Retirement incomes for many academics could be cut by up to half under plans now being considered by universities.

Although employers have already announced their intention to end the final salary scheme offered by the Universities Superannuation Scheme, the scale of pension cuts outlined by Universities UK may shock the sector as they go much further than anything imagined by unions or pension experts – increasing the likelihood of strike action next year.

Financial modelling carried out by pension consultants Barnett Waddingham for Times Higher Education suggests that some academics would lose about £20,000 a year in retirement income if the new scheme goes ahead (see box below).

In a consultation document now circulating in universities, UUK explains it would seek to replace the current final salary and career revalued benefits (career average) schemes with a more affordable “hybrid” that is “targeted on scheme members with the lowest incomes”.

In this scheme, some 150,000 higher education staff who currently pay into USS would instead contribute towards the new scheme to help the USS close its estimated £7 billion funding gap.

But under the proposals circulated by UUK, employers would contribute only 16 to 18 per cent of pay up to a salary threshold of “no less than £40,000 per annum” into a defined benefit scheme.

Above that income level, institutions would pay only 12 per cent of pay towards pension costs, with employees contributing 6.5 per cent of salary at all pay points, although employees are likely to be asked to pay more in future, the consultation paper says.

Money paid into the pension scheme above the salary threshold would be paid into a defined contribution (DC) scheme, which typically offer far lower pension payouts than defined benefit schemes.

Younger academics in the final salary scheme will be hit hardest, particularly if they expect to reach the higher pay bands of professor or senior management later in their careers.

Academic staff already in the less-generous career average scheme would see reductions of up to about 10 per cent, although losses would be smaller for those who do not climb the career ladder.

Michael MacNeil, head of bargaining at the University and College Union, whose representatives are meeting to discuss the reforms in Manchester on 19 September, said many members would regard the plans as a “radical attack on pensions”. UCU will contest the methodology used to value the fund, he added.

A UUK spokesman said its consultation would end on 22 September and it would use employers’ responses to develop its plans. UUK was currently in discussions with UCU, with whom it formed the USS Joint Negotiating Committee, which would publish its plans for wider consultation early next year, he explained.

Edmund Cannon, reader in economics at the University of Bristol, who has studied the USS, said it was clear that the benefits would need to be cut, but the UUK plans are highly contentious.

“It’s now about who will take the pain – these proposals hit hardest those who previously did well out of the scheme, which were higher earners,” he said.

Dr Cannon continued: “Some people will take some really big hits here – they are not just losing out looking forwards, but also looking backwards as the accrued benefits that they thought were secure will now be lower than expected.”

Under the UUK proposals, benefits for past service for existing final salary members would be calculated based on their salary at the date of the USS changes and uprated only in line with the consumer price index of inflation.

“That is the least generous possibility that the USS could impose,” said Dr Cannon, adding that it should consider linking benefits to future average earnings increases or even honouring the final salary link on past service.

Paul Hamilton, partner at Barnett Waddingham, which is holding a free conference on pensions in Manchester on 4 November, said the shift towards a defined contribution scheme was a “sensible way” to reduce the risks faced by employers regarding potentially unaffordable future pension payouts.

jack.grove@tesglobal.com