all but three universities saw an improvement in their balance sheet position over 2024/25. All else being equal, those same factors should also mean that funding positions, which drive contribution requirements, have improved in recent years. We saw some evidence of this over 2024/25, as aggregate contributions fell to around £190m from £220m in 2023/24.
However, there’s a big caveat – the Pensions Regulator’s new funding code is now in place, and so all else is not equal. The new funding code may lead to the trustees of SATs pushing for stronger funding targets and less time being given to making good any shortfall, both of which could lead to an increase in contribution requirements. Exactly how contributions change will, as always, depend on each institution’s particular set of circumstances.
Finding 2: The aggregate position hides material differences between institutions
Pension schemes have legal obligations to balance assets and liabilities in the long term. Schemes are frequently reviewed to check the – “the extent to which the employer and any suitable contingent assets can support the scheme, now and in the future, and the risks to this support being available when needed.” If normal employer contributions are not currently sufficient they may be obliged to pay extra deficit contributions to restore the balance.
Universities and trustees carry out valuations of their pension schemes for a variety of reasons. Every year, universities carry out a valuation to determine the pension scheme asset or liability to recognise on their balance sheet, and the cost of the scheme to show in their accounts for the year. For universities reporting under the UK accounting standard, the requirements for this valuation are set out in Section 28 of FRS102.
Separately, every three years (or more frequently if needed), trustees will assess whether they have sufficient assets to meet their liabilities (ie the pensions that are promised to members). In carrying out this valuation, and placing a present value on future pension payments, assumptions are made around future investment returns, inflation and mortality (among other things). If the valuation shows a shortfall (ie if the assets are not sufficient to cover the liabilities), the sponsor may be obliged to pay deficit contributions to ‘balance the books’. The requirements for funding valuations are governed by the Pensions Regulator.
The aggregate position across the 29 universities in our survey is healthy, with an FRS102 surplus of £620m at 31 July 2025. But funding levels vary significantly and different universities are having to consider very different questions. For a handful of better funded schemes there is a surplus and attention will turn to how the surplus could be used. Could it subsidise the cost of new benefit build-up or improve member benefits, could it improve defined-contribution (DC ) benefits, or could it be returned to the university? For the five best funded arrangements the total surplus on a Low Dependency basis could be in excess of £600m. (Low Dependency is the minimum measure that could be used to determine whether a surplus could be released to a sponsor, ie the university). Potentially, that £600m could all be used for one or more of the aims set out above.
Others are still facing a shortfall and are continuing to pay extra deficit contributions. The new funding code could mean that scheme trustees look to strengthen funding targets and remove any shortfall more quickly. For the five least well-funded schemes, annual contributions by universities might increase by 50% to meet the new DB funding code’s “Fast Track” parameters.
Finding 3: HE funding positions lag behind the wider UK DB universe
The Pensions Regulator (TPR) estimates that, for all the DB schemes it regulates, around 80% of schemes are fully funded on a Low Dependency basis and 60% on a buy-out basis. However at 31 July 2025 we estimate that the equivalent figures are 25% and 15% in higher education. On average, DB schemes in the HE sector are not as well funded as their counterparts elsewhere.
University accounts do not give definitive information, but an educated guess is that:
- As part of a funding valuation, trustees consider the ‘covenant’ – “the extent to which the employer and any suitable contingent assets can support the scheme, now and in the future, and the risks to this support being available when needed.” – provided by the sponsoring employer. Historically, employers in higher education have been viewed as having a strong covenant (or certainly, a stronger covenant than many UK DB scheme sponsors). Having a stronger covenant means that trustees and sponsors are more able to adopt less prudent funding targets, and to allow any funding shortfall to be made good over a longer period.
- Most of the schemes in our study have now hedged a significant level of interest rate and inflation risk, but the timing of any change in investment strategy matters. A scheme that hedged these risks before the “mini-budget” in September 2022 will not have benefitted as much from the subsequent bond yield rises (as other schemes, including USS, have).
