USS Pensions explainer - 22 September 2021

Resources related to the USS Pensions explainer event held on 22 September 2021. This page was last updated 11 November 2021.

Recording

Following on from the explainer session held in June, universities pensions specialist Rebecca Dodd gives an overview of the latest situation and discussions related to the USS scheme valuation. 

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Factsheet from Mercer

Questions & answers

The following questions were asked by staff during the session. Answers have been provided by the UCL pensions team.

Q1. Given junior academics are most strongly impacted, what role have they had and do they now have on the decision making process?

The University and College Union (UCU), represent all USS scheme members on both the Board of Trustees and the Joint Negotiating Committee. UCL has previously asked for feedback from its scheme members and would strongly encourage participation in the Employee Consultation which is due to commence in November 2021. 

UCL is acutely aware of the issues facing early career academics in relation to the affordability of the scheme, where USS are reporting opt out rates of between 15 to 20 percent, or the reform of scheme benefits and its implications to generating a retirement income. UCL’s agreement to the UUK proposal of benefit reform to address the current scheme deficit is conditional to the implementation of a low-cost alternative USS arrangement in the near future and a full review of the schemes Governance. There is also the possibility of a strengthening of the USS funding position in future valuations which could result in an uplift to annual pension benefit growth.

Q2. What is the lifetime impact on income of the proposed reforms, as a function of current age?

An increase to the cost of a reduced defined benefit could be more negatively impactful on an early career academic in the long term compared with a scheme member who has secured the best part of their USS benefits under the previous defined benefit arrangements. There should, however, be a consideration to a potential recovery of the USS funding position in future valuations which could result in an uplift to defined benefits comparable with previous arrangements and positive Investment Builder returns (although not guaranteed) may also address the balance.

Q3. In basic terms, what will the impact be of these changes?

The proposal would decrease the growth of future benefits (from 1 April 2022) within the Retirement Income Builder by: 

• Reducing the salary threshold from £59,883.65 to £40,000. 
• Increasing the factor used to calculate defined benefits from 1/75th of pensionable salary to 1/85th of pensionable salary (up to the salary threshold of £40,000).

The annual revaluation (increases) of benefits would be restricted to a maximum 2.5% compared with a current maximum of 10% (if Consumer Price Indexing (CPI) were above 15%)
A reduction to the salary threshold to £40,000 would result in a greater proportion of contributions payable to the USS Investment Builder (8% employees and 12% employers contributions on earnings above £40,000). 

For UCL, this is the proposal to reform the schemes benefits is the least worse-option. The alternative would have resulted in an unaffordable increase in contributions for both staff and employers. UCL’s agreement to the UUK proposal is conditional to the formulation and implementation of a lower-cost alternate arrangement and a full governance review. We also argued for a delay to the valuation until 2021 where it was felt that the asset position for the scheme was in a better position than in 2020. 

Q4. If the scheme becomes unaffordable for me, can I leave and return at a later date when/if the scheme becomes more manageable?

The affordability of the scheme for staff and employers was a primary concern for UCL for the USS 2020 valuation. The UUK proposal stabilises employee contributions for the next 3 years at 9.8% so we are hopeful that opt out rates will be minimised as a result.  It is possible to withdraw from the pension scheme, giving 28 days-notice, and you can re-join the scheme at any time. You would need to consider that you would not be benefiting from the employer contributions (proposed to increase to 21.4% from 1 October 2021) and that you would not be covered for active member death in service and ill health retirement cover for the period. UCL would recommend that you seek Independent Financial Advice before withdrawing from the scheme.

Q5. In the new offer, above £40k only 20% of the ~30% being paid goes into the Investment Builder. Is the other ~10% being used to cover historic accrued benefits?

It is the view of USS that more funds are required to support the Defined Benefit section of USS. Under the UUK proposal, UCL will be required to deduct a 9.8% employee and 21.4% employer contribution from all pensionable earnings. An overall 11.2% of earnings (1.8% employee and 9.4% employer contributions) will be used to support the Retirement Income (Defined Benefit) section of USS. 

