An £18bn deficit has forced the Universities Superannuation Scheme (USS) to propose vastly increased pension contributions for UK universities and their staff.
Scheme trustees have today proposed a range of solutions to reduce the escalating deficit of the USS, which has ballooned to £17.9bn from £3.6bn in 2018.
Of the solutions under consideration, the costliest is a proposal to more than double contributions paid by university employers and about 200,000 members to nearly 68% of salaries from the current 30.7%.
This option would force many lecturers to pay thousands more to maintain the same benefits.
The proposed contribution increases are a concern not only from the standpoint of universities’ finances, but also of academic staff opting out of USS and potentially triggering immediate employer debts at some institutions
– Jeremy Harris, Fieldfisher
Universities Superannuation Scheme 2020 valuation
The proposals were published today as part of the ongoing 2020 valuation of the scheme. The consultation document warned of a ‘perfect storm’ that has beset the USS: “Against a more benign economic backdrop, we might have expected some of the changes we are proposing as part of the valuation to deliver better news for you.
“But circumstances have worked against us. Experience has been notably worse than the economic assumptions and expectations that drove the 2018 valuation. Even ahead of the pandemic, the continued fall in real interest rates was increasing the cost of USS pensions.”
“[USS] resilience will only become fully clear over the next two to three academic years,” the report added.
The USS is the UK’s largest private-sector pension fund and one of the remaining few defined benefit (DB) schemes in the country. USS committed to holding a valuation in 2020 because of uncertainty about the 2018 valuation. “That commitment recognised the challenging and volatile economic conditions present during the 2018 valuation, and the desire of UUK and UCU to revisit the contributions scheduled from October 2021”.
The valuation uses a ‘snapshot’ of the scheme’s funding position, which was taken on a pre-agreed date of 31 March 2020.
Mindful of the impact of the pandemic on the financial markets, USS chiefs explored other routes to addressing the scheme’s deficit, such accelerating the de-risking planned under the 2018 valuation, but none was deemed better – or more palatable – than continuing with the March 2020 valuation as planned. Moving the valuation date from 31 March to later in the year would likely result in a larger deficit, the report explained, because “the outlook for future investment returns has deteriorated”.
In order to lower the deficit to £9.8bn and reduce contributions to the lowest proposed option (40% of salaries), universities and other employers would need to agree to supporting the scheme for 30 years and giving the USS priority over new debt.
Resolving the valuation process could last nearly a year – but must, by law, be concluded by 30 June 2021. The consultation on the proposed options runs until Friday 30 October. The USS then needs the Joint Negotiating Committee (JNC), which includes employer and employee representatives, to agree on a plan by March 2021 in time for the statutory deadline. JNC negotiations could prove hard; the University and College Union (UCU) has already said it has “no confidence in the needlessly cautious” approach taken by USS chiefs.
Bill Galvin, USS’s Group chief executive, said he was “acutely aware of just how unwelcome the prospect of paying more for pensions will be” for the higher education sector, but continued: “The hard reality is that persistently low interest rates and greater uncertainty of future investment returns have created an environment where such promises have become increasingly expensive.”
“We fully recognise that the contribution rates we’ve illustrated are unlikely to be considered affordable or sustainable by either employers or our members. We are committed to working with our stakeholders, Universities UK (UUK) and UCU as they consider how to respond to these challenges, and to working with stakeholders to ensure the Universities Superannuation Scheme is a sustainable scheme.”
UCU has ‘no confidence’ in USS assessment
Members are leaving the scheme because of its high cost – calling for unnecessarily large reductions in benefits and increased member contribution is not the way forward. Universities need to start demanding more from USS and push back against this approach
– Paul Bridge, UCU
A spokesperson for UCU spoke this morning of the union’s disappointment at the USS plan, adding that the union felt the USS had “cherry-picked” recommendations from a Joint Expert Panel (JEP) set up by UCU and UUK following strike action in 2018-2019.
The union head of higher education Paul Bridge urged universities to make USS reconsider its approach.
“We have no confidence in the needlessly cautious methodology applied by USS. We are also disappointed USS has cherry-picked from the recommendations made by the JEP. UCU members are well informed and expect to see better evidence behind the judgements USS has made.
“We want USS to take account of the strong long-term outlook for the scheme. Members are leaving the scheme because of its high cost – calling for unnecessarily large reductions in benefits and increased member contribution is not the way forward. Universities need to start demanding more from USS and push back against this approach.”
The UCU and UUK are battling a war of wills over the reopening of campuses later this month. The news from USS will likely increase the tension between the two increasingly fractious sides.
Jeremy Harris, a partner at Fieldfisher, thinks universities will find any contribution increases “unpalatable”. Although university leaders are battling to reopen universities and restart term, the looming spectre of USS “requires urgent attention by universities”, Mr Harris added.
“The ‘elephant in the room’ is the need for significant further reductions in USS benefits if these contributions hikes are to be avoided or ameliorated. The proposed contribution increases are a concern not only from the standpoint of universities’ finances, but also of academic staff opting out of USS and potentially triggering immediate employer debts at some institutions,” he continued.
On behalf of UUK, which represents all 341 employers in the scheme, a spokesperson said the organisation wants “to continue a positive dialogue with UCU and USS” and is keen to see the JNC consider all possible solutions, “including the possibility of allowing members to opt to reduce their contributions in return for different benefits, rather than leave the scheme”.
“Employers are acutely aware that the current employee contribution levels are leading to high levels of opt-out by younger and less well-paid staff, leaving them without any employer contributions to their pension provision. Now, more than ever, members need a choice on contribution levels,” the spokesperson added.