- Many of the DB schemes considered remain open (three in four still have benefits building up). That means that there is naturally less focus on the “end-game” of the scheme, which may in turn mean less stringent funding targets are in place. For example, an open scheme is unlikely to be targeting the very prudent level of funding needed for a buy-out transaction (ie securing benefits with an insurer – an option that is increasingly targeted by closed private sector schemes).
- The SAT DB schemes do not represent the most significant pension cost or risk for HE institutions. For some institutions, the level of contributions required for USS is also likely to have constrained their ability to address funding shortfalls in their SAT schemes more quickly.
For many institutions it may well remain the case that they are not as prudently funded as the average DB scheme – and that’s absolutely fine. However, for some universities, scheme trustees may become more uncomfortable with shortfalls and/or weaker funding targets. The general improvement in funding levels across the DB universe, combined with the Pensions Regulator’s new funding code, may mean we see scheme trustees pushing for higher contributions to strengthen their scheme’s funding position more quickly.
Finding 4: Running a DB pension scheme is an expensive business
Running a DB pension scheme is not cheap, but our survey suggests that the costs of running schemes in the HE sector may be particularly high. We might expect the core running costs for schemes to be around 0.33% of assets for smaller schemes and as low as 0.15% of assets for larger schemes. Based on the information in our study, the average running cost for those that disclosed it in their 2024/25 pension note was almost 0.6% of assets, with 1 in 8 spending more than 1% of assets on running their scheme over 2024/25.
There will undoubtedly be reasons for this “overspend”. Benchmarking of costs is likely to be dominated by closed schemes, and it is more complex (and therefore more expensive) to run an open DB scheme. Universities may also have provided additional work beyond the “core service” requirements of a pension scheme. But even taking those factors into account, there may still be scope to improve efficiency and reduce costs. Pension running costs may not receive the same scrutiny as other university expenses, especially if they are met directly by the scheme, but these costs are still ultimately borne by the employer, and so should face the same scrutiny as other costs.
Finding 5: The importance of these arrangements is overshadowed by USS
Across the universities in the survey, less than 10% of total pension expenditure was in respect of benefits building up in a SAT DB scheme. This partly reflects the fact that DB is not the sole method of pension provision for non-academic staff in the sector – many institutions offer a DC option alongside, or in place of, their DB arrangements. But most pension expenditure is on academic staff who, for the institutions in our survey, are mainly members of USS. As a result, the contributions to USS were materially higher than contributions to other arrangements.
In total, the 29 universities considered recognise around £6bn of pension liabilities on their balance sheet. The USS preliminary funding valuation (for all universities in the scheme) puts USS pension liabilities at over £60bn. There are more employers participating in USS than the 29 universities considered in our study, so we cannot conclude that each university has ten times as much exposure to USS as to its own SAT DB scheme. At a sector level, however, it does illustrate the relative scale of USS – and, given its strong current funding position, the significance of that improvement for the financial outlook of the sector as a whole.
What should universities be thinking about?
From a pension perspective, things have greatly improved in recent years, with an expectation that the position at 31 July 2026 is likely to be even better. Continuing increases in bond yields have improved accounting and funding positions, while also reducing the cost of providing future benefit accrual. There is also good news from the other schemes in the sector (USS, TPS and the Local Government Pension Scheme). Coming at a time of significant uncertainty for the sector, falling pension costs are certainly welcome. Decisions made on the ongoing USS valuation will have a material impact on employment costs for the sector.
But it’s not all good news for the sector. For the 29 universities we have considered it is very much a story of the haves and have-nots. The Pension Schemes Act 2026 is expected to make it much easier for employers to access surplus, although employers and trustees will first need to consider the appropriate balance between using surplus for the benefit of members and returning it to the employer. Those institutions still facing a funding shortfall will need to be aware of the potential implications of the new funding code, and whether that will drive up contribution rates.
In both cases, monitoring and managing running costs will be important. For employers making good a deficit, every pound spent on expenses is a pound not being used to close that gap. For those considering a surplus release, keeping running costs under control will help maximise the surplus available and make a release more achievable.
John Ingoe is an Associate Partner and Head of Employer Actuarial Services at First Actuarial, a Gallagher Company. He has over 19 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..






















