Answers to frequently asked questions about the USS pension scheme.
There have been two recent employer consultations related to the USS pension scheme which UCL has responded to:
- Following the publication of the JEP report, in late 2018 Universities UK ran a consultation with employers on the findings, which focused on three specific questions. Further details can be found on USS's website.
- At the start of 2019, USS announced that they will be undertaking a , in order to properly consider stakeholder feedback and the Joint Expert Panel’s review. As part of this they launched a consultation with Universities UK on the 2018 USS Pension scheme valuation.
For both consultations, we asked for your comments via our anonymous online form. These submissions were reviewed by the Provost and shared with UCL Council as part of the decision-making process on our institutional response.
You can view minutes of the UCL Council meetings on Student and Registry Services' webpages.With thanks to all those who shared responses, we have compiled an FAQ below which covers the concerns and queries that were received.
FAQs have been grouped into the following themes below:
USS scheme management
Why is there a problem with the USS pension?
The cost of providing defined benefits has risen substantially; by around one-third since the 2014 valuation. In addition, the past service deficit has increased due to persistently low long-term interest rates (negative in real terms).
What will happen if there is no agreement on pensions?
The Trustee’s cost-sharing proposals will take effect, giving rise to substantial increases for employers and members from April 2019 onwards.
What impact has the JEP report had on decision making?
This will depend on the response from the stakeholders (UCU and UUK), as well as the Trustee, and potentially the Regulator. It is hoped that it will help all parties find an acceptable way forward.
How are concerns around governance and management of USS being addressed?
These matters are in scope for the 2nd phase of work being undertaken by the Joint Expert Panel, known as JEP2. This commenced in March and is due to report in the Autumn of 2019. It will be addressing, amongst other things, the governance of USS and the process of undertaking valuations, including questions of transparency, information sharing, consultations and decision-making. It is expected that the JEP2 report will be made public, as was its first report.
What was agreed and decided at the UCL Council meeting on 10 October 2018?
Council endorsed the recommended response which is that UCL welcomes and accepts the JEP findings and that it is prepared to pay the higher employer rate of 20.1% which the JEP report indicates would be required if its recommendations were accepted. Council also supported the request for more information about what would be involved in accepting more risk.
Is UCL supporting the UUK position?
Responses to the consultation indicated substantial support for the JEP recommendations amongst employers and UUK have conveyed this view to USS.
Does UCL support the JEP recommendations?
Is UCL prepared to pay the recommended increase in employer contributions?
Yes (although, to be clear, it’s not a ‘recommended increase’).
Would UCL be willing to take on more risk?
Yes, though we would need to understand in more detail what this might entail.
How did UCL respond to the 2018 valuation consultation?
UCL was asked to respond to three specific questions for the 2018 valuation consultation. These are listed below along with our institutional response which was agreed at the meeting of UCL Council on 13 March 2019.
- Do you have any specific comments on the proposed assumptions for the 2018 valuation, including views on the proposed upper bookend and lower bookend?
We remain committed to retaining an attractive and sustainable pension offer for our staff, and to supporting USS over the long term. We wish to see the recommendations of the Joint Expert Panel implemented in full in the 2018 valuation, including the deferral of de-risking of the investment strategy. We are also unconvinced by the rationale for setting deficit recovery contributions at 5% rather than 2.1% at present. We believe therefore that the total cost should not exceed 30% (upper or lower bookend) and even at this level we have serious concerns about the affordability of contributions for both members and for UCL. The impact of this may involve having to re-prioritise and defer investment, and find compensating cost reductions. We are nevertheless prepared to pay the employer’s share of a total contribution cost of up to 30%.
- Do you support UUK putting forward a proposal for a CCs arrangement to the USS Trustee as it requested? If not, would you prefer to pay at the upper bookend level, or what would your preferred response be?
We do not believe that contingent contributions are necessary because (1) the covenant of USS employers is sufficiently strong, and (2) the Trustee has adequate existing provisions within the rules to respond to extreme circumstances (as evidenced in its application of rule 76.4 for the 2017 valuation). If, however, the only means of securing a contribution rate of less than 30% in total is to agree to contingent contributions then we support UUK in putting forward a proposal as requested.
- Do you find the proposal for a CCs arrangement set out in the Aon note acceptable, taking all the factors into account? If not, what aspects would you wish to change?