Q6. Is the UUK Proposed Salary threshold still at £40000 or will that increase?

It is proposed that the Salary Threshold will increase annually from its starting position of £40,000 but we are waiting for further details from UUK on this. There is also the potential for the threshold to be increased if the USS funding position improves in future valuations.

Q7. What happens to me existing benefits, say as of 30th September 2021? Are these secure? I feel anxious that these will not be honoured.

A triennial statutory valuation is essentially a temperature check of the USS funding position. Where a deficit is identified, the USS Trustee are required to cost the scheme in order for the funding position to recover. This can be addressed by increasing future contributions, reforming future benefits or a combination of both. The proposed changes will only affect the service accrued within USS from 1 April 2022. All previous service is secured, will increase on the previously agreed basis and cannot be changed retrospectively.

Q8. Why was the valuation carried out at the worst time during the pandemic when there was a dip in the assets, which has since recovered?

USS are required to undertake a triennial statutory valuation. However, in this instance, and given that USS had already conducted a 2018 valuation, there was the potential to move the 2020 valuation to 2021 and this was strongly advocated by UCL. The USS actuary did undertake a funding check as at 31 March 2021 but, in USS view, found that there was no material difference in the overall funding position despite the recovery in the schemes assets. This was largely due to the scheme actuaries view that future investment returns were forecast to be lower than in March 2020. UCL has continued to challenge this assumption via its consultation feedback to UUK.

Q9. Has the inevitable reduction of membership, caused by these changed, being modelled in terms of how much money will be coming in?

UCL anticipated that there would be a greater decline in scheme membership had employee contributions increased to 11% from the 1 October 2021 and USS did undertake some modelling around this. The subsequent contribution increases costed by USS for the 2020 Valuation would have had a further and significant impact on the affordability of the scheme for members. UCL feels that the UUK proposal is the least-worst outcome for existing members of the scheme and for employers and that the acceptance of the proposal is conditional to USS and its stakeholders to urgently look at the feasibility of an alternate and affordable scheme section which can accommodate staff who are currently out-priced by the existing scheme arrangement. The current USS opt out rate nationally is 15 to 20 percent (UCL is nearer 13%) and we are hopeful that an alternate option for staff can increase membership numbers.

Q10. How does the governance of USS work? If the pension is managed so badly, why would not their executives be replaced (instead of making us pay)?

How USS is governed is set out on their website but it is essentially a trust with an executive branch. Its purpose is to ensure that the benefits secured by members can be payable in the future. Both UUK and UCU have previously raised concerns around the scheme’s governance. The UUK proposal supported by UCL is conditional to a full review of the scheme’s governance before the next valuation in 2023.

Q11. If USS is proposing to run a DB scheme on £40,000 based on x percent contribution, why can't that scheme be extended to £80,000 with the same x per cent contribution?

It would not be possible to sustain a salary threshold of £80,000 and retain the existing contribution levels.  This is because the cost of guaranteeing defined benefits in the long term has become more expensive. The current UUK proposal to reform benefits has sought to stabilise contributions and this has been at the cost of reducing the salary threshold to £40,000. There is the potential for the threshold to increase if the funding position has improved within future valuations.

Q12. Is there any scope in discrimination/inequality law to resist the changes? These changes will more strongly impact women and ethnic minorities (as usual).

UCL will conduct an equalities impact assessment in conjunction with the USS employee consultation in November 2021. Our assessment will be provided to UUK and USS.

Q13. Why is USS the only option that UUK offer, which includes the option for the employer contribution?

The USS exclusivity rule prohibits employers from using any alternate pension arrangements for eligible staff. It is possible for an individual member to withdraw from USS and join an external arrangement, but the employer contribution cannot be used for this purpose.

Q14. Why are the evaluations on USS not conducted by an independent third party (i.e. by the pension’s regulator)?

USS is required to undertake its own valuations with its appointed scheme actuary. UUK and UCU also employ actuaries for guidance and advice on the outcome of a USS valuation. The Pension Regulators role is to ensure that USS have committed to an acceptable level of prudence in their estimations of the schemes funding position to ensure that USS can meet its future commitments. It is highly probable, given the Pension Regulators commentary on the 2020 valuation that they would impose a greater level of prudency to the valuation than currently employed by USS resulting in a further increase of costs.

