Close
In May 2021, UCL submitted a response to the Universities UK (UUK) employer consultation, taking into account staff feedback.
Covenant support measures
1. Would you be willing to support the alternative covenant support package which UUK has outlined in section 4, as the means to achieve a solution which might be acceptable in the round (see also question 15)?
Answer: UCL’s position has not altered greatly from the response we provided during the Technical Provisions consultation of last year. We recommended a light touch towards debt-monitoring and were agreeable to a Pari Passu arrangement on future secured borrowing subject to appropriate carve-outs. We remain unconvinced that the moratorium on scheme exits is appropriate and has been sufficiently justified by USS. Our view is that USS have significantly overreacted to the section 75 exit of Trinity College and that a more considered and holistic view is necessary when assessing the covenant position, given the enduring strength and resilience of the HE Sector. On this and the other aspects in the consultation we have outlined our current position but will continuing to evaluate as information emerges.
2. If the USS Trustee is not willing to accept UUK’s alternative proposal (should there be employer support for it), would you be willing to support the USS Trustee’s scenario 3 covenant support package to obtain a ‘strong’ covenant rating? If not, why is this and what level of covenant support would you be willing to provide?
Answer: Our position is outlined within the answer to question 1. We remain unconvinced that the moratorium on scheme exits is appropriate and has been sufficiently justified/supported by the scheme. UCL therefore does not feel that it is in a position to comfortably accept a lengthy moratorium, particularly when it is presented with the choice of unaffordable contribution increases (in all scenarios) or radical benefit reform, both of which would not offer UCL and its existing and potential scheme members value for money. Limiting the flexibility of UCL in this context may not be in the best interests of the institution and its staff.
3. Are there areas of the covenant support measures which cause you particular concern, or which you would wish to see modified? Please provide details.
Answer: UCL feel that USS has been overly reactive to the exit of a relatively small institution from the scheme with the imposition of a moratorium and the weight/importance that they have attributed to it in terms of its influence on setting the timescale for a recovery plan. We also feel that USS are not fully recognising the enduring financial strength of the sector and its resilience, with most HEIs remaining in strong financial health despite enduring what would normally be considered existential threats in the last twelve months with the UK’s exit from the European Union and the Covid-19 pandemic. We would ask that this is reassessed by the Trustee.
4. Are there other areas of covenant support you would wish to consider such as contingent contributions or asset pledges?
Answer: It is difficult to respond to this question in the absence of a response from USS on how contingent contributions or asset pledges could work across the varying employers.
Contributions
5. Do you agree that the current levels of employer contribution (21.1% of salary) and member contribution (9.6%) are the maximum sustainable – and should be the foundation for any solution? a. If not, please state the level of employer contribution you would be willing to pay to USS following the 2020 valuation. b. We would welcome any commentary on the reasons for your views. c. We would also welcome employer views on the level of member contribution.
Answer: UCL agrees that the current level of employee and employer contributions are the maximum that can be sustained. The majority of scheme members who withdraw from USS are mainly early career academics and there must be an alternative option/s to ensure people of all ages can save for their retirement. The reasons for withdrawal are usually related to affordability and because it is felt that the scheme does not offer sufficient value to them. A further increase in contributions would no doubt exacerbate an already unwelcome position with current opt out rates at UCL at 11% compared with 9.5% at 31 March 2019 and 8% on 31 March 2016. In the case of the most moderate scenario (3) put forward by USS, UCL would be required to fund an extra 7.4% of employer contributions which would cost UCL an additional and unsustainable £46 million per annum. We will be seeking a sustainable outcome that might allow for the eventual reduction of employer and employee contributions.
Benefits
6. Do you support the broad principle of seeking to retain the hybrid benefit structure?
Answer: UCL is broadly supportive of retaining a hybrid benefit structure providing the arrangement can offer an affordable, valuable and sustainable defined benefit component across all scheme member demographics. The current level of opt outs suggests that an increasing portion of potential members are priced out of the scheme or no longer consider that the scheme offers a valuable benefit. There is concern at UCL that opt out levels will increase if member contributions increase further, or defined benefits are reformed to an extent where it is no longer competitive with a defined contribution scheme. We would support reform of the scheme that provides members with greater choice than the current ‘one size fits all’ model. Ideally there should be a range of options from a hybrid to a fully DC option with varying contribution rates, and the ability for members to choose between them. Central to this is the necessity for further options to allow younger and/or lower paid staff who have opted out of USS membership to be able to save for their retirement.
7. Looking at the illustrative hybrid benefits which UUK has put forward, would you consider this an acceptable outcome in terms of benefits at this valuation – based on the positions on covenant support and contributions laid out?
Answer: We note that 88% of our staff have indicated that they either disagree or are unsure of the UUK proposal. UCL’s strongly preferred outcome would be to wait for a 2021 valuation assessment where a more positive asset position is expected to be reported. Earnings within London Universities are generally higher than the rest of the country. Consequently, we estimate that a salary threshold of £45k to £50k would be required to: provide 40% of our existing USS members with a wholly defined benefit; allow 80% of our existing USS members to pay 80% of their contributions into a defined benefit.
8. If the illustrated hybrid would not be acceptable, what alternative benefit arrangements would you wish to provide (and please indicate alternative positions on covenant and contributions as appropriate)? (For example, if the USS Trustee does not ultimately amend its assumptions, would you wish to offer a hybrid solution as set out in the USS Trustee’s illustrations (p18 of the Update Report) or would you prefer to move to a different offering, such as DC provision?)
