USS: An unbridgeable gap?

Pensions lawyer Jeremy Harris looks at what direction the USS scheme could take following huge industrial action

University and College Union’s second wave of 14 days of strikes at universities will come to an end this week.

Whilst the strike action has intensified since the action before Christmas, being longer (for 14 days instead of 8) and more widespread (covering 74 universities instead of 60), the strike still affects a minority only of the 340 or more employers that participate in the Universities Superannuation Scheme (USS).

UCU contends that no reductions should or need be made in USS benefits and no increase in member contributions to the scheme should or need be required. UCU argue that the employers as the scheme sponsors should meet the full cost of the increase in contributions to USS that the trustee company is requiring.

UCU say that the increase in member contributions which is sought, from 8% to 9.6% of salary, would be likely to lead to increasing numbers of members opting out of USS.

The employers, on the other hand, contend that it is reasonable for members to bear some part of the increase in the cost of their USS benefits and that employers cannot afford to bear the full increase in that cost, taking account of the pressures on the higher education sector in competing internationally for students and staff, the freeze on tuition fees and the need to compete in research.

The regulatory regime policed by the Pensions Regulator has led to extensive de-risking by private sector defined benefit pension schemes and to most of such schemes ultimately closing to future defined benefit accrual

The USS trustee company has the power under the scheme rules unilaterally to impose an increase in the employer contribution rate to the scheme, subject only to consulting with Universities UK (UUK). The employers’ agreement is not required to this.

The employers’ contribution rate is to increase from 18% to 21.1% of salary under the trustee company’s proposal. The employers are accordingly already bearing the bulk of the cost of the scheme. The proposed allocation of the increase in contributions between employers and members broadly reflects the default position under the cost sharing provisions of the scheme rules.

Under those provisions, if there is no agreement between UUK and the UCU as to how the required contributions increase should be allocated between employers and members, employer and member contributions are required to be increased in the ratio 65:35.

Whilst the gap between UUK and UCU might appear to be unbridgeable, past experience tells us that it is likely to be resolved.

A logical compromise?

A logical compromise position would be to give members an option to contribute to USS at a lower rate in return for a lower level of benefits. Such flexibility exists in many other defined benefit pension schemes and there is a salary-related tiering of member contribution rates under the Teachers’ Pension Scheme and the Local Government Pension Scheme, which often co-exist with USS by applying for particular employers to non-USS employees alongside USS.

Such flexibility would address the risk of increasing member opt-outs from USS.

It seems unlikely that such flexibility would be accepted by UCU, although an optional lower member contribution rate could enable younger and lower paid academics to join and remain in USS.

There are other areas of flexibility where employers and employees on other pension schemes have found a common cause, in terms of flexibility in the way benefits are provided following retirement and flexibility in the way in which retirement is defined. There are significant constraints on such flexibilities under USS.

UCU will need to point to some kind of gain from the current process in order to justify the strike action carried out and calling a halt to that action. It seems that the Joint Expert Reports have resulted in agreed changes to process only rather than in changes of substance.

A logical compromise position would be to give members an option to contribute to USS at a lower rate in return for a lower level of benefits. Such flexibility exists in many other defined benefit pension schemes

In view of the default cost sharing position under the USS rules, and the financial objections raised by universities, it seems unlikely that the employers would agree to bear the full increase in the contributions required to the scheme.

On the other hand, it appears probable that UCU would only abandon industrial action if there is some reduction in the proposed increase in member contributions, or some other improvement in the members’ position as compared with the trustee company’s proposal.

Some form of middle ground involving a slightly greater increase in employer contributions and a slightly lower increase in member contributions than currently proposed seems feasible.

However, this would only be a ‘sticking plaster’ over the fundamental issues facing USS.

At some point in the future, it seems inevitable that further benefit changes will be needed in order to control the costs and risks of the scheme.

This is particularly so in the context of the regulatory regime policed by the Pensions Regulator, which has led to extensive de-risking by private sector defined benefit pension schemes and to most of such schemes ultimately closing to future defined benefit accrual.

Going forward, universities will need to consider what (if any) tuition fee refund schemes for contact time lost through industrial action would be appropriate, to maintain the goodwill of students, and also how to structure the employment relationships with staff, and how properly to communicate to academic staff regarding their benefits under USS, to maintain good employee relations.

Jeremy Harris is a pensions lawyer at law firm Fieldfisher, with 29 years’ experience advising trustees and employers. 

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