Pressures over pension obligations come as universities faces unprecedented challenges from the coronavirus pandemic © Christopher Furlong/Getty

UK universities and thousands of their staff face increased annual pension costs totalling billions of pounds under proposals to plug an estimated £18bn deficit in the sector’s main retirement scheme.

The £67bn Universities Superannuation Scheme, the UK’s largest private-sector pension fund, will on Monday lay out a range of options to reduce the burgeoning deficit, which was £3.6bn in 2018.

These include a proposal to increase the contributions paid by university employers and about 200,000 scheme members to as much as 68 per cent of employee salaries from the current 30.7 per cent.

The proposal could mean the pension bill for universities already hard hit by coronavirus disruption would more than double from the current £1.7bn per year, with a typical lecturer forced to pay thousands more for the same pension benefits.

In a consultation document to be published on Monday as part of the scheme’s formal “health check”, the USS will advise about 350 employers, which include Oxford and Cambridge as well as other UK universities, that they can reduce the contributions increases if they agree to a number of conditions, including supporting the scheme for 30 years and giving the USS pension priority over new debt.

According to the USS, if the employers agree to the measures, the increases in contributions can be brought down to about 40 per cent of salary and the deficit could be reduced to £9.8bn — compared to £17.9bn if no support is agreed.

The pressures over university pension obligations come as the sector faces unprecedented financial and operational challenges from the coronavirus crisis, which has affected the number of overseas students and disrupted the 2020 A-level intake.

In 2017 proposals by the USS to increase pension contributions by 26 per cent — 8 per cent by employees and 18 per cent by employers — sparked the biggest wave of industrial action by staff on UK campuses in decades.

The USS health check took place in March as markets plummeted because of Covid-19 disruption. It is expected to show that a combination of market volatility and a gloomy outlook for investment returns is behind the deficit’s big increase since its last formal valuation of £3.6bn in 2018.

“Employers promise our members retirement benefits regardless of what happens to the economy,” said a USS spokesperson. “The hard reality is that persistent low interest rates and greater uncertainty of future investment returns have created an environment where such promises have become increasingly expensive.”

A spokesperson for the University and College Union, which represents USS members, said it had “no confidence” in the assumptions used by the USS to calculate the cost of pension promises. “UCU members are well-informed and expect to see better evidence behind the judgments USS has made,” they said.

“We already know members are leaving the scheme because of cost, and calling for unnecessarily large reductions in benefits and higher costs is not the way forward. Universities need to also start demanding more of USS and push back against this approach.”

Universities UK, which represents employers, declined to comment. The USS will hold consultations with them for eight weeks on the assumptions underpinning its estimates of the scheme’s funding shortfall.

USS said it was “committed to working with our stakeholders, UUK and UCU, as they consider how to respond to these challenges”.

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