Pension contribution rates for members and employers will need to “rise sharply” to deal with significant funding challenges, the Universities Superannuation Scheme has said – proposing increases described by universities as “unaffordable” and “unprecedented”.
The USS – which has more than 200,000 members working in UK higher education and research institutes – today published an actuarial report that suggests pension contribution rates need to rise from 30% to nearly 50% to deal with the scheme deficit, which quadrupled to almost £15 billion.
The most favourable scenario set out by USS would require contribution rates to rise to 42.1% of payroll. In another scenario set out today, contributions would need to increase to 56.2% of payroll.
The figure is currently 30.7%, and stakeholders agreed to increase that to 34.7% in the coming financial year.
University employers currently contribute 21.1% of employer salaries, with employees contributing 9.6%. When contributions rise from this October, these figures will increase to 23.7% and 11%, respectively.
The increased rates proposed today would require the 340 member employees and employers to contribute more than £2bn per annum towards USS.
The scheme is the UK’s largest private pension fund, but its trustees say its covenant is plagued by “persistent low-interest rates and reduced expectations of future investment returns”. The trustees say higher contributions were needed to “maintain existing benefits of the scheme”.
Universities UK (UUK), which represents employers, said they needed “significant reassurance that the USS Trustee is not being overly prudent on matters like projected investment returns or undervaluing possible covenant support measures”.
Trends in financial markets have made USS ‘much more expensive’
Dame Kate Barker, chair of the trustee board, reported that The Pensions Regulator (TPR) considers the proposals at the limits of compliance. The trustees considered other options, Dame Kate wrote in her foreword to the report, which the “TPR felt would not be prudent enough to comply with Part 3 of the Pensions Act 2004.”
The report calculates the contribution cost of a “package” proposed by UUK. According to trustees, the proposals would require contributions rise to 49.6% of payroll if UUK agreed to a range of new commitments set down by the scheme. Without those commitments, the contributions would need to increase to 56.2%.
“Of the three scenarios”, the USS said, it is the 49.6% “scenario on which the Trustee based its contribution determination that has been shared with the JNC.” The Joint Negotiating Committee comprises members from UUK and the University and College Union (UCU), representing employees. The two sides will now discuss how best to proceed.
Dame Kate said: “We fully recognise the scale of the challenge facing the scheme and sympathise with our employers and members in light of the difficult decisions that lie ahead. Trends in financial markets have made the valuable pension promise offered by USS – a set inflation-linked income for life in retirement, regardless of what happens to the economy in future – much more expensive today than in the past.
“I believe everyone involved with USS wants to find a way forward, consistent with our legal and regulatory duties, that provides valuable and secure pensions, and that puts the scheme on a sustainable footing. We are committed to being as collaborative and constructive as we can in supporting UUK and UCU’s discussions to this end.”
USS has informed TPR that it will not be possible to complete the valuation by the statutory deadline of 30 June 2021, owing to the need to consult with the JNC. The current expectation is that the valuation process will not conclude until late 2021 or early 2022.
The very high prices for current benefits put forward by the USS Trustee are unaffordable for employers
– Universities UK
A spokesperson for Universities UK said the recommendations were “unaffordable” and “unprecedented”.
“The very high prices for current benefits put forward by the USS Trustee are unaffordable for employers, risk pricing even more staff out of the scheme, and undervalue the collective and enduring financial strength of the participating employers.”
“Employers understand that the USS has a sizeable deficit and that a high number of staff on lower grades opt-out because the contributions are too expensive for them. It is important that USS is designed so that people in early career can also access an affordable pension. This means it is vital that contributions to the scheme are affordable and sustainable for staff and employers alike and that reform is necessary.
“However, employers and scheme members need a stronger and clearer justification from the USS Trustee for the very high pricing decisions. Without this justification, employers and scheme members will be concerned that the scheme is facing an unnecessary level of reform.
“There has been a three-month delay in the USS Trustee confirming the price of current benefits, while it has had discussions with The Pensions Regulator. The USS Trustee has now set out higher prices than it previously thought necessary and it appears to be taking a more cautious approach than employers and our actuaries advise is needed.
“Employers and their staff need significant reassurance that the USS Trustee is not being overly prudent on matters like projected investment returns or undervaluing possible covenant support measures, both of which remain under discussion.”
[USS] has also proceeded with a valuation date of 31 March 2020, so the value of its assets has been measured during a global pandemic as markets were crashing. The scheme receives more in contributions annually than it pays out, making it able to ride out any bumps
– Dr Jo Grady, UCU
UCU have maintained there are flaws in the valuation of the scheme, which include an “overly pessimistic view of the higher education sector and […] its growing asset base”.
General secretary Jo Grady said USS was trying to “spin the fundamentally flawed assumptions which its valuation of the pension scheme relies on as objective matters of fact. In doing so it risks endangering a healthy scheme”. She called on UUK to “step up the pressure on USS to change its approach”. She said the union would hold a special sector conference for higher education branches and “cannot rule anything out”.
She added: “USS’s asset base is huge and has doubled in size since 2011, yet it continues to revise assumptions down. The rationale for this remains unclear to many, even those of us closest to the process. It has also proceeded with a valuation date of 31 March 2020, so the value of its assets has been measured during a global pandemic as markets were crashing. The scheme receives more in contributions annually than it pays out, making it able to ride out any bumps.
“USS chief executive Bill Galvin was awarded an eye-watering bonus last year, but USS members who have worked so hard during the pandemic are being told that either contributions have to go up or benefits must go down. After a decade of pay and conditions being degraded, many precarious and low paid higher education workers can no longer afford to be USS members. Even more will quit if contribution rates go up further and this will endanger the health of the scheme as a whole.”
Dr Tim Bradshaw, chief executive of the Russell Group, whose 26 members are all USS employers, said the proposals “are unaffordable for staff and employers and don’t reflect the significant backing that the sector provides for the scheme”.
“We recognise the scheme is currently in deficit and changes will be needed to address this, but at the same time, the scheme must be sustainable for the future and continue to provide security for our staff. In particular, we are concerned that around one in six have already opted out because it is too expensive or does not meet their needs.
“We will need to consider carefully all of the information provided by the Trustee and regulator to ensure changes implied by today’s report are not being driven by an unnecessarily cautious approach.”
Read more: USS pension fund deficits double to £13bn