Pensions: USS employers back UUK reforms

141 employers responded to Universities UK’s consultation in bid to avoid “damaging, unaffordable contribution hikes”

Higher education providers are backing Universities UK’s (UUK) suggested reforms to the troubled Universities Superannuation Scheme (USS) pension scheme.

Employers representing 95% of USS membership responded to UUK’s consultation on medium and long-term reform of the scheme.

The USS is the largest private pension scheme in the UK. In March 2021, its 2020 valuation resulted in the shock news that pension contributions from employers and staff would need to rocket to plug an estimated £15 billion shortfall. The USS Trustee argued that its covenant was plagued by “persistent low-interest rates and reduced expectations of future investment returns”.

Without changes to the scheme, employers and scheme members face escalating contribution rates: for employers, from the current level – 21.1% of salary – to 23.7% in October 2021 and at least 28.5% next year. Similarly, members would see their payments rise from 9.6% of salary, to 11% in October 2021 and reach at least 13.6% next year.

Both UCU and UUK have queried whether the USS valuation is, in UUK’s words, “overly pessimistic”.

In April, in response to the USS valuation, UUK launched a seven-week consultation, floating a range of ‘fixes’ that would maintain pension contributions at present levels while preserving what it describes as a “valuable pension scheme for staff”. The UUK proposals were heavily criticised at the time by the University and College Union (UCU), which sits on the pension scheme’s Joint Negotiating Committee, and has 140,000 members, many of whom have USS pensions.

UUK received 141 responses from employers to the consultation, backing the following measures:

  • Employers to offer further, stronger covenant support measures including: a moratorium on exit; debt-monitoring; ensuring that pension promises are even more secure through protecting the USS Trustee’s status as a creditor; measures deemed necessary by the USS Trustee to lower its pricing in the current valuation “if it results in a good level of defined benefit pensions and avoids damaging, unaffordable contribution hikes”.
  • No increases in member contributions or employer contributions.
  • Maintaining the scheme’s DB/defined contributions (DC) hybrid with changes at this valuation to keep contributions at the current level with a proposed salary threshold of £40,000.
  • A major new review of the scheme’s governance.
  • Work to begin immediately on developing proposals to explore a move to a conditional indexation model – which pegs a part of annual pension provision to the performance of scheme funds – through the suggested establishment of a working group representing all stakeholders.
  • Addressing the high opt-out rate, which sees around 20% of members choosing not to join the scheme and losing out on the 21.1% employer contribution, by giving eligible members the choice of a new lower contribution option.
  • A commitment that, should the scheme’s financial situation improve, then improvements to benefits can be considered rather than reducing contribution rates.

 

Action is needed to avoid unpalatable contribution increases for both employers and members or the number of staff leaving the scheme will become a stampede and there will be cuts to teaching, research and jobs – USS employers spokesperson

Universities UK says that for a university staff member earning under the salary threshold of £40,000 per annum, the UUK proposal would lead to a headline reduction of about 12% in future pension benefits (benefits earned prior to any change are secure and unaffected). Members would also receive a 20% DC contribution above the threshold. Under the lowest cost USS Trustee scenario, there would be a reduction of around 25%.

To keep current pension benefits, in the lowest cost USS Trustee scenario someone on a £41,526 salary would have to pay in at least £1,660 a year more under the default employer/member cost sharing ratio – 42.1% in total, 13.6% for members, 28.5% for employers.

“We are grateful for the very high response rate to our consultation with many employers engaging extensively with their governing bodies and members of staff,” said a spokesperson for USS employers.

“There is a strong desire for changes to the scheme, some of which will take time to fully explore including governance reform and conditional indexation, which requires legal changes and significant work to get right.

“This still leaves employers and scheme members with an immediate challenge. Action is needed to avoid unpalatable contribution increases for both employers and members or the number of staff leaving the scheme will become a stampede and there will be cuts to teaching, research and jobs at many institutions as employers would be forced to pay extraordinarily high pension costs.

“We continue to press USS and The Pensions Regulator to achieve a fair price for the demanding additional support measures employers are offering to keep the hybrid alive and maintain a good level of defined benefits in the scheme. The USS Trustee’s initial response to the UUK proposal, which has received the backing of employers in this consultation, is that it is willing to adjust its assumptions to lower scheme costs, but not far enough to be able to offer the level of defined benefits for the contributions and covenant support proposed by UUK.

“Further consultation is therefore planned with employers to see if they can give stronger assurances on covenant, and then with the USS Trustee to see how any final gap can be bridged.

“We hope the union will work with us and suggest ways of tackling these immediate financial challenges to avoid ruinous contribution increases, and to explore longer-term changes, including a governance review, a flexible option for members and conditional indexation.”

Previous disagreements over the future of the ever more contentious pension scheme have resulted in significant industrial unrest, including 14 days of stoppages at 52 universities in February and March 2020 and eight days of strikes at 46 universities in November and December 2019. 

In April, UCU warned universities could face yet more industrial action if they supported the proposals in the UUK consultation.

UUK says it will publish further detail on the responses of employers later this month.

The proposals will be discussed by the Joint Negotiating Committee over the coming weeks.


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