This guest blog has been kindly contributed by Alistair Jarvis, Chief Executive of Universities UK – which represents the 340 USS employers.
Figures released this week by the Universities Superannuation Scheme (USS) in its latest actuarial valuation – a formal ‘health-check’ of the scheme’s finances – make for concerning reading.
USS provides pension benefits to over 400,000 active and retired members of staff at universities, charities and research institutes across the UK – and those benefits are getting more and more expensive to provide. This is partly the result of low interest rates and investment returns which have pushed the cost of pensions up, and in USS’s case, deepened the scheme’s deficit. But it also reflects the high level of prudence the USS Trustee has chosen to adopt in its pricing, under regulatory pressure.
Employers understand that the USS has a sizeable deficit and a high member opt-out rate and that both need to be addressed in the interests of intergenerational fairness. To ensure that the pensions scheme remains affordable for members and employers reform is necessary. However, employers and scheme members need a stronger and clearer justification from the USS Trustee for the very high pricing decisions. Without this clarity, employers and scheme members will be concerned that the scheme is facing an unnecessary level of reform.
Over the last year, representatives from the USS, the union and employers have been working closely together to explore alternative approaches to the valuation. We’ve had some success in finding common ground, helped by the second report of the Joint Expert Panel (set up by UUK and UCU in 2018). Together – in a tripartite effort – we have developed high-level shared valuation principles to inform the approach to this valuation, and everyone involved has made a commitment to greater levels of transparency and sharing of information.
USS has removed the ‘Test 1’ measure of risk appetite from the valuation methodology – a real bone of contention in previous valuations – and also introduced a Dual Discount Rate, which is more appropriate for a scheme of USS’s size and structure. These changes have been welcomed by both UCU and employers.
Despite this positive joint working, the indicative contribution levels presented by USS this week are surprisingly high. All three prices proposed by the USS Trustee are unaffordable for scheme members and employers. This comes after a three-month delay to the valuation while discussions took place between USS and The Pensions Regulator, which have led to the USS Trustee taking a more cautious stance than previously anticipated.
Employers are concerned that the latest approach does not fully take account of the strength of our world-leading university sector and the unprecedented package of financial support – often referred to as ‘covenant’ – put forward collectively by the 340 employers.
Employers are not arguing that the scheme’s status quo can be maintained – it is not affordable. The scale of this deficit means that reform is needed, but we want to work collaboratively with USS and UCU to consider a revised approach and assumptions that bring the headline costs down.
We accept that the USS Trustee has the legal responsibility for the valuation pricing, and is under regulatory pressure, but we will be pressing them to work with us on a joint solution that fairly recognises the covenant strength provided by employers.
Together, employers and scheme members are already making a significant salary contribution of 30.7% towards the scheme, a 50% rate increase for both employers and members in the last decade.
For most universities and their staff, paying higher pension contributions isn’t an affordable option. The high drop-out rate and growing contribution levels need to be addressed in the interests of intergenerational fairness. We can’t responsibly push this parameter further given the uncertain economic times and knock-on effects elsewhere in university budgets – and it would be grossly unfair to place huge additional burdens on the shoulders of future generations and employers.
At the current member contribution rate of 9.6% of salary, many colleagues have been voting with their feet – in some recent months, an alarming c.20% of eligible members are opting out of the scheme because of its cost, leaving them without any employer contributions towards their pensions. An optional lower cost entry route to the scheme is needed to ensure that the scheme remains affordable to all.
In the coming months, USS, UUK and UCU must collectively explore every possible avenue to tackle the deficit and consider ways of making the scheme more appealing and inclusive for the long run.
While these discussions progress, USS must set out clearer reasoning for their pricing decisions and better explain the value they have attributed to the covenant support measures offered by employers. The unique nature of the scheme and the strong support on offer from employers, suggest a more acceptable outcome is possible if we work together on this. Employers are committed to working with scheme members, their representatives, and the USS Trustee to seek a fair and affordable solution.