Responding to the USS pension 2020 valuation employer consultation


Like many university employers, UCL has launched a 'consultation' survey of staff about the USS Pension Scheme. These ask a series of leading questions framed by Universities UK, the Employers' organisation.

There are two fundamental problems with this consultation.

First, the survey assumes there is an actual financial crisis in the USS Defined Benefit scheme (a 'deficit') that requires urgent action to avoid an outcome where staff pensions would not be paid.

However, this 'deficit' is the result of a combination of two factors:

  1. an accountancy method that models the scheme being rapidly shut down and
  2. the spot-sampling of asset values and projected values in March 2020, when stock markets were exceptionally pessimistic.

Secondly, the survey assumes that reducing benefits or increasing contributions still further could avert this crisis.

Yet as we respond below, to balance this projected deficit, USS is demanding additional payments ('deficit recovery contributions') that are so high that they will make the scheme cost more to staff than they could feasibly expect to receive in pension over their lifetime - even were one to write off employer contributions!

This arithmetic means all of the UUK proposed changes are unsustainable. They will reduce income to the scheme and drive out members, who would be better off investing their savings elsewhere. These proposals are in fact a recipe for rapidly undermining and closing the scheme, bringing about the very outcome they are supposed to be addressing.

UCU believes that the only purpose of this UUK 'consultation' is as a softening-up excercise to convince staff that only a 100% Defined Contribution Scheme would be sustainable - but even that would still have to pay these very high 'deficit recovery contributions'.

This is an expensive mess but it is avoidable. The method that preserves a credible Defined Benefit scheme for the future involves a new valuation, at a minimum with up-dated stock market data, and a transparent valuation method that makes the most of the multi-employer nature of the pension scheme.

Consultation questions and suggested answers

Covenant Support Measures

  1. UCL will be asked if they would be willing to support the alternative covenant support package which UUK has outlined in section 3 of the consultation document, as the means to achieve a solution which might be acceptable in the round (see also question 15). How do you feel they should respond?  Required Yes / No / Unsure


  1. If you feel that UCL should not accept UUK's alternative proposal, do you feel they should you be willing to support the USS Trustee's scenario 3 covenant support package to obtain a 'strong' covenant rating?  Required Yes / No / Unsure. If not, why is this? [free text box]

NO. We do not believe that the March 2020 valuation is a credible or viable starting point for consultation about the future of the USS Defined Benefit scheme. Whereas even the most overly-prudent (i.e. pessimistic) assumptions of previous valuations projected asset values rising over the medium to long term, this valuation projects asset values as falling in real terms, and then demands future contributions to compensate for this projection. This appears to be due to a series of assumptions, including a market assessment dated March 2020, at the start of the pandemic, a point where UUK’s actuaries, AON, estimate the risk to institutions and investments as being at its worst point. 

Whatever the source of the problem, there is no mathematical solution to addressing this valuation projection that does not yield a contribution rate with a positive value for money, because this projected shortfall can only be addressed by future contributions. As well as being patently intergenerationally unfair, a negative projection undermines the credibility of the pension scheme as a worthwhile investment for employers and employees. Proceeding on this basis can only lead to scheme closure.

Valuations are not sacrosanct. The September and November 2017 valuations were set aside in favour of a new one in 2018. We believe UUK must continue to press USS to do the same to the 2020 valuation, both by challenging the valuation methodology assumptions and by using more up-to-date data on the value of the actual assets and updated mortality figures due to Covid. 

UCL must remain committed to the scheme. The scheme has provided good value for money in the past, permitting staff to retire on comfortable pensions. The scheme has accrued £80bn in assets. It is an “immature” net cash positive growing scheme. It has outperformed each of the valuations since 2011, when a series of low valuations triggered contribution rises and benefit cuts. 

The fact that this particular valuation is so pessimistic raises serious questions about the competence, methodology and evidence base of the valuations being undertaken. Insofar as it attempts to quantify the (ultimately unquantifiable) risk of market-driven institutional failure arising as a result of UK Government HE policy, we believe that serious consideration should be applied to the question of whether this risk could be shouldered by the UK Government, possibly in the form of a Crown Guarantee.

  1. If there areas of the covenant support measures which cause you particular concern, or which you would wish to see modified, please provide details. [free text box]

In the light of our low confidence in the valuation methodology and outcome we find it hard to accept that UCL should put aside its assets or make contingent contributions to meet a shortfall that appears to be an artifact of the valuation. We do believe that the sector is financially healthy, despite Covid-19. It has proved successful in adapting to the current circumstances, and has delivered huge societal benefits in the pandemic. This should be reason enough for the Government to stand with the sector and shoulder some of the risk, however putative this risk might be.

  1. Are there other areas of covenant support you would wish to consider such as contingent contributions or asset pledges? [free text box]

Accepting that UCL will necessarily need to engage in more modelling, but as an interim measure as part of a package of measures to achieve a new valuation UCL should be prepared to accept temporary contingent contributions.


  1. UCL will be asked if they 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. How do you feel they should respond?  Required Yes / No / Unsure
    A. We would welcome any commentary on the reasons for your views on the level of employer and member contributions.  [free text box]

There is no good reason to seek higher contributions from employees, and to do so could exacerbate rather than solve scheme finances. Staff salaries have fallen by 20% in the last decade. Given that 1 in 6 eligible employees are already opting out, we do not believe that higher employee contributions are sustainable. 

We think UCL should explore the potential for a temporary increase in employer contributions as part of a package of measures to ensure a new valuation is conducted.


