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Five things we learned from universities’ pensions accounting disclosures in 2025

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..


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From TPS to USS – is now the time to move pension scheme?

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 dateEmployer rateMember rateTotal
April 201618.0%8.0%26.0%
April 201919.5%8.8%28.3%
October 201921.1%9.6%30.7%
October 202121.4%9.8%31.2%
April 202221.6%9.8%31.4%
January 202414.5%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 dateEmployer contribution rate
September 201516.48%
September 201923.68%
April 202428.68%
April 2027Next 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:

DriverTPSUSS
Economic assumptionsCosts 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 performanceNo 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 designBenefits 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 trendsLongevity and other member behaviours influence valuations.Longevity and other member behaviours influence valuations.
Regulation and governanceKey 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