Major reform of the USS pension scheme moving forward at pace

Employers are calling on union representatives to join them in shaping and overseeing important changes to the USS pension scheme.

As part of the employer reform proposal passed on 31 August 2021 at the Joint Negotiating Committee – the forum for agreeing changes to the scheme – there was a commitment to hold a thorough governance review, explore alternative scheme designs and take urgent steps to reverse the high employee opt-out rate.

USS employers want to work together with representatives of the University and College Union (UCU) in three areas:

1. A taskforce of employer, union, and USS representatives, and their actuarial advisers is swiftly being established to explore alternative models for scheme design (Conditional Indexation, for example) that could potentially offer enhanced benefits and better value for money.
2. Employers have invited UCU representatives to join a tripartite task and finish group along with USS to urgently progress work on high-quality, lower cost pension options, which is an important part of the employers package of proposed reforms. This would give staff flexibility to pay in less than the current mandatory rate of 9.8% of salary, and still benefit from a generous employer contribution towards their pension. Employers have asked USS to model defined benefit options (offering members a set amount of pension benefits) and defined contribution options (a pension based on how much is paid in and how well investments perform) for union and employer representatives at the Joint Negotiating Committee to discuss and explore which options best fulfil the needs of members currently choosing not to be in the scheme.
3. Employers believe a governance review, carried out with independent expertise, is long overdue and want to work with the UCU and the USS Trustee to take this forward as soon as possible so the scheme better serves the interests of members and sponsoring employers.

A Universities UK spokesperson, on behalf of USS employers, said:

“We’re creating a better and more inclusive pension scheme which is affordable for early career staff, exploring how scheme redesign could offer enhanced pension benefits and better value for money for members and employers, and establishing an independent review of scheme governance. We expect that the UCU, which represents all scheme members, will want to play a full part in these important discussions and decisions. There are many issues like these where employers and their staff agree that change is necessary and by working together quicker progress can be made.”

USS is one of the largest private pension schemes in the UK and is the principal scheme for academic and comparable staff in UK universities and other higher education and research institutions. Universities UK represents the views of 340 higher education employers on USS.

Conditional Indexation (CI) involves annual increases to pension benefits – above any statutory minimum increases – may be dependent on scheme investment returns and not guaranteed. (This may be considered, for future benefits, by stakeholders after the 2020 valuation.)

Around 20% of members are currently choosing not to join the scheme and losing out on the 21.4% employer contribution, leaving them without any pension savings for their future.

USS members priced out of pension savings without changes to the scheme 

7th Oct 2021: A new contributions calculator developed by @UniversitiesUK shows how much more Universities Superannuation Scheme (#USS) pension scheme members will be paying each month if employer-backed reforms are blocked by union strike action.

The USS Trustee, which runs the scheme, recently confirmed that it would impose higher contributions from April 2022 without benefit changes.

This would hit the pay of staff currently paying into USS, with scheme members seeing a 12% rise in contributions in April 2022, followed by a further 17% rise in October 2022. A member earning £40,000 would therefore pay an additional £860 in pension contributions in 2022 for the same benefits, with contributions set to rise further every six months until 2025.

Contribution increases would also have huge implications for the budgets of USS employers, as money would need to be diverted from other areas such as student services and staffing budgets to pay the USS Trustee’s higher costs.

The contributions rises in April 2022 alone would cost employers an additional £206 million per year – equivalent to nearly 5,200 full-time roles across the university sector – and comes after employers agreed to give even stronger backing to the scheme, estimated at £1.3 billion each year. The costs would also then escalate higher every six months from October 2022.

To avoid such damaging cost increases, employers reluctantly proposed changes which still provide a good pension for staff at close to current contribution levels, with employers paying in more than two and half times the average contribution rate for FTSE 100 companies.

Figures published today by the USS Trustee show that the proposed changes could reduce the amount of pension members receive at retirement by around 10-18% (7-15% when state pension is included) for a range of example members. All benefits earned from contributions to date are safe and will not be affected.

The University and College Union (UCU) is balloting its members on strike action despite choosing not to put their alternative proposal to the vote at the Joint Negotiating Committee, the official forum for deciding on scheme changes.

Professor Julia Buckingham, Vice-Chancellor of Brunel University London said:

“The spectre of higher contributions is causing a great deal of worry for university leaders. Staff have worked immensely hard through the extremely challenging conditions forced on us by the Covid-19 pandemic, and it would be an utter travesty if further pension contributions hikes led to more staff not joining the scheme because of the cost, a further exodus of current staff members from the scheme because they cannot afford to pay in more, and mass redundancies as employers have to cut back elsewhere to pay higher pension costs.

“With so much financial uncertainty currently engulfing universities, and the significant financial pressures last year brought due to loss of commercial income and additional spending to make campuses Covid-secure and move teaching and support online, now is the time to shore up USS by making changes that guarantee good pension benefits without significant additional costs.”

Tim Bradshaw, Chief Executive of the Russell Group, said:

“Existing benefits that USS members have accrued are secure, but we need to make sure USS is sustainable for the long term. Making changes in contribution rates and future benefits is never easy, and only done when absolutely necessary, but the employer proposal means that a core Defined Benefit (DB) element can be retained while keeping the scheme affordable for individuals and employers.

“I firmly believe that a combined contribution rate of around 30%, along with the extra measures employers have agreed to, should be enough to deliver both a decent pension and the other valuable benefits that come with USS membership.”

