Proposed USS pension reforms
16 October 2014
Employers across UK higher education are proposing reforms of the USS pension scheme, following a 2014 valuation that has estimated a shortfall of between £8 and £11 billion.
The 2014 valuation and its implications
The recent formal and independent valuation by the Trustees of the Universities Superannuation Scheme (USS) of the assets and liabilities has shown that a substantial deficit persists. The Trustees estimate a shortfall of between £8 and £11 billion. This is an increase on the deficit identified at the 2011 valuation, which was then £7 billion.
The USS Trustees have a primary responsibility to ensure that there are sufficient funds available to pay the pensions already promised and to ensure that future benefits are adequately funded. They have informed all employers who are members of USS that this will require significant additional contributions if benefits at their current levels are to remain. In addition they are implementing a derisking investment strategy which means that the scheme's assets will consist of more low-risk, low-yield investments. The USS Trustees have been informed by the Pensions Regulator, a statutory body, that they must come up with a robust financial plan, which is both satisfactory and feasible to them, and which addresses the future funding of USS.
Proposals to manage the scheme deficit
The USS Trustees have informed all employers that to maintain the current level of benefits for members going forward, there would need to be a large increase in the level of contributions. At present, employers including UCL pay an employer contribution rate of 16% which was increased from 14% in 2012. The USS Trustees have been informed by their actuary that in order to maintain the current benefits and support a de-risking investment strategy, the employer contribution rate would need to increase by up to 9%. This would cause additional annual cost to UCL of up to £27 million.
Employers in the USS scheme want to continue to provide a defined benefit pension scheme for their employees. However, the higher education sector as a whole cannot afford the level of increase proposed by the Trustees and is in an exceptionally difficult position.
For this reason, employers have worked together through Universities UK (UUK) to devise a plan that raises the employer contribution to the scheme to 18%, but maintains a defined benefit structure for employees, albeit at a reduced level. Current proposals are that all employees switch to a career average scheme (CRB) from their current final salary scheme, with a career average salary cap of £50,000. Staff with career average earnings above this level would receive a 12% contribution into a personal defined contribution account for salary over £50,000.
The USS Joint Negotiating Committee (JNC), a committee on which the University and College Union (UCU) has equal membership with employer representatives, will determine any benefit changes to be made, and they will submit them to the Trustees for consideration and implementation. As yet, no formal proposal for change has been submitted by the JNC, and discussions continue to be held between the two representatives' negotiators. In October and November, JNC meetings will be held where UCU member representatives will meet with the UUK representatives, to consider initial proposals from the employers, and if UCU wishes, they too can present an alternative proposal to ensure USS remains affordable.
If you are a member of UCU, you will have been recently balloted to vote on industrial action regarding the issue of pension reform. UCL views the UCU ballot as premature and contrary to the interests of staff and students. Taking strike action or action short of a strike will not reduce the significant deficit or change the requirement for the scheme to put in place an integrated plan to achieve sustainability, but it will inevitably impact on our students and on the earnings of those who choose to participate. USS is and will remain an excellent pension scheme: the task of all the parties involved in the negotiations at the JNC (UCU, employer representatives, plus the independent chair) will be to agree reforms to the benefit structure that will deliver an affordable and sustainable scheme for future and current employees and for employers.
When will I be consulted?
In early 2015, the USS Trustee Board will consider the JNC decision and ask scheme employers to launch the statutory employee consultation with affected employees on proposed USS benefit reforms. The consultation will last for at least 60 days. All active members of USS as well as employees who have opted out of USS or other USS eligible non-members should by law be included in the consultation as well as certain representative bodies. This consultation must be undertaken by each scheme employer with their own employees. The JNC and USS Trustees will then receive feedback from the consultation before making final decisions by June 2015.
Is my pension safe?
Accrued pension rights are protected in law and remain secure, as they are backed by the robust covenant of the scheme's participating employers. The benefits a member has built up before the date that any changes are implemented will be protected and will be calculated based on their service and pensionable salary at the date of change. It is also important to note that this is not a cost-reduction exercise; even with the potential changes to pension benefits being explored, the employer contributions to USS on your behalf are expected to increase significantly above the current level of 16% of salary, probably by a minimum 2% increase in employer contribution, equating to £6 million additional cost for UCL.
For more information about the funding deficit and the valuation process see additional information available on the Employers Pensions Forum website.
Director of Human Resources