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Information related to the USS pensions town hall held on 27 April 2021.
Recording:
Questions and Answers:
Could you please comment on Sam Marsh's USS brief 106 on 2020's prudential assumptions, assuming zero asset growth over half a century, and why UUK are not calling for Bill Galvin to resign and for new trustees to be appointed?
UCL is in agreement with UUK that USS have been excessively prudent in its valuation assumptions.
What alternative options to the USS pension do we have if it becomes unaffordable?
The USS exclusivity rule prevents UCL from offering an alternate pension arrangement. For that reason, we will push USS for greater options and flexibility within the existing scheme.
Why are further increases being suggested when even the last increases were not supported by the Joint Expert Panel (JEP)?
USS accepted a number of the Joint Expert Panel (JEP) recommendations, including a dual discount rate, the removal of Test 1 and exposure to more risk in its investment strategy. USS viewed that adopting all of the Joint Expert Panel (JEP) recommendations would involve an unacceptable degree of risk for both the Trustee and the Pension Regulator, as is their right to do so.
For the March 2020 valuation, a covenant support rating of ‘tending to strong’ (which negatively influences the level of risk exposure for the scheme), and volatile market conditions, were contributory to higher contribution pricing.
There was a significant recovery in the markets post valuation which restored the current pension funds assets, however, USS reported an increase in the cost of securing future benefits as a result of a fall in future expected investment returns.
USS are required to undertake a prudent estimation of future costs and it is the view of the UUK Actuary (Aon) that USS have been overly cautious in estimating the deficit position for the 2020 valuation.
Is UUK ignoring the independent JEP recommendations?
UUK was instrumental in the founding of the Joint Expert Panel and endorsed their eventual recommendations. UUK have already raised the fact that USS have overlooked significant aspects of the JEP’s recommendations. It should also be noted that USS was under no obligation to adopt the JEP’s recommendations.
What guarantees are there for UCL employees that the rise in their contributions will have the desired outcome and goals will be met? What happens if goals aren't achieved?
The purpose of a triennial valuation is to determine if the current level of contributions is sufficient to fully fund the pensions owed to date and in the future.
If the pension scheme estimate that this is not the case then appropriate measures to mitigate a further deterioration in the schemes funding position must be agreed upon. Ultimately, scheme stakeholders will seek an outcome that is sustainable in the long term, however, this cannot be guaranteed.
UUK says it 'will continue pressing' the Trustee to reconsider valuation assumptions - but in proposing major cuts to benefits, UUK apparently acquiesces in the Trustee's call for radical change. Why would UUK's pressure now have any force?
UUK is not agreeing with the level of prudency that USS have employed in their estimation of the cost of paying future pension benefits. However, UUK’s independent actuary (Aon), employing a less prudent approach but which they feel would still satisfy the Pension Regulator, have determined that the scheme would still be left in a deficit position though much reduced from that outlined by USS. UUK have therefore proposed the alternate measures contained within the consultation documents.
USS pension is the only attractive part of Academia compensation. Is UCL planning to propose new benefits (e.g. higher salaries)?
USS is clearly an important part of UCL’s overall reward package. While the proposals put forward would result in either a higher cost or reduction of benefits, USS will still be a good scheme in comparison to those commonly available elsewhere. UCL has already taken action to increase the minimum salaries of the lowest USS members in recent years and automatic increments have continued to ensure well over half of staff below grade 10 have received a pay award of 3% during a time of very low pay awards in the wider economy. This is also a time of financial constraint for the sector but UCL will continue to review the situation in light of the final outcome.
Should the contribution costs become unaffordable, could employees on the USS pension scheme be given the opportunity to switch to a different scheme (e.g. SAUL)?
USS has an exclusivity rule which currently does not allow UCL to offer its academic staff an alternative pension scheme arrangement. UUK is asking UCL if it would support a review on scheme governance. A potential relaxation of the exclusivity rule would form part of that discussion.
If contributions increase, so will the opt-out. How will this help fund the USS Scheme?
It is recognised that further increases in the employee and employer contribution rate would undoubtedly result in higher opt-out rates which in turn has the potential to destabilise the schemes future funding position. This is a fact that USS have not adequately addressed. Employers, including UCL, have confirmed to UUK that the current contribution levels are at the limits of affordability.
I struggle to understand how increasing contributions solve the deficit; if the contributions go up so should the pensions (?). Or is the idea that we are funding more now but receiving the same (or less) later?
USS sets the pricing of securing existing and projected scheme benefits with each valuation cycle. In this valuation period, USS have determined that increased contributions are required to secure the existing level of benefits available to scheme members. UCL agrees with UUK that USS have been overly prudent in determining the level of contributions required to secure scheme benefits at their current level.
Can we have a simple, one-sentence definition of what is meant by "the covenant" please?
The ‘covenant’ is the collective financial strength of over 340 employers in the USS scheme. It is the confidence that future contributions will be paid and the ability of employers to step in and cover scheme liabilities should it be required.
The USS Income Builder, the defined benefits scheme, has become poor value for money. Can members be given the option to put all of their own and the employer's contributions into a DC scheme? Do young staff have to fund the deficit?
It is currently not possible for an employer to support an alternate scheme arrangement to the USS Retirement Income Builder. Currently, all scheme members pay contributions to the scheme at the same rate to ensure that existing pensions and projected pensions are sustainable. It is recognised that a one size fits all approach may not present an altogether attractive option for new scheme entrants who may wish to be offered greater flexibility in terms of what they contribute to USS. UUK have asked if UCL would support an affordable alternate USS arrangement specifically to attract/retain younger academics and to address issues of potential intergenerational unfairness.
