Defined benefit (DB) pension schemes for UK universities' non-academic staff are potentially spending as much as £200,000 more than they need to each year due to inefficiencies in running costs, analysis from Spence & Partners has revealed.

The analysis, which looked at the current running costs of 30 DB schemes for pre-1992 UK universities, revealed that funding levels for these schemes improved "dramatically" in the past two years with rising gilt and investment grade corporate bond yields.

According to the research, this has also shrunk scheme liabilities, often by as much as 40 per cent, meaning many schemes are now less of a risk to university balance sheets.

As a result, Spence estimated that a required employer contribution rate of 30 per cent of salaries two years ago is now likely to be under 20 per cent, noting that past service funding levels may also be ahead of plan, meaning the current level of deficit contributions are no longer necessary.

However, the analysis found that the running costs for these DB schemes are often high, with average running costs of around £700,000 each year.

Whilst some of this is justified with data work such as the need to equalise guaranteed minimum pensions, Spence argued that it should be possible to rationalise this by using the latest systems and a simplified governance model.

In particular, the firm said that these DB schemes could consider reviewing service providers, shrinking trustee boards, and considering consolidation or packaged solutions, estimating that these changes could cut costs by as much as 30 per cent, generating an average saving of around £200,000 per annum.

According to the research, nearly three quarters (70 per cent) of these schemes are still open to future accrual, of which 27 per cent are also open to new hires, which stands in "stark" contrast with the broader position in the UK, where 56 per cent of DB schemes are now closed to future accrual.

Spence also argued that this sector has longer investment time horizons, meaning it could stand to benefit from the Mansion House reforms encouraging run-on of DB schemes, and use surpluses to subsidise pension costs.

Commenting on the findings, Spence & Partners head of the public sector and not-for-profit advisory practice, Alistair Russell-Smith, said: "With the big-ticket Universities Superannuation Scheme (USS) pension costs, risks and benefits stabilising in the last year, now is a good time for universities to focus on the running of their self-administered trusts for non-academic staff pensions.

“Our research shows running costs have built up in these schemes, and there are substantial savings available through simplifying governance and updating operating models.

"The long-time horizons of these schemes, with 70% still open to future accrual, means these changes should be looked at to ensure the schemes are delivering value for money for the long term.

“The good news is there are already a range of newer, more efficient operating models available.

“Most of these solutions have had significant investment, use technology effectively, and in some cases rely on just one system to manage all data flows. Our calculations show that a careful consideration and implementation of these solutions could generate £200,000 a year of savings.”

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