The recent University webinars on the UUK Consulatation on the 2020 USS valuation can be found here these have been slightly enhanced to include some impact of the potential changes.
USS Pension Scheme Consultation
What is it all about?
Members of staff may be aware that a discussion is taking place nationally and locally over the future of the Universities Superannuation Scheme. However, many of us struggle to get our heads round the issues at the heart of the debate. This is an attempt to set out the key elements in layperson’s language. We should start with an apology to those budding actuaries who are steeped in the matter and who may find what follows overly simplistic – we will gloss over some of the detail but try to cover all the really important bits.
First, we should be clear that the USS pension plan is only open to staff on grades 6 and above in pre-1992 universities across the UK. Other members of staff at UofG have access to NEST (the government’s workplace pension scheme); longer standing employees at grades 1-5 may be members of the University of Glasgow’s own pension scheme (UGPS). Most staff in grades 6 and above are members of USS but membership is not compulsory – staff members can opt out and increasing numbers are doing so. A small number of staff belong to other pension schemes.
USS, like all pension schemes, is intended to provide for members of staff when they retire (whenever that may be). The state also provides a pension but this is fairly meagre, so it makes sense for staff to make additional provision for their later years.
The scheme is funded by contributions from the employer and the employee. Currently, the employer puts in 21.1% of an individual’s salary and the member of staff tops that up with an additional 9.6% of salary. If nothing else changes, those rates will rise to 23.7% (employer) and 11% (employee) from October 2021. So there is a major incentive for most members of staff to stay in the scheme; if they leave, they are missing out on that additional 20+% from the employer. They are also missing out on the tax relief which the government allows on pensions savings.
Basically, the more that is put into the pension pot, the higher the pension will be when you retire. You can retire at any age over 55 (for a small number, it’s over 50), but the earlier you retire, the smaller your pension will be, for two reasons – (1) because you will have paid in less money than if you remained a contributing member; and (2) because the scheme reduces your pension on the assumption that you will be drawing it for a longer period than if you retired later.
The scheme is overseen at national level by a board of directors made up of employer representatives, employee representatives and independents. The current chair is Dame Kate Barker (one of the UK’s leading economists). The employer representatives are nominated by Universities UK (the body that represents UK higher education institutions) while the employee representatives are nominated by the University & College Union (UCU). Our own Principal, Professor Sir Anton Muscatelli, is one of the employer-nominated directors. The board is supported by a professional team headed up by the Chief Executive, Bill Galvin; most of the staff are based in Liverpool. USS Limited is formally a corporate trustee (the ‘Trustee’) which runs and manages the scheme under the trust rules.
The scheme invests the contributions of both employers and employees (the ‘assets’) with the aim of being able to pay the pensions of staff once they retire (the ‘liabilities’). Every three years, the Trustee is legally required to carry out a valuation of the scheme; the aim of this exercise is to work out whether the assets in the scheme are enough to cover the future liabilities. The Trustee then informs employers and employees what contributions it needs to cover future liabilities.
The Trustee has no role in determining the size of pensions paid to retirees; this is decided by a body called the Joint Negotiating Committee (JNC) – a separate group of representatives drawn from Universities UK and UCU, and again with an independent chair. The current chair is Judith Fish (an actuary and former Head of Pensions Risk at Santander). The JNC sets the size of the pensions; the Trustee then decides the size of contributions needed to cover those pensions.
There are two elements to the pensions USS members receive – a defined benefits (DB) element and a defined contributions (DC) component. The defined benefits element guarantees a lump sum and an income for life once you retire, depending on size of the contributions made pre-retirement. Giving this guarantee creates a significant risk for the scheme – it must pay out the DB element regardless of what assets are left in the fund. In the case of the DC part, the individual member will receive more or less pension depending on the value of the assets they and their employer have contributed during the years of their employment. All the Trustee has to do is to invest the assets so that they earn decent and reliable returns for the benefit of the members post-retirement. The DC element could potentially perform better than the DB component but the risk lies entirely with the individual member.
Currently, the employer and employee contribute into the DB part of the scheme for earnings up to a defined salary threshold (currently £59,883.65). For earnings above that amount, the employee and the employer contribute to the DC element of the scheme.
The Trustee must work under rules set by the government’s Pensions Regulator. The Regulator exists to ensure that pension schemes have enough assets to cover their liabilities. It monitors closely the way that schemes undertake valuations and takes an especially close interest in USS, because it is one of the biggest schemes in the country.
