Plans for pension reform proposed by Universities UK (UUK) suggest a “way forward is emerging” for the Universities Superannuation Scheme (USS), its chief executive has said.
In a letter to employers, who are represented in the Joint Negotiating Committee (JNC) by UUK, USS chief executive Bill Galvin said “there [was] grounds for cautious optimism” as the seven-week UUK consultation on pension reform closed.
UUK floated a range of solutions that could see contributions rates held at an “affordable” level for employees and employers and lower the employee opt-out rate, which currently runs at 20% of eligible HE staff.
It suggested a “low cost”, flexible USS membership option offered to staff who currently opt out – said to be early career staff who may be balancing other costs like childcare, rent, tuition fee repayments and mortgages. It also proposed lowering the threshold for the defined benefit cut-off from just under £60,000 to £40,000.
UUK mooted 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. UUK also proposed a rolling 20-year moratorium on USS employers exiting the scheme and signalled it could levy additional covenant support from members.
The letter from Galvin came three days before the UUK consultation on its plans closed yesterday (24 May).
Galvin said the proposals “demonstrate a clear desire to find a holistic solution to the funding challenges facing the scheme”. Based on its initial assessment of the modified hybrid (defined benefit/defined contribution) benefit structure in the consultation, Galvin said it would be possible to implement the changes “by 1 April 2022 for a total contribution rate of 34.7%”. That figure is substantially lower than the contribution rate currently anticipated by USS: according to the 2020 valuation, contributions from employers and staff would need to rise to between 42.1% and 56.2% of salaries. UUK has described this as “unaffordable”.
Combined contributions are currently 30.7% of salaries: employers contribute 21.1% and employees contribute 9.6%. Stakeholders agreed to increase that to 34.7% in the coming financial year; from October, these figures will increase to 23.7% and 11%, respectively. If the USS initial assumptions do not change, the UUK-proposed reforms could secure contributions in line with the levels currently paid by employers and employees.
“We believe there are grounds for cautious optimism,” Galvin wrote. “A way forward is emerging that could address affordability concerns and put the scheme on a more sustainable footing, but which could also see members continue to build up a meaningful level of inflation-protected income for life in retirement.”
He added: “But we must now wait to see what mandate UUK is given by employers and how that translates into formal proposals tabled by them at the Joint Negotiating Committee (JNC) that we can formally price.
“UCU may also want to consider alternative proposals and formally present those at the JNC and we stand ready to support that process. Our role as Trustee is to price the contribution and benefit structures UUK and UCU put forward.”
A way forward is emerging that could address affordability concerns and put the Scheme on a more sustainable footing, but which could also see members continue to build up a meaningful level of inflation-protected income for life in retirement
– Bill Galvin, USS chief executive
University and College Union (UCU) had indicated that the plans proposed by UUK were unsatisfactory and that it would take industrial action if employers did not change course.
Galvin said, “difficult choices need to be made by all parties” and informed the JNC, which comprises representatives of UUK and UCU, that the USS had agreed to a three-month extension to the time allowed for deliberations. “We recognise how challenging negotiations are likely to be and how providing more time to the JNC could have potential benefits to the process and eventual outcome,” he added.
The letter to employers also explained what impact changes in the financial markets would have on the pension scheme investments.
Galvin wrote: “Nominal interest rates and asset values have increased, which are positive developments for the scheme funding position. On the other hand, inflation expectations seem to have increased significantly, while expectations for future expected investment returns have reduced – both of which put pressure on scheme funding and contribution requirements.
“Early assessments suggest that they might have marginal or no ‘net’ effects on the funding position, but there is more analysis to do.”
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