People’s longer life expectancies and the current global economic upheavals make these challenging times for pension funds, and the Universities Superannuation Scheme – one of the largest pension funds in the UK – is no exception.
At the time of the last triennial valuation of the USS, in March 2011, the fund had a sizeable deficit: the difference between the scheme’s assets and the value of the benefits for which it is liable was £2.9 billion. By March last year, this deficit had increased to £11.5 billion.
The outcome of the next triennial valuation, which will be available later this year, is expected to show growth in the value of the assets but also the continuation of a very substantial deficit.
There have already been changes to the scheme: from October 2011, career average benefits were introduced for new entrants. However, the continuing shortfall means that more change is necessary to ensure that the sector is able to address the deficit, a view supported by the Pensions Regulator and trustees of the USS.
The Employers Pensions Forum, which represents Universities UK, GuildHE and the Universities and Colleges Employers Association, has been working with the trustees of the USS and the University and College Union to consider what action is needed. The employers’ objective is for the USS to remain affordable, attractive and sustainable for members and employers, while addressing the deficit and reducing the risk of future contribution increases.
The approach that is being explored by employers is based on an extension of the career average benefits section to all active members and the closure of the final salary section. But this will not be enough to ensure the financial sustainability of the scheme.
To avoid future unaffordable contribution increases for both employers and members, we must further develop the USS trustees’ proposals in their recent engagement paper for employers. The Employers Pensions Forum is seeking a balanced and fair pathway for all scheme members. Thus we are considering an innovative approach: for career average benefits to be provided up to a specified salary threshold, with an additional defined contribution element being provided in respect of salary above this threshold.
For this, employees earning above the agreed salary threshold would pay into a defined contribution section, which employers would also contribute to. Contribution thresholds would depend on affordability and we would seek to ensure that the defined contribution elements of the new USS would provide members with attractive projected benefits. This would ensure that all members would retain a core defined benefit, with more significant benefit changes applying to the scheme’s higher earners.
This is not a cost-reduction exercise. Employer contributions will not fall below their current level of 16 per cent and are likely to increase. Without such action, it will be more difficult for USS employers to manage their resources and to prevent job losses in response to rising pension costs.
These Employers Pensions Forum proposals are the subject of an employer consultation on funding and benefits that runs until September. The results will provide context for the USS trustees to consider the outcome of the 2014 triennial valuation, and a statutory consultation with all USS employers will take place in the autumn.
The outcome of the consultation on benefit reform – together with the USS’ plans to fund the scheme – will shape the proposal that the employers will submit formally to the USS Joint Negotiating Committee later this year. The JNC consists of an equal number of employer and UCU representatives and we are committed to continuing dialogue with our UCU colleagues in the period before the JNC decides on future scheme benefits. As is required by statute, employers will also consult their employees before any scheme changes, and their views will be taken into account by USS trustees.
It is vital to re-emphasise that USS pensions are safe and are backed by robust employers. Any pensions already in payment or deferred in the scheme will not be affected at all by any changes implemented in the future, and past service accrued rights are protected by law.
Whatever changes are eventually agreed, the Employers Pensions Forum and the employers will do everything they can to ensure that the USS remains an excellent pension scheme for current and future members.