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Questions & Answers to USS proposed changes

1 Why has the scheme got to change?

The schemes actuary informed the Trustees last year that a deficit of over £12 billion exists in the USS at 31st March 2014. This has now risen to nearly £20 billion due to a drop in market conditions. The Trustees informed the employers that they wanted to make changes to the investment strategy by derisking the asset portfolio with anticipated lower returns; a need to reflect the extra cost to benefits due to an increasing age in mortality; and importantly, the cost of retaining the current benefit structure, and clearing the deficit within a 15 year window, would result in an employee contribution rate of over 12% and an employer rate of 25%.

2 Why have the scheme benefits got to be changed?

The employers submit that no USS employer could afford a 25% employer contribution rate, and that employees would object to having to pay a 12% contribution rate; and that without changes to the benefit structure, the scheme as it currently stands would not be affordable to both the employer or employees. An alternative way to address the future cost is to reform the benefit accrual, bringing in more predictive costs, as can be realised with a CRB scheme and a adjustable salary cap.


3 What are the new proposals on offer?

It is proposed that the scheme is changed with effect from 1st April 2016, subject to a statutory consultation. A summary of the proposals negotiated between the Employers and Union representatives, and currently subject of a consultative ballot within UCU, are as follows;

A summary1 of the potential joint proposal for reform of the USS – 15th January 2015

  • Final salary accruals would cease as at 31 March 2016. Benefits built up before this date would be protected. Their value would be calculated using the existing definition of pensionable salary and service as at 31 March 2016 and from that date accrued benefits would be increased annually in line with CPI, rather than increases in final salary.
  • All members would build up future defined benefits in the Career Revalued Benefits (CRB) section based on an accrual rate of 1/75th of actual pensionable salary. The right to a tax free cash sum of 3 times pension (3/75ths) will also be increased in line with the higher accrual rate.
  • Benefits in the CRB section would also be increased annually in line with CPI.
  • Benefits in the CRB section would be based on the first £55,000 of the member’s pensionable salary. Therefore for members earning up to £55,000 their total salary would be pensioned through the CRB scheme. All members would receive this core benefit.
  • The salary threshold would increase each year in line with CPI (subject to the outcome of a review to be completed by the USS Joint Negotiating Committee by 31 March 2020).
  • If the member earns more than £55,000 they would still build up CRB benefits on their salary up to the salary threshold of £55,000, but any pensionable salary over this threshold would instead be pensioned through a new Defined Contribution (DC) section of the scheme. Employers would pay a contribution of 12% of pensionable salary over the threshold into the DC section.
  • Employee contributions would increase to 8% of pensionable salary. If the member earns over the £55,000 salary threshold then their contribution of 8% of their pensionable salary over the threshold will be paid into their DC pot, in addition to the employer’s 12% contribution.
  • All members would have the opportunity to choose to pay in an additional 1% of pensionable salary into their personal DC pot, which would be matched by their employer to build up an additional flexible DC fund. This option would be available to those members earning below the £55,000 salary threshold as well as those earning over this amount.
  • Benefits on death in service and on ill health would remain comparable with current provision

4 What are the next steps?

The above proposals are subject to a UCU consultative ballot, the outcome of which should be known by the 28th January. A USS JNC is timetabled for the following day; 29th January, at which a decision on scheme reform is intended to be taken. In early February the USS Trustees will confirm the changes proposed and provide the details for the statutory consultation process between employers and affected employees. It is then anticipated that the statutory consultation will commence on the 16th March and run for a minimum of 60 days.

5 Is there a calculator to show how these changes will work?

An online benefits estimator has been launched to allow scheme members to estimate what the proposals would mean for you individually. This is available at: www.benefitestimator2015.com

6 I have heard that you will not get benefits if you earn more than £55,000?

No - You will build up benefits on all of your pay, the proposal for how those benefits are built up and on which part of your pay are shown under the What are the Proposals on offer? There are two salary thresholds for benefits, CRB upto £55,000, or your pensionable pay figure if lower, and then DC from £55,000 up to whatever you earn – there is no salary cap or limit to pensionable pay on which DC can be paid.

