USS pensions: Oxbridge VCs and UCU presidents agree need for radical pension overhaul

A letter signed by the vice-chancellors and UCU branch presidents of Oxbridge supports conditional indexation as a route out of USS pension woes

In a rare moment of fraternity, the vice-chancellors of Oxford and Cambridge universities and the presidents of the Oxbridge UCU branches have published a joint statement calling for a radical overhaul of the beleaguered Universities Superannuation Scheme (USS). 

The letter says that a joint employer-employee contribution rate of between 25-30% of annual salaries “should be sufficient to secure a good pension for staff”.

The USS 2020 valuation looks likely to fix contributions slightly above that margin, at 30.7%, after Universities UK (UUK), representing 340 USS employers, agreed with institutions on extra financial backing – known as covenant support – for USS pensions. The move brings the conclusion of the latest, troubled valuation within reaching distance. 

But the Oxbridge vice-chancellors and UCU branch presidents say the design of the 2020 valuation – and the similarly contested valuations since 2016 – can be repeated no longer. The statement calls for a “fully resourced team… to look into alternative scheme designs… to report in six months”, something UUK has also signalled it is keen to pursue. 

The letter is a rare sign of local unity between university leaders and UCU branch presidents. 

The statement published on Tuesday 3 August was co-signed by Prof Louise Richardson, vice-chancellor of the University of Oxford, Prof Stephen J Toope, vice-chancellor of the University of Cambridge, Dr David Chivall, president of Oxford UCU branch, and Michael Abberton, president of Cambridge UCU branch. 

At a national level, the UCU general secretary has accused UUK and the USS trustee of “colluding to slash pensions” during the 2020 valuation.

At present, USS uses a standard, and overly simplistic approach to risk that may be appropriate for single employer closed schemes but is not appropriate for USS
– joint Oxbridge statement

Cambridge and Oxford set out USS grievances

“We believe that the current regulatory and actuarial approach to risk for traditional defined benefit schemes – including the current USS scheme – makes it difficult to obtain good value for money,” the letter explains. “Successive valuations have locked in higher contribution rates and/or reduced benefits for a scheme that can afford to operate under a very long-term investment horizon.”

The four lament that members “see their benefits eroded on the basis that something bad – but ultimately unlikely – might happen, but see little flexibility in the scheme to benefit from improved market conditions”.

“USS uses a standard, and overly simplistic approach to risk that may be appropriate for single-employer closed schemes but is not appropriate for USS,” the four leaders argue. 

USS pensions_ Oxbridge v-cs and UCU presidents agree need for radical pension overhaul VCs
Prof Stephen J Toope and Prof Louise Richardson are the first vice-chancellors to publicly call for widespread structural reform to the Universities Superannuation Scheme since the troubled 2020 valuation

Cambridge and Oxford come out in support of conditional indexation

The solution favoured by the four academics is one idea sketched out in a report by UUK for USS employers this March: conditional indexation (CI). At the time, UUK warned CI would take “a lot of work”, adding it wanted strong support from employers before pursuing it.

UUK and UCU have both accused the USS Trustee of overprudence – underestimating the scale of returns from its investments, which has led it to seek ever-higher contributions from employers and employees. 

CI would, if implemented, lower contributions from employees and employers – but at the cost of some guarantees to members. A move to CI is predicated on the view that current USS investments can deliver good – or better – returns than the USS Trustee presently thinks. 

Benefits would not – as they do presently – automatically increase with inflation until retirement and would instead be conditional on the market performance of USS investments. The pension benefits would remain consistent throughout retirement, however. 

In a document published this March, UUK said CI would mean, “members have [the] possibility of similar or increased benefits compared with status quo […] if it transpires that the USS Trustee is […] overly prudent in its assumption choices and good investment returns emerge.”

But there are potential downsides. UUK warned that “if increases are not given, then this could lead to tension and possibly to increased opt-outs”. 

The price of contributions to a CI scheme to employers and employees would be lower than the current, hybrid defined contribution/defined benefit scheme, but guaranteed increases would be diminished as a result. However, parameters could be set that would protect members from “significantly deleterious outcomes”, the Cambridge-Oxford statement suggested. 

The Cambridge-Oxford statement added: “Over the medium-long term, we would expect benefits to appreciate as much or more under this approach as in the current inflation-linked scheme. 

“The investment in a diverse mix of long-term growth assets should protect against the erosion of benefits even in conditions of high market volatility such as the high-inflation 1970s.” 

UUK also warned in March that USS has a record deficit – £15 billion at the last count – which could hamper implementation. UUK also warned members might prefer a defined contribution component because “they may benefit more clearly from good investment returns on growth assets, rather than rely[ing] on the USS Trustee to pay higher benefits when investments perform well”.

CI is also relatively rare: only two other UK schemes use it, and one is in a hybrid structure. How it could work for HE “is less well-known, and will inevitably be more complex to implement”, UUK added. 

Next steps

The letter from the vice-chancellors and UCU branch presidents implores the union and UUK to put aside their differences and “investigate alternative scheme design based on employer and member risk and reward sharing” – with solutions to be published in the first two months of 2022. 

Read more: USS pensions: Employers pledge more money but warn it could financially weaken some

Header image of Cambridge University and Oxford University via Flickr. 

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