Answer: We anticipate that the funding level as at 31 March 2021 will be more favourable and are wary of making substantial long term changes to the scheme based on the economic position as at March 2020. Importantly, a possible postponement of the valuation to 2021 with the agreement of the USS Trustee would afford UUK more time to hold further discussions with USS on defining an acceptable level of prudency in its assumptions. From there we would hope that a hybrid model closer to the existing benefit structure may be more feasible. Irrespective of the valuation our staff have indicated that they would support the option of an additional lower cost alternative benefit. We believe that this would partially address concerns around intergenerational fairness and increasing opt out levels.
9. Would you wish to explore conditional indexation or other conditional benefit models as a possible solution (likely longer-term, beyond the 2020 valuation)?
UCL would be supportive of an exploration of these options if it offers a sustainable, valuable and affordable scheme for staff.
Flexibilities and options
10. Would you like to see flexibilities implemented for members to move away from the current uniformity of the USS structure, and if so which flexibilities do you think are particularly important?
Answer: UCL would be in favour of exploring options for members to be provided with greater flexibility than the current scheme structure. An alternative to the current arrangement should be considered for staff who cannot afford the current contribution rates. This may include:
- A lower cost option to attract and retain employees who find the current inflexible structure to be unaffordable.
- An option for a member to switch to a DC only arrangement.
- Any additional flexibility would need to be optional in terms of providing members, or those who currently choose not to be members, greater choice. This should not detract from the overriding need to ensure that the main benefit model is attractive and sustainable.
11. Would you support the creation of a lower cost saving option for members and which of the parameters described in this paper are most important / or would need modification? (If yes, we would welcome employer views on the options to achieve this (potentially informed via engagement with eligible USS employees).
Answer: See answer to question 10. UCL could be broadly supportive of exploring an optional lower cost defined benefit or defined contribution option specifically to attract and retain employees who consider the existing scheme to be unaffordable or not offering value for money. An alternative to the current USS benefit should be available. We would suggest that UUK provide examples of a DB or DC arrangement with an employee contribution at a lower rate whilst retaining the full employer contribution rate. We would also be interested in seeing projections of how an optional lower cost scheme could potentially impact on the future funding position.
12. Would you support the creation of an option for members to switch (from the hybrid structure) to wholly DC pension saving?
(We invite employer views on whether the same deficit recovery contribution should be made for members choosing any new flexible DC alternative option, and what levels of member and employer contributions devoted to DC pensions saving should apply).
Answer: UCL may be supportive of this as an additional option for employees if any reform of the defined benefit section did not offer value for money for scheme members in the future. The question of deficit recovery is more difficult as it is arguable that a member with accrued defined benefit who elects to switch would progressively need to pay more into the deficit to support their legacy benefits, whilst paying deficit recovery contributions would not appear to be appropriate for new scheme entrants. These issues would require much further consideration before any commitment could be made.
13. Would you wish to explore options for employers so that they can offer some variations to the USS standard benefits in the future – and if so, what would those variations be?
Please refer to the answers to questions 10-12.
Governance
14. We would welcome views from employers in relation to the governance of the scheme and the valuation process (including views on the Joint Negotiating Committee). Specifically, would you support a post valuation governance review, and what areas what you like to see covered in such a review?
Answer: UCL would strongly support a post valuation governance review. In general, it is felt that the Trustee needs to demonstrate greater transparency and accountability to its stakeholders. We would support a review of how UUK and UCU Trustees are appointed to the board towards direct stakeholder appointments as opposed to nominations. We feel that there should be greater representation on the Trustee Board from stakeholders and would support increasing the number of UUK appointees from 4 to 5 and UCU from 3 to 4. UCL supported the JEP recommendations to:
- Set up a funding and valuation sub-committee to liaise with the JNC
- Establish a joint forum between the Trustee and JNC to undertake modelling and the valuation assumptions
- Create a senior Steering Committee for the valuation comprising employer and member representatives.
We would seek to have the recommendations implemented in full. UCL agrees with UUK that USS would demonstrate good governance by providing a full explanation to stakeholders when they consider an alternative proposal to be unacceptable. (Refers to the UUK suggestion of Gilts + 3.5% which was rejected without explanation by USS)
UUK alternative approach
15. As part of a solution to the 2020 USS valuation would you support the alternative covenant support package illustrated by UUK (headlines – moratorium of a minimum of 20-years with debt-monitoring and a pari-passu arrangement for secured borrowing above c15% of gross/net assets), to provide a hybrid benefits package at current contribution rates in the order of (pension accrual of 1/85 of salary [plus 3 times lump sum] up to a salary threshold of £40,000 with the CPI indexation of benefits [for active, deferred and pensioner members] capped at 2.5% per annum, and with DC above the salary threshold at an overall contribution of 20% of salary), together with a lower cost alternative to address the high opt-out rate, as well as a governance review of the scheme and valuation process?
We feel that the 2020 valuation, during a period of unprecedented market volatility could not have been worse timed and that greater consideration should now be given to post valuation experience, where there has been a significant recovery to the scheme’s asset position. In view of this we would be strongly supportive of a 31 March 2021 valuation if it proved to offer a more favourable outcome for stakeholders. It would also allow more time for UUK to engage with USS on an agreeable level of prudency for the pre-retirement discount rate and salary increase assumptions. Although the UUK proposal, if agreed by USS, is more favourable for stakeholders than the scenarios presented by the scheme, concerns around the devaluation of the existing defined benefit and the additional covenant support required (particularly the length of the proposed moratorium, which we do not support) remain. This prevent us from fully supporting the alternate proposal.