7 Does this mean everyone will get less pension benefits?

No – for those current members of the CRB section there will be no difference in their benefits unless their pay rises above the proposed salary threshold of £55,000 (currently fewer than a third of members would be affected by a salary threshold at this level). Where there pay is below the salary threshold, their benefits will be higher as the accrual rate changing from 1/80 to 1/75 means an increase in accrual levels.

For members currently in the final salary section of USS (who will change to CRB for future benefits), and those who are earning in excess of the salary threshold, the impact of the proposed changes will very much depend on their individual circumstances, but overall future benefits accrued will be lower (see  www.benefitestimator2015.com for a comparison).  All members with salary above the proposed threshold will build up additional benefits in the DC section of the USS.

Some changes to pensions which were announced in the March 2014 Budget mean that the funds in the DC scheme could enable the member to take more of their pension as cash and will give a greater flexibility as to how and when this portion of benefits are taken

8 Will the new scheme cost me more?

Yes - Under these joint proposals the standard member contribution rate will be increased to 8% of pensionable pay. You will have the ability to put in another 1% to the DC arrangement, and this will be matched by the employer.

The employers are prepared to increase their overall contribution to USS from 16% to 18% of total salary to help ensure the USS remains sustainable and benefits remain attractive. This additional investment is approximately £135m a year and follows an increase in employer contributions from 14% to 16% in 2009.

All employers would pay the same rate, increasing their contribution from 16% to 18% of total salaries. However it should be noted that actual employer contribution into the proposed defined contribution section, which will provide benefits in respect of salaries above salary threshold of £55,000, is 12%, rather than 18%. The balance of the employer contribution (6%) will pay for future benefits in the career revalued benefits section, and will be required to address the scheme’s funding deficit in respect of past service benefits

9 Why are pensioners not asked to accept changes to their benefits?

These benefits are now in payment and the benefit promise to them is required to be kept, their pensions cannot be changed once in payment

10 Are the DC benefits protected against future deficit in the scheme?

Yes  - The proposed DC element of the benefits for those earning above the £55,000 salary threshold, and those who elect to put in the extra 1%, is a protected fund which is allocated to a named individual and will be protected for that individual

It is anticipated that the DC element of the USS scheme will be administered and invested by USS, although this has not been confirmed and is one of the issues that will be resolved if the proposals are accepted and proceed

11 Why has 18% been set for the employer contribution rate?

Employers reviewed how much they could contribute to the scheme and the conclusion was that 18% was affordable in both the short and long term, anything above this level would not be sustainable and could prevent investment in capital projects, such as student facilities, buildings maintenance and updating of IT systems in order to continue to compete in the global education market. It was felt that the 18% would still ensure that USS remains a sustainable attractive benefit for staff

12 Can employers refuse the USS trustees to change the scheme?

Through UUK the University can make their views known about the scheme as a whole, including the assumptions made for the valuation, the investment strategy and benefit structure. However the USS scheme is governed by independent trustees and they, in conjunction with the JNC (Joint Negotiating Committee) who are made up of trustees and UCU members, are the formal body who decide on the USS structure and benefits

13 Are the financial assumptions being made for the valuation pessimistic?

Valuing a pension scheme is an inexact science, as it is necessary to make predictions about future events, such as salary increases, life expectancy and investment returns. This is the responsibility of the USS Trustees and, with the help of their professional advisors, they have modelled a wide range of possible outcomes, always bearing in mind that they are required to act prudently. While the Trustees changing the assumptions in this instant could affect the size of the deficit, it cannot change a deficit into a surplus. The deficit is sizeable, been at a very high level for two valuations in a row, and benefit reform is now unavoidable, and expected by the Pensions Regulator.

The USS has made available an explanation of its assumptions online at: http://www.uss.co.uk/SCHEMEGUIDE/FUNDING/Pages/default.aspx

14 Where can I get further information?

 

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