Pension and National Insurance hikes to hit academics hard

Thousands of university staff will soon see their take-home pay fall by about £100 a month when changes to state and occupational pension schemes take effect, an analysis has shown.

Almost all staff in higher education will see their net pay fall in April as their National Insurance contributions rise after changes to the state pension system.

But about 150,000 staff who currently pay into the Universities Superannuation Scheme will be hit further in April by increased employee contributions to the deficit-hit pension provider, after a deal agreed last year between employers and unions on reforming the scheme.

These combined higher payments are likely to cost the average academic almost £100 a month, according to an analysis provided by the Universities and Colleges Employers Association (Ucea) for Times Higher Education.

A lecturer on £46,414 a year – the median salary for the sector in 2014-15 – will pay an extra £1,175 a year (about £100 a month) owing to the twin changes from April if they are part of the USS career average scheme, Ucea calculates (see below).

Meanwhile, a professor on £70,000 a year will pay £1,529 a year more (about £125 a month) thanks to the hikes in USS and National Insurance payments.

Many university staff may be surprised by the dip in their take-home pay, despite efforts by institutions to raise awareness about the forthcoming changes, said pensions adviser Chris Faulkner, associate director at accountancy firm Grant Thornton.

“People who have been members of defined benefit schemes for years have never needed to think much about their pension scheme – how the fund is invested, what the returns are – but they need to take an interest now,” he said.

University staff in other defined benefit schemes, such as the Teachers’ Pension Scheme and those run by local councils, will also see their National Insurance contributions rise, having already seen costs in their own schemes rise last year.

Universities will also face significant extra costs related to the changes in April.

An academic who earns £46,414 currently costs a university a total of £57,962 annually once pension costs are included, Ucea said. That will rise by 3.6 per cent to £60,054 a year from April – an increase of nearly £2,100.

Employing a professor on a £70,000 salary will cost an extra £2,563 from April thanks to higher National Insurance and USS contributions. The latter is increasing for employers from 16 per cent of salary to 18 per cent.

‘A quintuple whammy’

Koen Lamberts, vice-chancellor of the University of York and chair of the Employers Pensions Forum, said that the impact of the changes on institutions “should not be underestimated”.

“Changes in National Insurance add approximately 2.5 per cent to each institution’s pensionable payroll,” said Professor Lamberts. The overall additional cost to the sector will be about £200 million a year, Ucea estimates.

New pension costs may make “a significant difference” to the financial situation of some universities, warned Mr Faulkner.

“When you are talking about a couple of per cent on to payroll, you could ask where universities are going to find this extra money as the big increase in tuition fees has already happened,” he said.

Other changes to pension rules may also worsen university balance sheets, he warned.

For instance, universities will soon have to state what share of any deficit in a multi-employer pension scheme belongs to their institution, he said. Higher earners will also be hit in April by reductions to the annual and lifetime tax-free allowances for pensions, he added.

“It will not be a double whammy on pensions – it’s more like a quintuple whammy,” said Mr Faulkner.

With institutions facing significant new costs on pensions, it may also raise the prospect of a less generous pay rise in 2016-17 than this year’s 1 per cent national settlement.

However, Michael MacNeil, head of bargaining at the University and College Union, said that these increases should be not used as an excuse to hold down pay as the “sector has been aware of these increases for a long time”.

The increases “should not come as a shock and sensible employers will have been planning for them”, said Mr MacNeil.

jack.grove@tesglobal.com

What are the main changes taking effect in April?

Higher education staff and employers will be affected by several pension changes in April.

Those who pay into the Universities Superannuation Scheme will, from 1 April, see their contributions rise to 8 per cent of their salary under reforms to plug a multibillion-pound deficit that involve the end of final salary pensions for future service.

Those in the USS, who are predominantly those at pre-92 universities, currently pay either 6.5 per cent or 7.5 per cent of salary depending on whether they are in the career average or final salary scheme. Employer contributions will rise from 16 per cent of salary to 18 per cent.

In addition, National Insurance contributions will increase because of the introduction of a new flat-rate state pension system.

Under the current system, staff could opt out of paying extra towards a second state pension – that topped up the basic £115.95 received by everyone with 30 years’ National Insurance payments – if they were in a defined benefit scheme, such as the USS or Teachers’ Pension Scheme.

This allowed employers and employees to gain a rebate having been “contracted out”.

But with the abolition of the second state pension, both parties lose this rebate and must pay more of their salary towards pension costs (on weekly earnings between £156 and £770, staff will pay 1.4 per cent more and employers 3.4 per cent more).

What do these pension changes mean for university staff?

Academic who is earning £46,414 a year and currently enrolled in the USS’ Career Average Revalued Earnings scheme

Before April 2016

• Employer pension contribution: £7,426.24 ; employer National Insurance contribution: £4,122.36; total employer cost (including salary): £57,962.60.
• Employee pension contribution: £3,016.91; employee NI contribution: £3,720.12; total cost: £6,737.03.

After April 2016

• Employer pension contribution: £8,354.52 ; employer NI contribution: £5,285.64; total employer cost (including salary): £60,054.16. Difference: £2,091.56 a year (3.6 per cent extra for employers).
• Employee pension contribution: £3,713.12; employee NI contribution: £4,199.04; total cost: £7,912.16. Difference: £1,175.13 a year (2.5 per cent of salary extra for employees).

Professor who is earning £70,000 a year and currently enrolled in the USS’ Career Average Revalued Earnings scheme

Before April 2016

• Employer pension contribution: £11,200.00; employer NI contribution: £7,377.24; total employer cost (including salary): £88,577.24.
• Employee pension contribution: £4,550.00; employee NI contribution: £4,191.84; total cost: £8,741.84.

After April 2016

• Employer pension contribution: £12,600.00; employer NI contribution: £8,540.52; total employer cost (including salary): £91,140.52. Difference: £2,563.28 a year (2.9 per cent extra for employers).
• Employee pension contribution: £5,600.00; employee NI contribution: £4,670.76; total cost: £10,270.76. Difference: £1,528.92 a year (2.2 per cent of salary extra for employees).

Source: Ucea