  1. UCL will be asked if they support the broad principle of seeking to retain the hybrid benefit structure. How do you feel they should respond?  Required Yes / No / Unsure

No. The existence of a hybrid structure has been controversial, and Defined Contribution remains unpopular. Were it to become a greater part of the pension, as the result of lowering the cap as UUK propose, it will expose staff to a greater risk of yielding low value at the point of retirement, due to both stock market volatility and costs arising from conversion to annuities. We do not believe that it is reasonable for staff to be expected to gamble with their retirement. 

  1. UCL will also be asked, when looking at the illustrative hybrid benefits which UUK has put forward, would they consider this an acceptable outcome in terms of benefits at this valuation – based on the positions on covenant support and contributions laid out. How do you feel they should respond?   Required
    Yes / No / Unsure

No. Given the foregoing, any combination of contribution rises and/or benefit cuts are unjustified. But they are also liable to be unsustainable, causing employees to leave the scheme, and placing the cost of meeting the projected deficit on fewer contributors. Even without employee exit, offering a low-cost/low-benefit option would yield less income to DB, as would lowering the DC contribution threshold.

  1. If the illustrated hybrid would not be acceptable, what alternative benefit arrangements would you wish to see provided (and please indicate alternative positions on covenant and contributions as appropriate)?  Required [free text box]

The 2020 valuation creates a crisis of confidence in USS, and a crisis of injustice, whether real or perceived. However, any viable scheme needs to command the support of the sector and of the employees who sign up for it. Changing the scheme design in a significant manner must therefore be properly justified, otherwise employees will simply leave. That justification must be premised on a valuation that commands support from the sector, which the current one does not.

  1. Do you feel UCL should indicate a preference to explore conditional indexation or other conditional benefit models as a possible solution (likely longer-term, beyond the 2020 valuation)?  Required Yes / No / Unsure

The problem takes us back to the valuation. If UUK, and UCU representing the employees, have no confidence in the valuation methodology, why would we have confidence in trigger conditions for contingent contributions or for temporary reductions in benefit accrual?

Flexibilities and Options

  1. Would you like to see flexibilities implemented for members to move away from the current uniformity of the USS structure?  Required Yes / No / Unsure
    A. If so which flexibilities do you think are particularly important?  [free text box]

Employees have a right to consider their pensions as deferred wages, and not speculative investments. They therefore have the right to a pension covenant protecting the value of their pensions, and not be expected to pay additional contributions due to failures in the management of the scheme. In any case, as noted above, in the context of a low-to-negative value scheme, where contributions outstrip benefits, any flexibility is liable to lead to further reduction in DB income. 

  1. Sould UCL support the creation of a lower cost saving option for members?  Required Yes / No / Unsure

No, for the reasons previously outlined. 

A. Which of the parameters described in this paper are most important / or would need modification? [free text box]
B. We would welcome your views on the options to achieve this [free text box]

  1. Should UCL support the creation of an option for members to switch (from the hybrid structure) to wholly DC pension saving?    Required Yes / No / Unsure

No. We believe that this would be highly unethical.

A. We invite your 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. [free text box]

This question illustrates the problem: if the deficit recovery contributions contribute to DB scheme pensions that contributors are not members of, this would clearly appear unfair to DC members.* This problem has been discussed in previous valuations when the DC scheme is introduced, but it will be far greater now, because payments are in proportion to the size of the deficit. This is liable to employee exit, where USS DC is simply a stepping stone to exit. 

*Of course, the contributions are not paid from DC members to DB members: they are a ‘tax’ on both sets of members to the fund, premised on the 2020 valuation.  

  1. Should UCL indicate a preference to explore options for employers so that they can offer some variations to the USS standard benefits in the future?  Required
    Yes / No / Unsure
    A. If so, what would those variations be? [free text box]

No. It cannot address the problems and seems to be yet another red herring. 


  1. Would you like UCL to support a post valuation governance review?  Required
    Yes / No / Unsure
    A. What areas what you like to see covered in such a review? [free text box]
    B. Do you have any other views in relation to the governance of the scheme and the valuation process (including views on the Joint Negotiating Committee)? [free text box]

Yes. But first we must deal with the current valuation.

UUK Alternative Approach

  1. As part of a solution to the 2020 USS valuation, should UCL support the alternative covenant support package illustrated by UUK to provide a hybrid benefits package at current contribution rates together with a lower cost alternative to address the high opt-out rate?  The alternative covenant support package (section 3) includes a moratorium on employer exits from the scheme of a minimum of 20-years with debt-monitoring and a pari-passu arrangement (see glossary of key terms) for secured borrowing above c15% of gross/net assets providing an accrual of 1/85 of salary [plus 3 times lump sum] up to a salary threshold of £40,000.  The CPI indexation of benefits (for active, deferred and pensioner members) would be capped at 2.5% per annum.  The Defined Contribution above the salary threshold would remain at an overall contribution of 20% of salary.  Required Yes / No / Unsure

This question is simply a rephrasing of the earlier questions to ask whether UCL should accept the UUK’s “alternative approach”. 

But this accepts the 2020 valuation and implements it in relation to cuts in benefits. It accepts a low-to-negative net value for money pension scheme that is hard to justify and liable to lead to employee exit and scheme closure. 

Thus, reducing accrual from 1/75 to 1/85 alone equates to a guaranteed 11.76% cut in benefits; reducing the CPI cap to 2.5% from the current 5-10% (tapered) exposes accumulated benefits to cuts resulting from CPI rises; and the £40K DC contribution threshold will reduce the total DB pension accumulated for many staff. It will lock further DC contributions into ‘deficit recovery’ costs. 

A. Would you also support a review of the scheme's governance and the valuation process?  Required Yes / No / Unsure

Yes. But first we must deal with the current valuation.