So what is the problem? Essentially, the Trustee has carried out a valuation of the scheme (known as the 2020 valuation) and concluded that there is a risk the assets it holds will not be sufficient to cover the liabilities it will have to pay out in the long term. It says that, in order to have a high probability of covering the current level of pension prescribed by the JNC under the DB element of the scheme, it will need to increase contributions very considerably – to a minimum of 42.1% (compared to a current combined employer/employer rate of 30.7%) and potentially much more.
Underlying this is the fact that people are now expected to live longer than they were in the past – this inevitably puts a strain on the scheme’s assets. In addition, the Trustee’s opinion is based on assumptions relating to future rates of inflation, future returns on assets (how well will the stock market do?) and the strength of the covenant (essentially, how committed the employers are to the scheme and how likely they are to be able to meet their obligations going forward). The forecasts have to look decades into the future when the shape of the sector may be very different. Changes to the assumptions can lead to radically different forecasts about the scheme’s health.
Both UCU and Universities have suggested the Trustee is being too pessimistic. However, the Trustee must keep one eye on the views of the Pensions Regulator, and the Regulator is saying that the Trustee’s assumptions are already at the limits of optimism. The Trustee has minimal wiggle room to revise its assumptions and come up with a way forward which will satisfy that higher level of authority.
At present, nothing has been decided – Universities UK is consulting employers, employers are consulting members of staff and there will be further discussions at national level between Universities UK, UCU and the Trustee. If no agreement can be reached, the planned increases to employer and employee contributions will be applied from 1 October, and further increases will follow. The risk is that these are unaffordable for some members of staff who then leave the scheme and do not provide for their retirement; further increases could also be unaffordable for some universities, leading to institutions running into serious financial difficulties or seeking to withdraw from the scheme altogether.
Universities UK have put forward a possible solution – it would keep contributions at the present rate (by their calculations) and preserve a significant (though reduced) DB element to the pension. Changes to benefits would not be retrospective – members would retain any benefits they have already accrued. The Universities UK proposal involves adjusting some of the assumptions the Trustee’s actuary has made and limits the extent to which pensions would be increased in line with inflation in future. It will be subject to further discussion at the JNC and with the Trustee.
Here at UofG, we are working to four key principles:
- Pension provision needs to be affordable for staff and universities
- We want to retain meaningful pension provision for staff, including a Defined Benefit element
- We support various measures being discussed to strengthen the employers’ covenant
- We would like Universities UK and UCU to come together and agree a way forward as soon as possible.
This is a complicated and many-sided issue but hopefully the above summary gives a sense of where we are at present. Much more information is available on the USS, Universities UK and UCU websites. There will be opportunities for all affected staff to take part in conversations about the USS Scheme in the coming weeks; we look forward to engaging with you in these forums.
Universities Superannuation Scheme (USS)
How USS works
There are two sections of USS that work alongside each other.
USS Retirement Income Builder
When you become a member of USS you automatically join the USS Retirement Income Builder. This provides you with an income when you retire based on how long you’ve been a member of USS and your salary, up to an annual threshold, which is set each year. The salary threshold for 2020/21 is £59,585.72.
The USS Retirement Income Builder gives you:
- The security of a regular income for the rest of your life when you retire
- The ability to take some money as tax-free cash when you retire
- Incapacity benefits cover if you become unable to work
- A payment of three times your annual salary to help support your family if you die while still working for the University
- An income paid to your dependants when you die
- Tax relief on contributions
USS Investment Builder
If you earn over the salary threshold (£59,585.72 for 2020/21), you and the University, will automatically pay contributions into the USS Investment Builder. If you don’t earn above the threshold, you can choose to join the USS Investment Builder by making additional contributions.
All contributions are invested and at retirement you can use the value to supplement your income from the USS Retirement Income Builder.
The USS Investment Builder gives you:
- The ability to top-up your retirement savings
- Your investments managed by USS, with ready-made solutions designed to meet your retirement needs, or a range of funds with the freedom to choose your own investments
- An online service provided for you to manage your membership of the USS Investment Builder
- Flexibility over how you can take your savings when you retire
- Tax relief on contributions
Your and the University's Contributions
You pay 9.6% of your salary into the scheme towards the cost of providing your benefits. You can choose to increase the value of your retirement savings by paying more.
The University pays a monthly contribution of 21.1% of your salary up to an annual threshold (£59,585.72 for 2020/21). If your salary exceeds the threshold, the University pays 12% of your salary over the threshold into the USS Investment Builder.
Further information on USS is available on their website at www.uss.co.uk.