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Update on USS pension and UCU proposal

15 Feb 2022

A statement from the Committee of University Chairs

There has been much comment over recent days about an alternative proposal from UCU regarding potential changes to the USS pension. The Committee of University Chairs (CUC) has released a statement which may be useful in explaining the challenges and the background which is helping to inform the consultation response the University has to provide to USS this week.

We will of course update further on this important topic in the weeks ahead.

Statement from Committee of University Chairs

USS 2020 valuation

Update as of Tuesday, 15 February 2022

Statutory deadlines mean that a decision is needed at the USS Joint Negotiating Committee (JNC) this month to avoid escalating and unaffordable costs for employers and scheme members.

Last week UCU tabled a costed alternative proposal. UUK is now consulting employers on whether employers would support the new UCU proposal to conclude the 2020 valuation instead of the UUK proposal – a response is needed by Friday, 18 February at 5 pm.

The details available to date on the UCU proposal are available – albeit the validity or practicality of the UCU proposals remains unclear.

In short, UCU is asking employers to sign-up to the covenant support pledged to the UUK proposal, as well as contributions increasing to at least 25.2% for employers and 11% for members to retain current benefits.  The UCU proposal then assumes that a better price for benefit would be achievable through a 2022 valuation – but would negotiate reforms if current benefits could not be provided for an employer contribution rate of 25.2% and a member rate of 9.8% from 1 April 2023.

There are some significant issues with the UCU proposition:

  1. Employers have made clear that the current rates of 21.4% for employers and 9.8% for members are at or near the limit of sustainability and affordability. Therefore, the UCU ask of 25.2% for employers is unaffordable/unsustainable for most, if not all, employers.
  2. The scheme's active payroll as of 31 March 2020 was £8.962 billion. USS employers' total monetary contribution to pensions is currently £1.89 billion per annum, meaning each additional 1% contribution to USS equates to an extra £89.6m per annum, equivalent to approximately 2,000 jobs. So, the UCU proposal would put at risk nearly 8000 jobs, and this would have significant knock-on consequences on student experience and research capacity.
  3. UCU is asking employers to legally sign up to a schedule of contributions, which the USS Trustee has costed and potentially involves increasing the employer rate to 29.1% of pay and the member rate to 13.9% of pay. There is no formal or legal mechanism to avoid these increases – other than, to date, a letter dated 26 January 2022 from UCU to say they would agree to cap the employer's rate at 25.2% from 1 April 2023. However, there is no confirmed mechanism or reforms tabled as to how this commitment could be delivered.
  4. The UCU proposal seems to assume the outcome of a moderately prudent (undefined) 2022 valuation would result in their desired contribution rates.  If UCU does define what a moderately prudent valuation is, there is no guarantee that the USS trustee or the Pensions Regulator would accept that definition or be prepared to implement it. Nor is there any guarantee that such a valuation would improve the situation even if the market backdrop was more favourable because the scheme's cost is made up of accrued pension costs and future service costs. The improvement in financial markets since March 2020 means that the accrued benefits component has improved (the deficit has been reduced but remains a deficit). Unfortunately, the same improvement in financial markets means that the cost of the deficit on future service costs has worsened, and these broadly balance each other out. 
  5. Without any legal guarantee, employers would be exposed to the higher contributions of 29.1% (13.9% for employees) set out in the USS Trustee's contributions schedule for this UCU proposal. 
  6. It is unclear if any assessment has been made of the impact of higher employee contributions on dropout rates (which are already too high).
  7. The UCU proposal needs the same covenant support measures as the UUK proposal. Sector consensus on these covenant support measures was achieved on the understanding that there would be no or minimal increased contributions.
  8. Whilst a UCU proposal is welcome as it suggests that some in UCU recognise that change is needed – the higher costs for employees and employers plus the risk associated with this UCU proposal go beyond the levels of affordability and sustainability that CUC members have indicated are possible. 

UUK's proposals, with the proposal to defer the 2.5% CPI cap on benefits increases, seek to address the issues that have been of great concern to CUC members:

  • to avoid, if possible, further increases in the already high costs for both employers and employees while continuing to offer an attractive scheme maintaining both DB and DC components
  • to develop an attractive low-cost option for lower-paid employees to ensure more employees benefit from a pension
  • to explore longer-term options which would avoid a crisis every three years with ever-escalating costs for employers and employees that reduce investments in the student experience and research base, and thus risk damaging the quality of higher education in the UK
  • to also explore ways to improve the governance of the scheme

In our discussions, CUC members have noted that:

  • employers have gone the extra mile on top of significant enhancements to covenant support by suggesting deferring the 2.5% CPI cap on benefit increases. 
  • the resulting UUK package represents a constructive narrow path between affordability for employers and employees and the rigorous regulatory framework within which the USS trustee must operate.

Thus, we have a strong CUC consensus that the UUK proposal is the appropriate way forward to begin to address the issues that have been of great concern to CUC members.

Further information may become available and there will be a continuing and active debate on the USS valuation. Chairs will want to ensure that any institutional consultation responses and public statements in response to this debate by their institution are appropriately discussed and agreed upon by the governing body.

John Rushforth

Executive Secretary, CUC

15 February 2022