USS Pension Scheme - update for staff

Dear colleagues

Members of staff in the USS pension scheme will be aware that discussions have been ongoing over the future of the USS pension scheme (to which most academic staff and professional support staff in grades 6 and above belong). The USS Trustee has now responded to the proposals put forward by the Joint Expert Panel set up by employers and the UCU last year and has set out three options regarding contributions. These are as follows:

  • Option 1: Upper bookend – 33.7% (23% for employers and 10.7% employees) to apply from April 2020.
  • Option 2: Lower bookend but with a contingent contributions arrangement – initially contributions set at 29.7% (20.4% employer, 9.3% employee), but with three possible 2% contribution increases should scheme funding deteriorate, with the potential to take the required rate to a maximum of 35.7%.
  • Option 3: An initial contribution rate of 30.7% (21.1% for employers and 9.6% employees) to apply from October 2019. A 2020 valuation would be undertaken and, subject to that and ongoing discussions between stakeholders, the contribution rate would remain unchanged until 1 October 2021. In event of there being no agreement on an alternative Schedule of Contributions following the 2020 valuation, a default rate of 34.7% would apply.


Please note three other important points:

  • a) The contingent contribution arrangement in option 2 is not the version UUK/Aon proposed – it is a much firmer version, as proposed by the USS Trustee (see FAQ 5 below).
  • b) If more than one employer decides that the risks associated with the scheme are too great and withdraws entirely from USS, the covenant rating could be downgraded, leading to a demand for higher contributions.
  • c) If no agreement is reached, the USS Trustee proposes to increase contributions to 32.9% from October 2019 (22.5% employer and 10.4% employee).


While none of the options are especially palatable, senior managers at the University Glasgow have provided an initial response, expressing a preference for Option 3. This is based on our thinking that:

  • i) It keeps the increase in contributions for both employer and employees relatively low (at least until the 2020 valuation process has been completed).
  • ii) It avoids the chronic uncertainty inherent in option 2 (given the strong likelihood that under this option, employers and employees would be called upon to pay contingent contributions).


Further information is available via the following websites:

https://www.uss.co.uk/how-uss-is-run/2018-valuation/2018-valuation-updates/9-may-2019

https://www.universitiesuk.ac.uk/policy-and-analysis/Pages/pensions.aspx

https://www.ucu.org.uk/article/10070/UCU-response-to-pension-scheme-proposals-from-USS-board


In addition, members of staff may find the following Questions and Answers useful – these were compiled for Universities UK by pensions advisers Aon.

We will keep staff informed of developments as further information becomes available.

David Duncan
Chief Operating Officer and University Secretary




1. What has the USS Trustee proposed and what is new?
2. Why has the USS Trustee refused to implement the full JEP?
3. What is the likelihood of further delays to this process, and what is UUK doing about it?
4. Can/will the USS Trustee still impose the upper bookend?
5. What modifications to the UUK/Aon contingent contributions proposal has the Trustee suggested?
6. Why should contributions increases be cost-shared with members?
7. Why can’t employers push for a vote of no confidence in the USS Trustee Board?
8. What are the next steps?
9. What is the Joint Expert Panel doing now?


1. What has the USS Trustee proposed and what is new?

The USS Trustee has proposed three potential options to conclude the 2018 valuation. The first option – contributions of 33.7% (known as the upper bookend) – has previously been communicated to employers. The second option includes contributions of 29.7% (the lower bookend), combined with a significantly stronger contingent contribution arrangement than that proposed by UUK (see question 5 for more).
Following consideration of UUK’s response to the 2018 valuation consultation, the Trustee has put forward a new, third option, which proposes contributions of 30.7% payable until a 2020 valuation – a year earlier than planned. Should members and employers fail to reach an agreement over how to conclude the 2020 valuation, a default rate of 34.7% would then apply.

