USS offers new pension options after cutting deficit estimate

Proposals reduce anticipated future contributions, but fall short of union members’ ‘no detriment’ demand

May 9, 2019
UCU pension strike
Source: PA

UK higher education’s largest pension fund has set out three proposals to solve the impasse over future contributions, after drastically reducing its estimation of its multibillion-pound deficit.

All of the options from the Universities Superannuation Scheme, presented as it finalises its new valuation of the fund, reduce the anticipated level of employer and employee contributions compared to what has previously been proposed, and preserve “defined benefits” – guaranteed payments in retirement which union members went on strike for 14 days last year to protect.

None meet the “no detriment” position demanded by some members of the University and College Union – under which any future increases in contributions would be paid for in full by employers – and nor do they fully accept universities’ demands.

But they are based on a calculation that the USS’ deficit, previously put as high as £7.5 billion – and the trigger for demands to reform contributions and benefits – may in fact be less than half that figure.

Contributions to the USS, which has around 200,000 active members, mainly in pre-92 institutions, rose to 8.8 per cent of salary for employees and 19.5 per cent for employers this month, up from 8 per cent and 18 per cent respectively. Based on the previous valuation, they are due to rise to 11.4 per cent and 24.2 per cent by this time next year.

Under the first new option, based on an estimation of a £3.6 billion deficit, employee contributions would increase to 10.7 per cent from next April, with employer contributions going up to 23 per cent. Under this scenario – the default if employers and unions cannot agree on an alternative approach – the next scheduled valuation would be in 2021-22.

However, USS says that, if “sufficiently strong” arrangements can be made for “contingent contributions” – under which, contributions would be increased if the pension fund does not perform as well as hoped – the baseline level of contributions would be 9.3 per cent for employees and 20.4 per cent for employers.

Contingent contributions were proposed by Universities UK but USS says that vice-chancellors’ plans did not provide “adequate protection from short-term risks”. Under USS’ proposals for contingent contributions, the overall rate of contributions could increase by 2 per cent annually, up to a maximum of 6 per cent.

A third option offers a slightly higher level of contributions – 9.6 per cent for employees, and 21.1 per cent for employers – but removes the risk of contingent contributions, in return for the next valuation taking place a year earlier, in 2020-21. In the event of a failure to implement a revised deal on contributions following that valuation could not be reached by October 2021, the combined total contribution rate would increase to 34.7 per cent from that date.

Paul Bridge, head of higher education at the UCU, said that “none of the three options satisfy the union’s ‘no detriment’ policy position”.

He said that the union would continue to “press” this position when the proposals are considered by UCU and UUK in the joint negotiating committee. “It will then be for our members to decide what happens after proposals emerge from the JNC negotiations,” Mr Bridge added.

A UUK spokesman said that the organisation was “disappointed” that its proposal for contingent contributions was not acceptable to USS, and that it was now consulting members to establish which of the three options for concluding the 2018 valuation was preferred.

USS’ proposals follow the work of a joint expert panel, set up by USS and UUK at the end of the strike, which suggested that existing benefits could be protected if employer contributions rose to 9.1 per cent, and employers paid 20.1 per cent.

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Reader's comments (7)

If members of the USS are to receive an increase in employer contributions surely those in other pensions schemes in the education sector should receive the same level of employer contributions, otherwise does this not amount to an under the radar pay rise for the USS members? it is not the fault of the members of other schemes that the USS has miscalculated or mismanaged their fund so why should the institution or the members of other schemes be penalised. Is there not a risk that it could lead to job losses if universities have to meet this shortfall?
Except that USS members get a lot less benefits than in other schemes (mostly because the final salary scheme that we had signed into was dropped a few years back). So following your suggestion would actually mean even greater unfairness. Just saying :-)
Surely you are not obliged to stay in one scheme or the other or any scheme for that matter, I thought that was a personal choice. That's the nature of pensions...they go up and down and things change, it's a bit like long term gambling. It appears that the legislation affecting this scheme might affect others too so maybe we can all expect a hike. My original point however is that this increase has an effect on an institutions finances and appears to provide additional employer contribution to those on the USS scheme. I hear the point that the institution signed people up to this scheme but did they? Perhaps they suggested or even recommended it but you have to sign up personally so the employer cannot be held to blame. I'm pretty green in this area but this is just how it appears to me.
It's funny how a pension offered by the employer as a benefit / condition of service or contract, when poorly managed or performing, is now treated as an 'employee investment risk'. It is employers who have chosen to invest this money in this way. When many people took up employment within the sector, this was part of their contract. Employees are being asked to shoulder a burden in the same way as if they had privately invested shares themselves. They haven't. Employers, pension providers and trustees have decided to invest payments and it's gone badly wrong. So Employers come creeping back to employees, slash their benefits and also ask for bigger contributions for much reduced and capped benefits. It's financial mismanagement, compounded by massive employer contribution holidays and reductions. when incredibly, high stock valuations made the scheme look massively in surplus. It's investment 101 that shares go up and down, so how could such ridiculous decisions have been made by trustees and employers ? So we all pay the price for investment mismanagement. The fees taken out of the scheme are not transparent either, nor are the costs of early retirement and executive retiree payments. As Universities attempt to put 'people at the core of their business' year on year pay reductions and pension disasters like this just erode morale and employee satisfaction and productivity.
It was obvious last year that the valuation was wildly wrong and overinflated... and I am no financial specialist, I'm a computer scientist. Cactus77 is right, though. Somehow fund managers always seem to do well themselves, however bad a job they do.
But the fund itself is performing very well. There is no problem with the investments. What is wrong is the valuation "strategy" that creates a future deficit based on illogical assumptions. The consequence of this can be that investments are forced to become more conservative and then perform less well. There is a risk of death-spiral for the fund if this happens at every valuation. The crux of the UCU argument is that the valuation strategy must be changed in order to secure the USS pension for the future. If pension members cannot win that argument we are always going to be in trouble.
Am I glad that I'm now receiving from USS, having spent a nervous last few years watching the pension I thought I was going to get eroded by incompetence. There are many reasons for the state of the USS. I'll mention just three - the first can be debunked straight away, and the other two I suspect USS and universities' management have conveniently forgotten about. 1. We are all living longer. This is the number one reason given by USS and the universities, and it's true. But it's entirely predictable. I suspect the population has been living longer ever since actuarial data has been taken - certainly for well over 100 years. This can come as no surprise, and should have been planned for. 2. In the 1980's, universities loaded the scheme with liabilities. Many staff seen as unwanted were given very generous pensions while in their early fifties. The financial cost of this has been horrendous. 3. In the mid-1990's, USS was perceived to be doing so well that the universities reduced their contributions from 18.85% to just 14%. And this reduced level carried on for well over a decade (but no reduction in employee contribution happened). Universities were entitled to do this, but the other side of the deal was that if the scheme reached hard times then the univerisities *only* would have to increase their contributions. In recent years this promise, clearly, has been broken. And think about 4.85% of your salary, and that of every other academic, over 10-15 years - the answer will run into billions in cash alone, even without a return on investment. Easily enough to account for the current USS deficit. Hindsight is a wonderful thing, but everywhere in the above are people whose job it is to plan ahead financially. Anyone - especially people with the intelligence of an academic - can see that people have been living longer for ages, don't load an early system with massive liabilities and, when an investment is doing well, put more money in, not less. As I say, the first 'reason' is entirely predictable and both USS and the universities will have conveniently forgotten about the other two.

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