The Universities Superannuation Scheme (USS) must modify its “overly cautious approach” or risk a “dreadful outcome” to the highly-contested 2020 valuation of the pension fund, the president of Universities UK (UUK) has said.
A seven-week consultation on the 2020 valuation was today launched by UUK for the 340 USS employers it represents, as the organisation seeks to break the impasse.
On 3 March, the USS Trustee published its 2020 valuation report, proposing higher contributions for employers and employees. Total contributions from employers and employees need to rise to maintain present benefits, USS concluded – proposing new rates between 11% and 25% higher than current levels. This was described at the time by UUK as “unaffordable” and “unprecedented”.
UUK, the voice of 140 universities and formal representative of the 340 participating employers in the USS pension scheme, held a press conference earlier today to launch its consultation.
Its objectives are for a “valuable pension scheme for staff, which includes a defined benefit element”, “fair valuation assumptions”, affordable contribution levels, and a reduction in the numbers opting out of the scheme.
UUK president Prof Julia Buckingham said the organisation had worked with its actuarial advisors Aon to explore a “potential alternative path for the valuation that could help to bring the headline costs down”.
No concrete proposals were yet ready, but Prof Buckingham said it was now time to consult employers, who range from multi-billion-pound universities to small research institutes, on the options under consideration.
One change mooted during the briefing with journalists was for a reduced defined benefits (DB) element of the scheme. Another idea floated was for a new short-term, flexible USS option that would offer cheaper contributions for early-career staff who find themselves “priced out” of the scheme, Prof Buckingham explained.
UUK also proposes reducing accrual from 1/75 to 1/85, reducing the size of retirement payments, and imposing a consumer price indexation cap of 2.5, which cuts protection for benefits against inflation above that level. It also suggested a rolling 20-year moratorium on USS employers exiting the scheme and signalled it could levy additional covenant support from members.
With the consideration underway, Prof Buckingham said UUK would continue “pressing the USS trustee to reconsider its approach to evaluation”.
It would be a dreadful outcome if an overly cautious approach by the USS trustee was to lead to unjustified and unnecessary cuts to the scheme
– Prof Julia Buckingham, Universities UK
UUK wrote to USS and the Pensions Regulator on 10 March over the handling of the valuation. Although UUK agrees “the scheme’s status quo cannot be maintained”, it told the USS Trustee it did not see “strong or clear justification for the very high pricing decisions”. It warned the proposed higher contributions would severely affect employers’ finances and exclude staff from the scheme, particularly “those at early stages of their career, increasing even further the current intergenerational unfairness within the scheme”.
Dame Kate Barker, chair of the USS Trustee Board, responded that it would not alter its conclusions in light of the concerns but added it would consider a “specific proposal” if UUK put forward an alternative. Dame Kate asked UUK what covenant support employers could levy, what structure employers want for future benefits, and the level of spending the 340 employers considered fair.
These three questions underpin many of the issues UUK is exploring with employers in the consultation.
The consultation will ask employers if they are able to provide additional financial backing, known as covenant support, to reduce the required rise in contributions. UUK hopes this insurance could persuade the USS trustee to “evolve their assumptions”.
Speaking earlier today, Prof Buckingham said: “Although the USS trustee has stated that it will not review its valuation approach until an alternative proposal is put forward, it ultimately has the power and the room for manoeuvre to fair assumptions, which lower its pricing to minimise the extent to the changes we need to make to the scheme and to keep alive a significant element of defined benefits.
“It would be a dreadful outcome if an overly cautious approach by the USS trustee was to lead to unjustified and unnecessary cuts to the scheme.”
Prof Buckingham continued: “Employers have raised concerns on the governance of the scheme. And we will, therefore, be asking employers to share concerns through this consultation as suggested areas for consideration in a post-valuation governance review.”
The USS is a hybrid scheme with staff eligible for defined benefits accrued up to a salary threshold of just under £60,000 a year. Above that threshold, USS invests 20% of earnings into the defined contribution scheme. UUK is consulting on a lower salary threshold “so that people on the highest salaries would pay more into the defined-contribution section of the scheme,” Prof Buckingham said, “but all members would still receive a significant element of defined benefits”.
Increasing numbers of staff are exiting the scheme, UUK said, because they cannot afford to meet the contribution rate of 9.6% of their annual salary. UUK hopes employers will approve the new optional lower-cost short-term flexible payment option as a way of ensuring more staff members can afford to join the scheme, even if at a reduced rate.
“This wouldn’t be a replacement for the main USS scheme, it would be an optional short-term alternative for those who are currently priced out,” Prof Buckingham said, adding: “USS is a one-size-fits-all scheme, so people can only be part of it if they’re able to afford to contribute 9.6% of their salary. While this is affordable for many, this rate is pricing numerous staff out of the USS. They are missing out on money from their employer towards their future, and they’re prevented from getting valuable life cover and other benefits.”