At what stage are UCL/UUK going to do an equalities impact assessment on the UUK proposals?
UCL is required to undertake an equalities impact assessment in conjunction with an employee consultation on proposed changes to USS. Providing there is agreement on a way forward, the employee consultation should take place later in the year.
There seem major equalities implications of this downgrade, especially off the back of previous changes to pension offer.
UCL is required to undertake an equalities impact assessment in conjunction with an employee consultation on proposed changes to USS. Providing there is agreement on a way forward, the employee consultation should take place later in the year. The outcome of the USS valuation does create significant intergenerational fairness issues which have been widely noted. Dependent on the responses of our employees UCL is minded to continue to suggest to USS that this issue needs to be more adequately addressed.
New proposals include an annual uprating cap (e.g. pensions in deferment) of 2.5%. If the rules are changed, would this figure apply to the uprating of pension benefits ALREADY accrued, and perhaps in deferment?
The alternate proposal from UKK would set a cap on the future accrual of service only and not existing benefits. Existing benefits would continue to be annually uprated in future based on the current arrangements; only new accrual would receive uprating capped at 2.5%.
I'd like to continue working at UCL until I retire. Am 58. I have 3 separate private pensions and want to transfer to my current USS pension scheme. Can I do this? Is it wise to do this? Who would one make contact with to enact this?
It is possible to transfer benefits into USS, however, we are legally prevented from providing direct financial advice. Direct financial advice could be provided by an Independent Financial Advisor.
In the valuations, I do not see reference to the possibility of altering the retirement age. People live longer than they did in the 1960s - a small shift in retirement age (or age at which benefits are taken) would surely be helpful.
Currently, USS align their retirement age with the recent and proposed increases in state pension age. The increases are therefore factored into the 2020 valuation. We can suggest this in our consultation response.
Currently, UCL is not offering a realistic/affordable pension package for early career researchers. Are there any plans to address this? Won't a massive opt-out have a very negative outcome for the pension fund?
Please see the answers provided to questions 9 and 12.
Is the valuation making the same assumption as the last time we went through all this - i.e. that all universities go bust at the same time?
The question reflects the assumption behind what was referred to as ‘Test 1’ whereby the valuation outcome had to demonstrate that, in the event of a large-scale failure of employers, the investment strategy could switch over time to a low-risk basis in order to continue to pay accrued benefits. This test has been dropped in this valuation, although USS does retain something similar as one a number of metrics used to monitor scheme health. It doesn’t however drive the valuation outcome.
Please can you define the term "benefits already accrued", especially for someone who has paid into the system over a number of years and then opts out.
This refers to benefits in the scheme that you have secured to date and under the existing scheme rules. These benefits would not change as a result of any future changes to the accrual rate or with any future reduction to the USS salary threshold. The reason that the deficit must be addressed is to ensure that these benefits can be paid when they become due to you.
Has UCL done any independent valuation actuarial work in relation to this USS process?
UUK is responsible for undertaking independent actuarial advice on behalf of all of the employers that it represents, including UCL. UUK has employed Aon to undertake its actuarial work.
What's happening with the Teachers Pension Scheme, where most post-92 institution staff are?
Unlike USS, which is an independent trustee scheme, The Teachers Pension Scheme is an ‘unfunded’ public sector pension scheme. This means that it is supported/subsidised by the government to ensure the payment of secured pension benefits. Payment comes out of member contributions and tax revenues as opposed to the scheme having assets which earn a return. Effectively today’s members are paying retired member’s pensions as they go.
Why is the proposed UUK cap on the DB set at £40k nationwide, given the vastly different costs of living in London vs elsewhere?
The scheme offers the same benefit basis for all members, as well as the same contributions. The figure of £40k was chosen to illustrate a package of benefits that could be offered for the current rate of contributions. The salary cap could be set higher (say £50k) but would require the accrual rate (the fraction of your salary which is secured each year as a pension) to reduce to avoid costs rising. At £40k, 80% of employees would continue to accrue a benefit that is fully DB.
American citizens have the misfortune of being prohibitively taxed by the US government on any investment schemes that are not through their primary employer. Will UCL maintain a scheme for employees regardless of this outcome?
UCL is legally required to provide a pension scheme arrangement for its employees.
Would the indexation cap apply to all benefits or just future benefits? This is a key issue for many of us, and esp. for those with pensions in deferment.
Please see the answer provided to question 15.
How would this transfer to those on NHS pensions?
The NHS Pension Scheme is an unfunded public sector pension scheme and is independent of USS. Consequently, any changes to USS do not impact the NHS Pension Scheme.
Is UUK in a position to seek an alternative pension provider for UK Universities?
Please see the answer provided to question 12.
Is there an agenda for UUK employers to make a capital injection into the scheme to shore it up? This happened in parts of the private sector to ensure that some well-governed DB schemes survived.
UUK have asked employers specific questions on contingent support measures for USS via asset pledges or injections of capital if required – these will be taken into account as part of the ongoing discussions.
Can someone explain here what the ‘cap at £40k’ means for what we pay and benefits?
The salary threshold is a ceiling on the earnings that would be used by USS to calculate the defined benefit component of the hybrid scheme arrangement. Contributions from earnings in excess of the threshold are payable to the defined contribution section of the scheme. The UUK proposal, if adopted, would result in a reduction of the salary threshold which is currently set at £59,883.65 for the 2021/22 tax year to £40,000.