Pension contributions could fall again as USS surplus doubles

The Universities Superannuation Scheme (USS) is on track to record another major increase in its surplus which could drive down contributions for employers and their staff.

An update released by the UK higher education’s largest pension provider as it carries out its latest valuation said the funding position of the scheme has “strengthened materially” in the past three years.

Its surplus has doubled since the last valuation in 2023, rising from £7.4 billion to £16.9 billion. The scheme’s assets have also increased from £73.1 billion in 2023 to £79.8 billion in 2026.

The figures will be used to determine employer contribution rates, which currently stand at 14.5 per cent, while employees contribute 6.1 per cent.

The USS said it was now “in a strong position from which to consider long term objectives, how these may be achieved and how much risk to take”.

The size of the surplus means that the pension scheme could, in theory, provide the same level of benefits with members contributing less. The USS estimates the combined contribution rate could sink as low as 16.4 per cent from the current 20.6 per cent without having a detrimental impact.

A consultation has opened on what the USS should do, with universities expected to stress the importance of long-term stability, which could be achieved by retaining contribution rates as they are and continuing to build up the surplus. 

Vice-chancellors will be anxious to avoid a return to the major instability experienced throughout the 2010s, when the USS’ deteriorating financial position prompted a major restructure of benefits – a highly unpopular move that was met with widespread industrial action from trade unions.

“Feedback we have heard so far indicates a clear preference for stability of both contribution rates and benefits,” the USS report says.

“Employers generally view the surplus as a valuable buffer against future uncertainty rather than for immediate use and highlighted the importance of investment strategy as a key lever in supporting long term stability, while seeking further clarity on its role. Overall, responses suggest a focus on stable and predictable outcomes and avoiding future funding and contribution volatility.”

Raj Jethwa, chief executive of the Universities and Colleges Employers’ Association, said he welcomed the provisional outcomes, which show “significant progress that has been made since the last valuation”.

“This position creates a range of potential options which are being carefully considered, and it is important that employers have the opportunity to consider the Trustee’s technical proposals thoroughly before reaching any conclusions.”

Ucea will now consult all USS employers on their views, and will provide a formal response in September.

John Ingoe, head of employer actuarial services at First Actuarial, said the improved financial position for the scheme means there are “myriad options” available for the pension operators.

“Many universities would welcome a material reduction in costs in the current environment, and it’s certainly feasible we could see a fall in contribution rates – not only is the expected cost of providing new benefits lower, but there is now a sizeable funding surplus that could be used to subsidise the cost of those new benefits,” he said.

Ingoe added that “in theory”, the position of the scheme is now “so strong” that it would be feasible to have a “temporary contribution holiday for members and employers”, but said this is a “highly unlikely outcome”.  

“The initial feedback from Ucea and employers was that there was a strong preference for stability of both costs and benefit structure, and both the USS Trustee and employers are likely to want to exercise caution in using the funding surplus, retaining some or all of it as a buffer against future adverse experience. The University and College Union will also have opinions on the use of the surplus, potentially arguing for benefit improvements.”

UCU general secretary Jo Grady said the healthy surplus was “further vindication of our members’ decision to strike for 69 days to defend their pension”.

“The priority must be to avoid the chaos caused by previous instability in the scheme. This means the current contribution rate must be maintained, a significant portion of the surplus must be used to hedge against future potential volatility, and the investment strategy needs to be orientated towards growth,” Grady added.  

juliette.rowsell@timeshighereducation.com