Pensions – the importance of getting it right

Much has been written recently about the Universities Superannuation Scheme (USS).  As with any issue where there is a diverse cast of interested parties and commentators; this leads to a spectrum of very different viewpoints and agendas. These include claims that student tuition fees will have to rise to prop up pensions – others argue that the deficit has been artificially inflated and the scheme is affordable in its current form. So, amidst the claims and counter-claims what should you believe? What are the facts that should be considered in this important debate?

The focus of debate has been on the size of the deficit in relation to pension promises for past service. While this is serious and needs to be addressed, it is not the only issue. The recent valuation also reveals that the cost of providing future benefits has increased from 26% of salaries (18% employer and 8% member contributions) to 32.6% – well above the maximum we see as a sustainable level both for individual members and employers. This means that to provide current benefits into the future the sums that employers and individual scheme members (university sector staff) would have to pay into the scheme would need to rise to unaffordable levels.

Why has this happened? Largely because economic changes, which could not have been predicted at the last valuation in 2014, have reduced future investment return expectations. This is a problem not just for USS but also for many other funded UK pension schemes.

A risk that employers cannot take

We should be under no illusion, this is not a problem that will go away if ignored.  To retain the status quo would only serve interests in the short term. Without reform now, universities will likely be forced to divert funding allocated from research and teaching to fill a pensions funding gap, or if they did not, they would risk the sustainability of USS. The option of no reform is a dangerous gamble. It is a risk that employers cannot take.

It has been suggested that rather than increase contributions or move to a benefits structure that is affordable for the long term, USS should invest more aggressively for higher returns. This would increase the risk that, if the strategy failed, USS would need to call on universities and other higher education sector employers in USS for additional funding at a level most institutions would struggle to meet. It would also be highly unlikely to gain the approval of the Pensions Regulator, which, as well as making sure that USS can pay pensions as they fall due, is tasked with ensuring that the cost of the scheme does not threaten employers’ survival.

Difficult decisions

There have been numerous meetings between USS, employer and member representatives (UUK and UCU respectively) over the past year to feed into the valuation process and methodology used by USS.  We are now approaching the end of USS’s formal consultation with employers on the valuation outcome and options for dealing with both the deficit and the rise in future pension costs. The next step is to reach an employer consensus on the way forward.

UUK, taking into account feedback received from USS employers, will be developing proposals to give the scheme stability and security, to ensure it remains affordable for individuals and universities, and continues to provide attractive benefits to current and future employees. Difficult decisions will need to be taken during the negotiation process, including the reform of future benefits. There are vital decisions that all involved need to get right to strengthen the sustainability of the scheme and avoid further rounds of uncertainty and change.

The recent Employers Pensions Forum (EPF) report sets out universities’ priorities for future pension provision. It is essential that we find a way to continue to provide pension benefits that staff value, within a sustainable framework with the flexibility to adapt to any future change in demands and behaviours. We owe it to current, future and past employees and, also – importantly – to our students to do so.

Discussions with USS and formal negotiations between employer and member representatives are expected to proceed through December 2017. Any agreed changes to member benefits or contributions will necessitate a full consultation with pension scheme members in February/March 2018.