Has TPR woken up to university pension issues?

In April, The Pensions Regulator (TPR) wrote to trustees of university sector pension schemes as part of their review of defined benefit (DB) schemes in the higher education sector.

Most that were contacted will likely be asking themselves questions like ‘Why now?’ and ‘What do I do?’. Timing wise, it feels quite late to be bringing this up, since the financial issues the sector is facing are not new.

What does TPR expect?

TPR expects trustees to reassess their covenant approach, especially in light of shifting business plans and wider economic pressures, to ensure the scheme is treated fairly alongside other stakeholders.

TPR also flagged the following key actions for trustees to consider:

• Review the new DB Funding Code of Practice and updated covenant guidance, including guidance for open and not-for-profit schemes.
• Stay informed on sector trends and maintain regular dialogue with the university as the sponsoring employer.
• Assess covenant strength at each valuation, factoring in competing claims on the employer.
• Establish a monitoring framework to track covenant, funding, and investment changes at least annually, or more often if risks are heightened.
• Agree on regular information sharing with the employer, including advance notice of significant events, such as refinancing or restructuring.
• Develop and review contingency plans if covenant risk is high or uncertain.

This doesn’t appear to be related to the recent market turmoil, but rather TPR finally acknowledging the unique financial constraints of UK universities – all of which were set out in the publication of the Office for Students’ Financial Sustainability of Higher Education Providers Report in May 2024 and its update that followed in November 2024.

They’re a reminder that covenant is an important consideration and that trustees should challenge themselves as to whether they are doing enough in this area.

What should trustees and universities do?

Most trustees of university schemes will already be aware of the higher education sector’s challenges, the new DB Funding Code and the updated covenant guidance. For some universities, they may feel a ‘keep calm and carry on’ response is appropriate. Although business as normal in current markets isn’t easy.

TPR has provided a useful reminder of the importance of trustees understanding the sponsoring institution’s business plan and the risks it may hold in the current volatile environment:

• The Office for Students reports suggest that 72% of English universities will be in deficit by the end of the academic year if they continue as they are. It highlights that projected improvements in financial health for the sector in the period to 2027 are reliant on unrealistically optimistic increases in income (in aggregate).
• Understanding the drivers of financial health for universities will enable trustees to work actively towards agreeing on sensible monitoring frameworks. A small minority of universities are at risk of financial stress becoming ‘distress’, experiencing serious financial or operational difficulties that threaten their ability to continue operating normally. Trustees understanding the risks a university is under will enable them to work constructively with the university in good time if this is required.
• Trustees should also reflect on their current approach to covenant assessment, especially if they rely exclusively on internal analysis, and consider whether this offers adequate scrutiny and challenge. They should take account of the specific actions flagged by TPR and consider how they intend to address these points.

Money matters

With regards to funding plans, pension schemes fund the financial commitments promised to members through either cash contributions from the university or investment return on assets, and have a defined time horizon by which the scheme should be ‘fully funded’.

The sector typically has a longer time horizon to work with due to the relative immaturity of most schemes. Trustees shouldn’t necessarily be asking universities for more cash or reducing the time horizon – nor do we think this is what TPR is expecting.

Instead, it’s an opportunity for both trustees and universities to consider how they can effectively plan for future pension costs and work collaboratively to protect the interests of the scheme while helping to support the university during this period of turmoil.

What else should trustees focus on?

Hopefully, it’s no surprise that I’d say the pension scheme’s investments are the current priority. With markets moving rapidly and questions on whether the situation is likely to be a short-term issue or have material long-term consequences, trustees need to spend time getting to grips with the implications for their schemes.

I’m spending my time this week closely monitoring market movements and working with the scheme advisers, in collaboration with sponsors, to take appropriate steps to manage scheme risks and market volatility as effectively as possible. Right now, it feels like taking a long-term view to ride out the market volatility is reasonable… but who knows if I’ll be able to say that next week!

Phil Williams is a client director at Vidett.