In recent weeks the sector has seen a considerable amount of speculation surrounding the employers’ proposals to reform the USS pension scheme.
There are some startling myths: the idea that the circa £8bn deficit is not a problem, that any change is unnecessary and even that the proposals are part of a plot to prepare the sector for full privatisation.
Such scare stories hide the truth: unless we reduce the very real risks and stem the increasing cost of providing USS benefits, the scheme will rapidly become unaffordable, for members and employers alike.
For the avoidance of doubt, under the employers’ proposed reforms:
- The final salary section would close to future benefits, with existing benefits protected and calculated using pensionable salary and service at the date of change.
- Future pension for all members would build up in the career revalued benefit (CRB) section on earnings up to a salary threshold – proposed to be £50,000.
- Pension on salary above the threshold would be provided in a new defined contribution (DC) section.
- All members would also have the option to pay an additional 1 per cent of salary into the DC section, which the employers would match.
These proposals are the result of a thorough analysis, which included modelling the potential impact on scheme members.
Projections indicate that around two-thirds of current members would continue to build up their whole pension on a defined benefit basis with optional additional DC savings.
This week we have published modelling to illustrate how these proposed changes might affect your pension. The figures have been calculated by USS using assumptions about future salary progression and investment returns that have been jointly agreed in discussions between UCU and the employers.
However, there are potentially damaging misconceptions that should be dispelled. These include:
- Institutions with lots of higher paid staff would contribute less under the proposals. Actually all employers would pay the same rate, increasing their contribution from 16% to 18% of total salaries.
- Longer-standing USS members’ final-salary benefits face the axe. Existing benefits would be protected at the point of change and calculated on pensionable salary and service at that date and increased each year in line with CPI. All members would build up future defined benefits in the career revalued section on their salary up to £50,000.
- DC benefits are poor for higher earners. The DC benefits being offered above the threshold include an employer contribution of 12 per cent. Together with the employee contribution of 6.5 per cent (and the 1 per cent matching if the member chooses to pay this as well) benefit provision above the £50,000 is generous.
- Newer members face the prospect of their retirement benefits being slashed. The reality is that any new members earning less than £50,000 would receive the same benefit as they would if they joined the scheme today. In fact they would be better off if they chose to additionally pay into the 1 per cent matched DC element. The significant DC contribution above £50,000 means that in many cases even higher earning new members should enjoy broadly the same level of benefits as previously, with some members likely to be better off in the under the reformed scheme.
- The normal funding rules should not apply to USS as the university employers could always bail out the scheme. The USS is a private occupational pension scheme and as such falls under the remit of the Pensions Regulator. It has to meet certain minimum levels of funding, a test which it currently fails to the tune of around £8 billion. It is unavoidable that a recovery plan has to be agreed that would remove the deficit over a reasonable period.
Sweeping the scheme deficit under the carpet is not an option. If the stakeholders fail to agree on reforms, the trustees will be compelled to increase contributions to a level that would be unsustainable for members (at 12 per cent) and employers (at 25 per cent) alike.
After that, the conversations would not just be about ‘how can we change the scheme?’ but ‘where can we make cuts (most likely in staffing) to meet the additional costs of USS?’ or even ‘how much longer can USS survive?’
Employers and the UCU will continue to negotiate throughout the autumn with the aim of reaching an agreement. We all want USS to remain an attractive, affordable and sustainable scheme for members and employers. But to get to that point, we need to start with the facts and I hope the USS modelling will help members with that.