Q15. Does £13 billion deficit of the fund mean bankruptcy? 

Although concerning, a scheme reporting a deficit position does not mean that it is going bankrupt. The purpose of a valuation is to assess the current and future funding position of the scheme and to take measures to address the deficit position. As well as benefit reform, UUK have proposed a series of additional Covenant (employer) support measures which includes a moratorium on scheme exits on a rolling 20 years. They have also proposed an 18-year recovery plan where additional support is provided to the scheme to stabilise the funding position.

Q16. If accepted, when would the UUK proposals come into force?

The reforms to USS benefits would come into effect from 1 April 2022.

Q17. USS is not transparent as other pension providers on how much money are actually held in each of their customer’s pension's pot. Why this lack of transparency?

USS are required to provide the value of your current Investment Builder fund as this is a defined contribution. You can view your current fund within your MyUSS account. This is not a requirement for the Retirement Income Builder as the current annual accrual of pension benefits is based on 1/75th of annual salary. USS are, however, looking to update MyUSS to include the overall annual contribution to the scheme.

Q18. All this considered, is it still convenient contributing to USS vs. any other pension scheme into the open market? 

It is not possible to provide financial advice on alternate pension arrangements vs. USS. It should be noted that the USS exclusivity rule prevents UCL from paying any employer contributions to an alternate scheme. UCL would encourage UCU to formally table its alternate proposal to address the 2020 valuation.

Q19. Who is going to take responsibility If TPR’s intransigence/short-sightedness results in more departures from USS, with spiralling impacts on its viability?

Ultimately, it is the responsibility of USS to cost the scheme via a triennial valuation to meet its statutory requirements and to satisfy the Pensions Regulator. UUK recognised that the current contribution levels are at the threshold of affordability. As a result, UUK proposals are focused on benefit reform in order to stabilise the current contribution level. It is hoped that opt out levels from USS will be less significant if contributions are not increased. UCL’s agreement with the UUK proposal was conditional to the implementation of a low-cost alternative scheme arrangement and a full review of the USS scheme governance.

Q20. Looks like there's a very real danger of all sides (UCU, UUK, USS) digging their heals in with this latest mess. Is Conditional Indexation a realistic 3rd way?

Conditional Indexation is one of a number of discussions that will take place following the closure of the valuation where it is hoped that there will be agreement on a way forward. Additionally, UCL has called for a full review of the schemes governance and for the introduction of a low cost alternate USS arrangement which will attract staff currently out-priced by the existing employee contribution.

Q21. Could you address *why* TPR is taking the position it is - the underlying "prudence", the insistence on not re-doing the valuation?

The Pensions Regulator require USS to be sufficiently prudent in its estimations of the future funding. The Pension Regulator and USS are of the view that a 2021 Valuation would not make a material difference to the future funding level of the scheme. This is based primarily, on the assumption that returns on investments will not be as high in the future. They will also expect USS to employ a shorter recovery plan within a 2021 Valuation. A shorter recovery plan would result in higher contribution levels for both staff and employers. UCL has continued to challenge this view by asking for a 2021 Valuation.

Q22. Why there is no support for low salary employees to invest in investment builder by the employers?

Employers are required to pay a contribution to USS which currently amounts to 21.1% of pensionable earnings. This includes a 12% contribution to the Investment Builder for those earning above the salary threshold (currently £59,883.65. UCL is also hopeful that a low cost alternate scheme can be introduced to attract staff who are currently outpriced by the current employee contribution.

Q23. Selling off stocks & shares to buy gov't bonds and gilts, almost guarantees the scheme will not meet growth expectations. Why isn't this reversed?

USS undertake a self-sufficiency test for each triennial valuation. The purpose behind the test would be to demonstrate the level of assets the scheme would require if the reliance on the sponsoring employers were reduced to a minimum. This would require a conversion to lower-risk investments. It should be noted that this is a test and does not require the actual conversion of stocks and shares to government bonds.