2. Why has the USS Trustee refused to implement the full JEP?

In short, although the Trustee has modified a number of assumptions to align with the JEP, not all of the JEP’s recommendations fall within the Trustee’s risk appetite.
Employers and members should note that the JEP’s report maintained ‘there are a number of different paths the USS Trustee could adopt to reduce the contribution rate’, and that its recommendations were illustrative of one such path.

3. What is the likelihood of further delays to this process, and what is UUK doing about it?

It remains a priority for UUK to ensure that alternative arrangements are in place before the implementation of further contributions increases in October 2019 and April 2020. The timescales are certainly challenging, but if employers and members can decide on a way forward shortly after the next USS Trustee Board meeting on 16 May, then it is possible for the valuation to be completed and submitted before its statutory deadline of June 30.
For this reason, UUK has asked employers for an indication of their preferred way forward by 16 May, to ensure that progress in discussions with both USS and the University and College Union (UCU) can be made at the earliest possible opportunity.
UUK remains committed to seeking a balanced solution that is acceptable to the USS Trustee, the Pensions Regulator, UCU and employers.

4. Can/will the USS Trustee still impose the upper bookend?

In the absence of an agreed alternative arrangement, the USS Trustee may elect to submit a valuation report by the statutory deadline of June 30 based on option 1, with the required level of contributions (33.7%) shared 65:35 between employers and scheme members.

5. What modifications to the UUK/Aon contingent contributions proposal has the Trustee suggested?

To ‘strengthen’ the proposed arrangement in their view, the USS Trustee has recommended changes to the metrics applied for calibrating trigger events, and the scale of the required increases, were they to be triggered.
Specifically, the UUK/Aon proposal failed to meet the Trustee’s principles for ‘Alignment’ and ‘Quantum’. The Trustee has recommended that the stepped increases be 2%, 4%, and 6% (as opposed to 1%, 2%, and 3%), and also specified a requirement for a trigger threshold level of £4 billion, as opposed to £10 billion proposed by UUK/Aon. This significantly increases the likelihood of the contingent contributions being triggered.

6. Why should contributions increases be cost-shared with members?

It is an important principle of the scheme that contribution increases are split 65:35 between employers and scheme members, and UUK believes this principle should be maintained for any contributions increases arising from the 2018 valuation.
It is possible that at future valuations the level of contributions required to fund future benefits could be lower than those arising from the 2018 valuation; having a set cost sharing formula is therefore vital for ensuring that both members and employers benefit from lower contributions, should they come to pass.

7. Why can’t employers push for a vote of no confidence in the USS Trustee Board?

The USS Trustee Board includes a majority of members nominated by UCU and UUK alongside experienced independent members with expertise in pensions and finance. Wholesale changes to the composition of the USS Trustee Board would impede the chances of reaching a satisfactory conclusion to the 2018 valuation in time to implement a new arrangement before the higher cost sharing increases due in October 2019 and April 2020. Removal of the USS Trustee Board would also likely lead to intervention from the Pensions Regulator.
Phase 2 of the Joint Expert Panel is currently considering evidence on the governance of the scheme, as well as aspects of the valuation process, and is expected to report in the autumn with recommendations.

8. What are the next steps?

UUK has written to all employers to establish which of the three options proposed by the USS Trustee is preferred. Employers have been asked to give an indication in advance of 16 May so that UUK can relay this to the USS Trustee Board, which is meeting that day, and also to UCU at the Joint Negotiating Committee, which meets the following day (17 May).
Employers have been asked to confirm a fuller, formal response by 30 May.
It will then be necessary for employers and members – represented by UUK and UCU at the Joint Negotiating Committee – to agree a way forward quickly, and before the significantly higher cost sharing increases fall due in October 2019.

9. What is the Joint Expert Panel doing now?

The Joint Expert Panel is currently considering evidence to aid the second phase of its work, which is concerned with the valuation methodology and scheme governance.
Through this work, the JEP hopes to identify a long-term, financially sustainable solution to ensure benefits remain attractive and affordable.
The panel expects to report on this phase of its work in the autumn.

 

 


First published: 16 May 2019