The coveted final-salary pension - long regarded in UK academia as crucial compensation for salaries below those on offer elsewhere - is set to be scrapped by the academy's largest pension scheme.

The decision has prompted warnings that the sector is losing one of its key selling points, with the main lecturers' union predicting the emergence of a "two-tier pension system" that would "damage recruitment and retention of university staff".

Academics and administrators in the Universities Superannuation Scheme (USS) now face delaying retirement until they are 65 and beyond, while new entrants are likely to receive reduced career-average benefits instead of final-salary payments.

Employers' plans for changes to the USS were passed ahead of rival proposals by the University and College Union at a meeting last week.

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The independent chair of the decision-making committee, Sir Andrew Cubie, used his casting vote to side with vice-chancellors, finance directors and others on the Employers Pensions Forum (EPF), after attempts to negotiate reform finally failed after two years.

The decision raises the prospect of higher education's first national strike since 2006.

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Michael MacNeil, the UCU's head of higher education, said: "It will be a matter of regret but the employers should be in no doubt that the union will ballot for industrial action should the changes be forced through without USS members' agreement."

The employers' proposals must now be approved by the USS trustees on 22 July - regarded by many as a formality - before going out to consultation with all existing members, and all those eligible to be members, in the autumn.

The USS has about 130,000 active members, mainly academics and senior administrators in pre-1992 universities, and assets worth about ?30 billion.

The employers' and the union's proposals differed on crucial points about the normal pension age.

Where the EPF proposed a pension age of 65 for existing members - up from the current age of 60 - the UCU proposed a pension age of 65 for new entrants only.

Only members aged over 55 on the date of the introduction of the employers' changes, 1 April 2011, would be exempt from them. The employers also wanted further increases in the pension age linked to the state pension age.

The UCU wanted to keep final-salary pensions for all, with member contributions raised to 7.35 per cent.

Charles Sutcliffe, a former UCU-nominated USS trustee, drew a comparison between the career-average scheme for new entrants (with an accrual rate of 1/80 for each year of service, a 3/80 lump sum and a contribution rate of 6.5 per cent) and the British Civil Service career-average scheme introduced in July 2007 (with an accrual rate of 1/43.5 and a contribution rate of 2.5 per cent).

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Professor Sutcliffe, professor of finance at the ICMA Centre at Henley Business School, said the civil service scheme was "vastly superior".

While the changes to the USS affect academics and senior administrators in pre-1992 universities, academics in post-1992 universities will still have access to the final-salary Teachers' Pension Scheme, which offers benefits similar to those of the current USS.

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Professor Sutcliffe said: "What is this going to do for recruitment into the old universities? It is not a suitable situation. You can't go on like that for 20 years."

The EPF said the increase in employer contribution rate from 14 per cent to 16 per cent last year, to meet the cost of increasing longevity, would cost the sector about ?110 million every year and was evidence of the current system's unsustainable nature.

Sir Bill Wakeham, chair of the EPF, said: "By implementing a career-average scheme for new joiners, the USS will be able to continue to provide attractive benefits at a cost that both employers and employees can afford."

The employers have argued that the two-tier system was not their first choice but was a response to the UCU's refusal to discuss a better career-average scheme for all members.

However, the union said that offer would have radically reduced some existing members' pensions and was tied to conditions such as a cap on the employers' contributions.

Fresh from winning the battle on pensions, some universities have been pushing for the Universities and Colleges Employers Association to withdraw its 0.4 per cent pay offer for the next academic year in light of the announcement of a two-year public sector pay freeze. It is thought likely that the government will expect higher education institutions, which are legally autonomous, to "have regard" to policies on public sector pay or risk penalties in funding.

But other universities argued that the 0.4 per cent rise could go ahead for 2010-11, as the government's freeze would not be introduced until 2011 in some parts of the public sector.

john.morgan@tsleducation.com

EMPLOYERS' PLANS FOR CHANGE

The EPF wants:

- A career-average scheme for new entrants on a 1/80th pension or 3/80th lump sum formula, with a 6.5 per cent employee contribution rate;

- A normal pension age of 65 for new entrants and existing members (members can currently retire at 60 with an unreduced pension). Only existing members aged over 55 would be exempt from the changes;

- Further increases in pension age linked to the state pension age;

- Contribution rate for members of the final-salary scheme increased from 6 to 7.5 per cent;

- All future contribution rate increases shared 65:35 between employers and employees;

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- Increases for pensions in payment capped at 5 per cent on the consumer price index.