Members of University Self Administered Trusts (SATs) in the UK will soon no longer be offered defined benefit (DB) arrangements, according to a Higher Education (HE) pension scheme manager

The manager, who wished not to be named, told Pension Funds Insider that maintaining DB funds for SATS was no longer a realistic aim.

"I think it is improbable that universities are going to be able to continue to offer defined benefit arrangements to staff who are members of their SATs in the longer term," said the manager.

"Although the payment of higher contributions in the short term may eliminate the deficits and result in a more affordable long term future contribution rate it is not the future service contribution rate which is the issue, but the risk of further deficits arising."

"Universities accept that there is nothing they can do about existing deficits and that they are going to need to pay the required contributions to eliminate these, although clearly this may result in there being less money available for other activities," the manager added.

The warning comes after a recent study by UK consultancy firm Barnett Waddingham concluded that funding cuts made by Government could pose a threat to recent improvements in reducing SATs funding deficits.

Average funding levels for SATs, which cover non-academic staff, increased by 3% to a total of 76%, as of 31 July 2010, according to a survey conducted by the firm. Equity returns and a change from the Retail Price Index (RPI) to the Consumer Prices Index (CPI) have helped to increase university's funding levels.

"The funding levels are moving in the right direction," said Nick Griggs, a partner at Barnett Waddingham. However, he is still concerned with what the future will bring for these schemes.

"They are paying in higher contributions now but is that sustainable? Obviously, with university fees going up - a hot topic - and budget cuts everywhere this might not be a good time for schemes," says Griggs.

The average scheme contributions of universities represented 3.1% of total staff costs in 2009. In 2010 this had risen to 3.6%. Meanwhile, average life expectancy assumption increased by 0.5 years in 2010.

"There has been a high level of concern regarding SATs pension costs for a number of years, with most HEIs (Higher Education Institutions) considering essential cost saving options to tackle issues such as increased longevity," an Employers Pensions Forum (EPF) spokesperson told Pension Funds Insider.

"The challenge shared by all institutions in the sector is to ensure that our pension schemes remain sustainable and affordable for the benefit of both employers and employees."

The survey, which focused on the impact 26 final salary pension schemes are having on the finances of universities, shows that in 2010 the pension deficit represented, on average, 11% of the net assets of the university (excluding the SAT pension deficit), this is 2% down from the year before.

But although average funding levels of university pension schemes have improved some schemes still have a pension deficit level which is "too significant".

Barnett Waddingham also expects that some schemes will have to make an allowance for an inflation risk premium as most universities assumed that inflation would be less than the 3.4% the Bank of England recently announced.

First published 04.05.11

azeevalkink@wilmington.co.uk