We are prepared, reluctantly, to accept the proposal for contingent contributions set out in the Aon note on the basis that this arrangement is only for the period to the next valuation. We do not wish to see this arrangement continuing beyond the next valuation. We wish to see the JEP continue its subsequent phase of work in order to focus on options for the long-term sustainability of the scheme. We hope that this will substantially inform the outcome of the next valuation.
I have heard that the valuation methodology is flawed, why are we using it?
The valuation methodology is determined by the Trustee Board, on the advice of the Scheme Actuary (Mercer).
Why was this not picked up in the JEP?
The JEP report does not conclude that the methodology is flawed. It has, however, identified that some adjustments can be made to assumptions that give a lower future service cost.
Why can’t we carry on with everything as it is/why does the pension have to change at all?
Even if the JEP recommendations are accepted in full by all parties, the cost will rise – from 26% to 29.2% in the JEP’s estimation – to preserve current benefits (excluding the match).
Why are contribution increases coming into effect from 1 April 2019 despite the findings of the JEP?
USS employee and employer contributions are due to increase with effect from 1 April 2019 to 8.8% and 19.5% respectively. Additionally, the employer component of the 1% match will discontinue.
This increase is part of the cost-sharing rule which has been implemented in order to satisfactorily complete the 2017 valuation, as required by the pensions regulator.
Further information on how the changes will affect you and why the changes are being introduced can be found on the UCL HR pension webpages. Here you can also find a guide to the estimated impact on net take home pay.
UCL remains committed to retaining an attractive and sustainable pension, and we wish to see the recommendations of the Joint Expert Panel implemented in full in the 2018 valuation.
Costs / affordability
Why are universities/UCL unable to pay more?
Some employers have indicated that they have significant affordability constraints and cannot pay more than the current 18%. UCL has indicated that it can pay more and is willing to accept an increase to 20.1%. Every 1% costs UCL approx. £4m every year and this has to be found from diverting expenditure from elsewhere – from existing pay and non-pay costs and from investing in the future.
Will UCL pay back withheld pay for those who participated in Industrial Action?
No, however after feedback from some staff, salary deductions were spread over a total of seven months with no more than two days deducted in any month.
Why can’t UCL cover the full costs of increased employer and employee contributions?
USS is a mutual scheme, one aspect of which is that there is a single employer contribution rate. This could only happen if every employer agreed to alter the rules of the scheme which require increases to be shared 65%/35%. This is highly unlikely to happen given the serious affordability challenges faced by some employers. Finally, it is not what the JEP report proposed, and we support the JEP report.
What’s being done to address inter-generational fairness?
A scheme that has a single benefit structure for all members ensures that future benefits accrue at the same rate as those currently earned. The best way to improve inter-generational fairness is to find a way to eliminate the deficit and therefore avoid future members having to pay to make up the pensions of those that have gone before them.
The proposals to increase costs for staff are not going to be affordable for all impacted by this decision. What can UCL do to support with this? Are there any other options?
We are concerned about the impact of cost increases for all staff, but particularly for lower earners. They do have the benefit under the current scheme of accruing wholly Defined Benefits but the cost as a % is the same as for higher earners.
Work has taken place to identify ways to support lower earning staff and we are now waiting to see what the final position is with USS before making final decisions on implementation options. Opt out rates will be monitored closely.
Can adjustments be made to staff salaries if it is not possible to increase the employers’ contribution rate?
See above – we are looking at options to support lower earing staff. Many of our lower earning staff are not in USS at all – they are in SAUL or have opted out of pension saving.
Did employers benefit from a contribution holiday in the past?
There have been references to historic employer contribution reductions/holidays, implying that the employer should pay for the whole contribution deficit and USS should not employ the cost-sharing rule. USS have confirmed that this is erroneous and there never has been an employer contribution holiday throughout its history.
Support for staff
What is the Provost going to do to help UCL staff with this issue?
The Provost will continue to press for retention of USS as a predominantly Defined Benefits based scheme.
Why can’t UCL leave USS and support a different pension scheme? UCL is in a very different position to other members of USS and could offer a more favourable option for UCL staff.
The cost of so doing would be vast – a one-time payment equivalent to our share of the deficit on a buy-out basis would be required (not known but a figure well in excess of £100m). This is just not realistic at the present time. It’s not at all clear that we could make a better offer, as the scheme running costs would be likely to be higher for a smaller scheme, and the investment opportunities would be different. It’s worth noting that most of the universities who have local schemes for professional services staff have closed them to new members, on grounds of affordability.