Q24. Is it true that UUK refused to afford the same Covenant Support to UCU proposals that they were prepared to afford their own proposal?

UUK did not withdraw employer covenant support. UUK is simply not in a position to grant employer covenant support unconditionally without consulting and gaining the support of employers, especially if any proposed reform comes at a higher cost. To enable an outcome to the 2020 valuation to be reached, employers have offered considerable additional covenant support – worth an extra £1.3 billion a year. UCL would encourage UCU to formally table its proposal to enable discussions around covenant support to take place.

Q25. Do you believe that a retiree can survive with the USS defined benefits in UK?

It is not possible to make this judgement as it relates to an individual’s personal financial position at retirement. UCL believes, however, that USS will remain competitive when externally benchmarked.

Q26. I am concerned about the amount I'll be losing in my pay considering the announcement about a rise in NI. How will you support colleagues on lower salaries?

The initial contribution scenarios presented by USS for the 2020 Valuation were considered unaffordable for both scheme members and for employers and was the reason why UCL supported (as a least worse case outcome) the UUK proposal to reform benefits in order to maintain the current contribution levels.

Q27. Is it possible that the pensions regulator may not have the best interests of employees in mind, but may want to let USS collapse?

The Pensions Regulator is there to ensure that USS have prudently costed their assets against their liabilities so that USS can pay the benefits promised to its members in the future. The Regulator would be more concerned by the strain placed on the Pensions Protection Fund in the unlikely event of the collapse of USS.

Q28. Should I be setting up a separate private pension? Will my university pension not be enough?

It is possible to increase your pension savings by contributing to the USS Investment Builder or an external arrangement. You may want to seek independent financial advice when determining the best investment options for you.

Q29. What are the proposed contribution rates (estimate fine)? Currently 9.6 & 21.1 (11 & 23.7 from Oct). 11% is unaffordable, extra options would be helpful.

The increase of employee contributions to 11% from 1 October 2021 has been averted and replaced by a 0.2% increase which will raise the employee contribution from 9.6% to 9.8%.

Q30. Will the change from 1/75 to 1/85 be backdated or does what you've built up before stay at 1/75? 

The change to 1/85 will apply from 1 April 2022 only.

Q31. Staff were paid less in comparison to industry over the last few decades, but College management justified the poor pay rise comparison with the better pension.

Pay does differ from sector to sector and UCL takes part in national pay negotiation (alongside the majority of the sector) which sets the pay award that is applied to the scales of most universities each year. While we have outlined that we want a better value for money scheme in the longer term by most metrics the USS scheme benefits remain competitive when compared with the wholly defined contribution arrangements available within the private sector. UCL contributes an additional 21.4% of earnings in order to secure USS benefits.

Q32. It is really unclear what the investment builder is and how it results in a pension. Who pays the 20%? Is that still shared employer-employee?

The USS Investment Builder is the defined contributions section of the scheme. Under the UUK proposal, contributions from earnings exceeding £40,000 per year will be payable to this section of the scheme. The overall contribution is 20% and is comprised of an 8% employee contribution and a 12% employer contribution. You will have the option to drawdown from your Investment Builder fund from age 55 or you can purchase a pension (annuity) with it on retirement.

Q33. Converting your Investment Builder savings to Retirement Income Builder benefits will end on 1 April 2022 - is that true?

This is the case and USS wrote to members on 21 September 2021 to confirm this. In future members with Investment Builder savings will not be able to convert the funds to a pension within the USS Retirement Income Builder. The option to drawdown from an Investment Builder fund or to purchase an annuity (pension) on the open market will continue and will be supported by a new independent third-party guided annuity service and flexi-access drawdown product to give you more choice when taking your Investment Builder savings.

Q34. Does the Investment builder grow with inflation, or does it receive interest? Living costs grow quicker than any money set aside.

Funds within the Investment Builder are linked to the investment performance of the funds that you choose to invest in. Therefore it is linked to investment growth rather than inflation.