There are 340 employers within USS, many of whom are small charities doing life-changing work with disadvantaged groups and communities. Sarah Armstrong, Chief Executive of the Ewing Foundation, a smaller USS employer improving the lives of deaf children, says any further contributions increases will be challenging:

“It’s so important that smaller organisations are considered in discussions over how to conclude this valuation. The financial implications of higher contributions are troubling – particularly for charities in the scheme like us, where resources are already very lean.”

All figures given on the calculator are for pre-tax illustrative purposes only.

Personas illustrating the impact of UUK’s proposed benefit reforms on scheme members at different salary levels have been published by USS.

This official modelling provided by USS suggests that when benefits already accrued and the value of DC benefits is taken into account, the impact will be a reduction in USS benefits at retirement of between 10% and 18% for a range of example members (not including state pension), with a retirement age of 66. These figures will vary depending on assumptions used for the future. The assumptions made by USS in its modelling were confirmed by both UUK and UCU for use to help the JNC understand the potential impacts on members.

Scheme members closer to retirement will find that the impact on their pension is much smaller. For those further away from retirement the impact is more difficult to predict. The scheme’s stakeholders have committed to explore alternative scheme designs which could provide even better benefits in future. 

The 35% reduction in benefits figure used by UCU is based on a very specific example, which chooses to ignore the valuable Defined Contribution (DC) element of the scheme. UCU acknowledge that if DC benefits are factored in to their example the reduction drops to 23%. 

On a like-for-like method, UCU’s draft benefit reform proposal would lead to a headline reduction in benefits of 27%.

The employer contribution rate of 21.4% of salary is 2.6 times higher than the average non-matched employer contribution from FTSE 100 companies (8.3% of salary), based on the FTSE 350 DC Pension Scheme Survey.

Unless there are changes to the scheme, employers and scheme members face escalating contribution rates imposed by the USS Trustee. Members would see their payments rise from 9.8% of salary, to 11% in April 2022 and reach 12.9%, in October 2022, reaching as high as 18.8% by 2025.

For employers, contributions would rise from 21.4% of salary to 23.7% in April 2022 and at least 27.1% in October 2022 and reach as high as 38.2% by 2025.

The scheme’s active payroll as at 31 March 2020 was £8.962 billion. The total monetary contribution to pensions by USS employers is therefore currently £1.89 billion per annum, meaning each additional 1% contribution to USS equates to an extra £89.6m per annum, equivalent to approximately 2,000 individual members of USS employed in USS institutions (based on an active membership of 200,355 and average USS member salary levels, as detailed in the rule 76 report presented by USS to the Joint Negotiating Committee.)

The value of the overall covenant support package agreed to by employers is worth the difference between 56.2% and 42.1% (USS’ scenario 3), which is equivalent to c.£1.3 billion. 

The USS Trustee has set out in a briefing note the reasons why it does not believe a 2021 valuation would deliver a materially different outcome to that of the 2020 valuation.

Higher pensions contributions avoided after USS Trustee accepts employer plans for reforms 

3rd Sept 2021: The USS Trustee board has agreed to take forward the Joint Negotiating Committee’s (JNC) recommendations for concluding the 2020 USS valuation, saving university employers and hundreds of thousands of scheme members from steep contribution increases from 1 October 2021.

Employers and scheme members were facing escalating contributions from October – for employers, from 21.1% of salary to 23.7%, while members would have seen their payments rise from 9.6% of salary, to 11%. But with the USS Trustee board’s approval of the JNC’s decision to modify benefits, and agreement to proceed with a dual schedule of contributions, new rates of 21.4% for employers and 9.8% for members will apply instead.

The alternative approach to the valuation – passed by a JNC vote – was developed by Universities UK (UUK), the formal representative of over 340 employers in the scheme following consultation with all scheme employers. The proposal includes additional commitments by employers on covenant support and benefit changes to prevent unaffordable rises in contributions. Central to the proposals are formal commitments from employers to explore alternative scheme designs (including conditional indexation) for the future; accelerate a major review of USS governance with independent expertise; and work with stakeholders including the University and College Union (UCU), representing scheme members, to develop and implement a flexible, low-cost option for lower paid members of staff.

The employers’ proposal was backed by the JNC Chair on 31 August 2021 following months of talks, after UCU representatives declined to formally table their own proposals for reform and refused repeated requests from employer JNC representatives to share the draft UCU proposals with employers for a view.

Employers agreed to provide an additional £1.3 billion worth of financial backing to the scheme – or ‘covenant support’ – to ensure the scheme’s current hybrid of guaranteed ‘defined benefits’ and defined contributions (which depend on the performance of investments) could be maintained.  

A spokesperson for UUK, on behalf of USS employers said:

“The USS Trustee board’s decision means decent pension benefits can continue being provided for contributions of 31.2% of salaries, which is close to the current contribution rate of 30.7%, and substantially lower than the 34.7% rate the USS Trustee previously said would apply in October. This decision in combination with the other reforms also prevents a further escalation of contributions next year.

“Avoiding higher contributions is essential for both employers and scheme members. For employers, higher rates would have consequences for jobs, teaching and the student experience, while unaffordable contributions for members would undoubtedly force many to drop out of the scheme in greater numbers, and miss out on money from their employer towards their future.

“Employers are committed to working in partnership with UCU to progress a major governance review of USS, jointly exploring future options for scheme design, including shaping a lower-cost option so staff on lower salaries are no longer priced out of retirement saving by high contribution rates.”