USS pensions: a conundrum for universities
Following strikes last year, 60 UK universities were again hit by national strike action from 25 November 2019. In the case of 46 of those universities, the dispute is wholly or mainly about pensions. Jeremy Harris explains the background
The trigger for the recent strikes is the proposed increase in member contributions to the Universities Superannuation Scheme (USS) from 8% to 9.6% of salary.
USS has been facing problems common in the pensions world.
Defined benefits have become increasingly expensive to provide as a result of improvements in life expectancy and low gilt yields following the financial crash and years of quantitative easing.
This has been compounded by the scheme funding and employer debt legislation and pressure from the Pensions Regulator to reduce risk. This has led to increases in the required pace of funding of defined benefit (DB) pension schemes.
The Pensions Regulator has statutory power, ultimately, to impose what it regards as prudent scheme funding terms on employers and trustees.
The cost pressure for universities is intensified by the unique structure of USS. Individual universities are not the authors of pension proposals, which gives rise to disputes with them and they are effectively locked into participation in USS.
USS from commencement has operated on a mutual basis as a single non-segmented trust in which non-associated employers participate. Unlike ordinary private sector DB schemes, USS has no principal employer which directs its benefit design.
The scheme is operated by the trustee company, Universities Superannuation Scheme Limited, which has a wide unilateral power to set the employer contribution rate, subject to first consulting Universities UK (UUK) as the employers’ representative under the scheme rules, and to prevent individual employers loading liabilities on to the scheme.
The trustee company has power to amend the scheme rules, but only with the consent of the Joint Negotiating Committee (JNC) of USS.
Employer and member interests in the scheme are represented under the scheme rules respectively by UUK and University and College Union (UCU). The JNC comprises equal representation from UUK and UCU together with an independent chairman. JNC decisions may be made by majority vote, with the independent chairman having a casting vote.
Alongside mutuality, USS has an exclusivity rule covering staff in academic and comparable roles. This means that universities are not allowed to provide a pension scheme other than USS for their staff in such roles, unless the trustee company agrees otherwise.
If this exclusivity rule is broken, the trustee company has a unilateral power to expel the non-compliant employer from USS. This would result in the employer being liable to a statutory employer debt to the scheme. This debt would equal the employer’s proportionate share of the entire deficit in USS calculated on the basis of the cost of buying annuities to secure all USS benefits.
Accordingly, universities cannot in most cases readily withdraw from USS. For many years, this did not present an issue because USS was regarded as being in surplus and had a stable employer contribution rate.
More recently, USS has been found, under the 2004 scheme funding legislation and the Pensions Regulator’s guidance, to be in deficit and the trustee company has required increased employer contributions, if the existing benefit structure is to be maintained.
This cost pressure has led to employer proposals, approved by the JNC, to reduce USS benefits.
From 2011, new entrants to the scheme may only have career average revalued earnings (CARE) benefit accrual instead of final salary.
In 2016, final salary benefit accrual was ended altogether and replaced by CARE up to a salary threshold of £55,000 per year (revalued each year) and a defined contribution (DC) benefit structure for salary above that threshold.
Under the cost-sharing provisions adopted in 2011, if there is any increase in the contributions required on a triennial valuation, the default position (unless the JNC decides otherwise) is to increase employer and member contributions in the ratio 65:35 to meet that.
Proposals last year to end DB accrual and move to solely DC accrual in future were abandoned. The trustee company has now weakened its actuarial methodology, seemingly to the limits that the Pensions Regulator would accept. This enables DB accrual to continue, but with increased contributions.
The issue in the current dispute is whether the employers should bear the full increase in contributions or whether some of that increase should be borne by the scheme members.
The JNC’s decision of 22 August 2019 would mean that employer DB contributions would increase from 18% to 21.1% of salary and member contributions would increase from 8% to 9.6%.
An increase in employer contributions requires only a decision by the trustee board, after first consulting UUK. An increase in member contributions would require an amendment to the scheme rules, which would need JNC consent. The options for individual universities in these circumstances are limited.
As Trinity College Cambridge has done, some universities might be able to meet their employer debt, in which case withdrawal from USS is a possibility. In other cases, a deferred debt arrangement, ceasing to participate in USS but deferring the liability to pay the employer debt, may be possible.
Some universities may have previously widened their participation in USS to include their non-academic employees. Such universities may consider now reducing the scope of USS coverage to the minimum required coverage of academic and comparable employees.
Each university should consider how the member contribution rate and benefit structure under USS compares with the Teachers’ Pension Scheme, the Local Government Pension Scheme and the university’s self-administered trust pension scheme for non-academics.
The circumstances giving rise to the current strike action are not of the universities’ making, but flow from demographic and economic factors combined with the legislative and regulatory environment.
The options available to individual universities are limited in nature, owing to the structure of USS. The universities’ remedy may be through their representatives in USS, particularly on the JNC, to change USS through scheme rule amendments.
There are also additional pressures on universities to comply with their regulatory and legal obligations to provide teaching to students and ensure they are not negatively impacted by the strike. This is difficult given the national nature of the strike action, but with different impacts on each of the 46 universities.
Jeremy Harris is a partner at Fieldfisher LLP.