Q36. Where are the contributions of the employer coming from if it is based on your salary?

The employer contribution is paid to the scheme in addition to the employee contributions deducted from your UCL salary.

Q37. Can we leave USS and move to SAUL for example or a pension scheme that isn't doing so badly?

SAUL is primarily a scheme for support staff employed on a grade 6 and below. It is possible for a SAUL member to continue with their membership of the scheme if they are regraded within UCL to a position above grade 6. The USS exclusivity rule prevents current USS members and USS eligible staff from joining SAUL.

Q38. Can you explain the difference between SAUL and USS pension? Do I have to move to USS if I get to Grade 7? Which am I better off choosing if I have choice?

Currently SAUL is a wholly defined benefit career average revalued benefit scheme with a 1/75th accrual basis. The current contributions are 6% employees and 16% employers (although the employer contribution is due to increase from April 2022). You would have the option to retain SAUL membership if you are an existing member and regraded to a grade 7 (or above) position.

Q39. The right to convert investment builder funds to boost the income builder will apparently end in April 2022. Should we take the opportunity to do that now?

It would only be possible to commute Investment Builder funds to secure additional pension within the Retirement Income Builder if you are retiring from USS.

Q40. I am interested in understanding how our pensions will be paid or transferred to another country of the EU now that we are not part of the EU anymore.

USS have a dedicated section for transfers which includes and answer to the question ‘Can I transfer my pension to an overseas pension scheme?’ 

Q41. I have past USS contributions (not drawing) but am currently in Saul. What are the implications (if any) if I should start paying into USS again in future?

You would essentially re-join USS and your SAUL benefits would remain deferred unless transferred into USS.

Q42. As a new (non perm.- so unlikely to get employer contribution) member of staff I am deciding whether to enroll. Is it worth it now? Or better to save elsewhere?

UCL cannot provide you with independent financial advice. You should, however, be aware that the exclusivity rule between UCL and USS prevents the payment of employer contributions (currently 21.4%) to an alternate scheme arrangement.

Q43. From a Pension view when is the best time to marry my partner to ensure he gets my contributions after my death – does this have to be before I retire?

It is not necessary for you to marry in order for death in service benefits to apply. A partner who qualifies as financially dependent would also be entitled to a partner's benefit.

Q44. I am already receiving some of my USS pension & worked for 14 months recently. Will this enhance my overall USS pension when I am due to retire March 2023?

Any accrual of USS benefits within the Retirement Income Builder of the Investment Builder will enhance your retirement benefits.

Q45. I have past USS contributions (not drawing) but am currently in Saul. What are the implications (if any) if I should start paying into USS again in future?

There are no implications when re-joining USS. Your previous service in USS is secured under the rules that applied up to the point of your exit from the scheme. Any new period of membership will not influence the service that you have previously accrued.

Q46. I have another USS pension from 20+ years ago. Can my two USS pensions be merged? A. USS was a final salary defined benefit scheme until the sections closure on 31 March 2016.

The benefits for your previous service are revalued annually on a different basis than current benefits. All benefits, however, from all your component parts of USS are payable on retirement from the scheme.

Q47. Is it possible that for the defined contribution portion people may end up getting back less than they put in, if the pot isn't strong at the point of claiming?

Defined Contribution schemes are investments and are therefore linked to investment performance. You should note that USS will invest in lower risk but potentially lower return investments as you progress towards retirement. It is also not necessary for you to access defined contributions on retirement if market conditions are not favourable.

Q48. Seems like all was going smoothly until the disaster of the Brexit vote. Coincidence?

USS have a mixed and international portfolio of liquid and illiquid investments/assets which has lessened the impact of Brexit. The Covid 19 pandemic had a far broader and negative impact on the markets in February/March 2020 but this was followed by a significant recovery.

Q49. Please confirm the inflation rate impacting the pension each year when it is actually claimed. Is it the actual rate or 2.5%?

The rate which is limited to 2.5% will only apply to benefits accrued from 1 April 2022. Previous secured benefits within the Retirement Income Builder can increase to a maximum 10% (if the Consumer Price Index were 15%).