It feels like we’ve been writing about USS in our email briefings forever – but we are very aware that the details of the current dispute are complex and there is very little out there to explain the terms and concepts that are thrown around by both sides.
The Universities Superannuation Scheme replaced a seldom-missed earlier scheme (the Federated Superannuation Scheme for Universities) set up in 1913 shortly before the government (via the Universities Grants Committee) became a major HE funder. The former scheme compared unfavourably to the pension arrangements of the day for teachers, but numerous early 1960s reports were unable to recommend a way to remedy this.
August 1973 saw the first of many explanatory booklets circulated to universities, following the agreement of a draft scheme by the CVCP. The new pension scheme was finally introduced on 1 April 1975 – with contributions set at 16% of salary (members paying 6% plus a 2% surcharge for back service). USS, as an independent private company, remains based in Liverpool – a location chosen primarily due to proximity to the consulting actuaries and the solicitor to the scheme.
What is a pension?
A pension is a savings tool to pay for the cost of living when you’re no longer willing or able to work. In the time before retirement ages were abolished, the expectation was that one would have a tidy savings pot which would pay out a bit like a salary. And because this has generally been seen as a Good Thing, the government has incentivised pensions through tax breaks and – most recently – the advent of auto-enrolment. As a collective protection scheme, pensions are often linked to other benefits like life assurance and income for dependants in the case of death during employment.
Under current UK regulations, there are two very different forms of employment-linked pension scheme – both offer you an income after you retire, but the way in which they go about this is completely different.
Defined Benefit – your pension scheme Trustee commits to paying you a defined proportion of your final salary (or another agreed sum) – usually expressed in terms of a fraction of your salary in each year of employment, and then adjusted by an agreed factor of indexation. In return, it takes a proportion of your salary, and uses this – alongside a contribution from your employer – to build up the money required to do what it has promised. Schemes of this type are either “funded” – where money is set aside specifically to provide for pensions – or “unfunded”, where the Trustee will cover pensions costs as they arise using income and savings from a range of sources.
Another difference here is between single employer and multi-employer DB schemes – USS is an example of the latter.
Defined Contribution – this is much more like you (and your employer) making contributions to a personal investment fund. This fund is then managed and invested for you by the pensions provider, with the contents of your fund available to you on retirement. Most people can access their pot from their 55th birthday, and at a point thereafter which suits their lifestyle, they have historically typically withdrawn 25% of the pot as a tax-free cash lump sum and used the residual to buy an annuity – a yearly income – either from the pensions provider or elsewhere.
It’s only at the point of buying an annuity that you really know for certain what your income will be on retirement, though your pensions provider will offer you a projection on their own annuity scheme, using projections of investment and wider economic performance, your estimated date of retirement and your estimated life expectancy.
The rise of DC pensions, coupled with recent policy developments, have increased the flexibility of at-retirement arrangements in many ways (such as withdrawing the whole amount, and not forcing the purchase of an annuity), but this has also increased the complexity of decision-making, placing more of an onus on the individual to plan for their own retirement.
Valuing a pension scheme
Making projections of future fund values is a big deal for defined benefit pension schemes. Defined benefits, more common in the public sector, are predicated on the viability of the employer and the degree to which the scheme is funded. So-called “government-backed” pensions (the Teachers’ Pension Scheme, for example) are, in effect, guaranteed by the government. No matter what happens to the agency or organisation you work for, the government owns the (legally enforceable) promise to give you the defined retirement income.
Defined contribution schemes do not tie the trustees to any particular level of benefit. Instead, each individual will receive at retirement the accumulation of their contributions, their employer’s contributions, and any investment returns. They tie the employer and employee to a specific level of contribution but do not expect the employer to underwrite final value. Instead – a lot more attention is on the value of individual accounts held in the scheme. Briefly, this calculation might depend on:
- The contributions made
- The performance of the specific portfolio of investments held by an individual account over time
- The individual’s own stated date for their intended retirement
- Projections of future investment portfolio performance, and the condition of the wider economy.
There are numerous ways in which these actuarial calculations can be done. If you are standing on a cold picket line, or trying to keep an institution running in the face of industrial action, just remember that a lot of this comes down to differences around methodology and underlying assumptions.
Managing and predicting risks
You’ll notice that the last two examples in the list above are based on things that haven’t actually happened yet. The practice of making and revising these estimates is known as actuarial science – and the brave souls who practice it are actuaries. If you’ve ever run any kind of quantitative experiment, you will be familiar with some of what such calculations entail. Predictions can be based to a certain extent on what has happened in the past, but ideas of what might happen in the future are even more important.
For instance, it is possible to assume that – over a longer term – investments that are (effectively) loaned to the government will pay back a lower rate of interest than investments in private companies. But it is also possible to assume that investments in a private company have a much higher likelihood of disappearing entirely.
Or – we know from historical data that life expectancy is probably going to go up by a small amount each year. This is good for humanity generally, but potentially more troublesome news for pensions providers as they will have to ensure more people get paid for longer. However, life expectancy has historically grown more slowly during economic downturns.
Which brings us to Brexit – we can be (into) sure it is going to happen, and there are various projections (of varying degrees of expertise and partiality) that suggest it will bring an economic slowing of some sort, at least in the short term. So calculations need to price in this effect.
USS: the federation and last-man-standing
But we are also starting down the barrel of a much less certain future for the institutions that pay into the Universities Superannuation Scheme. Changes to the regulatory framework in England – one part of the story on the current pensions debate – make it more likely that institutions will lose degree awarding powers or university title, or be merged, or closed down entirely. Possible changes to the funding regime could hugely affect institutional income and the ability to repay borrowing. Previously, there has been a de facto understanding that universities were too important, and too big, to fail. For USS members, this failure would mean a loss of ongoing payments to the scheme, but the promised income to retirees would still need to be provided – with the remaining members sharing the cost of this liability.
Changes to the regulatory framework in England – one part of the story on the current pensions debate – make it more likely that institutions will lose degree awarding powers or university title, or be merged, or closed down entirely
This risk has not existed before – and employers and the scheme are rightly worried about the effect this will have. So it needs to be “priced in”, which means – in turn – that trustees and employers may favour less risky investments to ensure that some money will still be there. And the Pensions Regulator will have a view on the way this is done. Moving from defined benefit to defined contribution shifts the risk of volatility in future returns from the employer-backed pension scheme to the individual; while likely to be less generous to the pensioner, it’s easy to see the logic for institutions.
Pension scheme managers (or trustees) have to make a triennial return to the Pensions Regulator, which is a government body that makes sure that pensions are being managed properly. For schemes that include a defined benefit element, this will include an actuarial valuation that reassures the regulator that the investments held have some chance of resulting in covering the promises made to those individuals who have paid in. If the regulator would not be reassured, either a different valuation or a change to the scheme (or some combination of the two) is required.
The story so far
The most recent valuation process hit the headlines in July last year when USS announced an estimated “deficit” of £17.5bn based on the position of the fund at 31st March 2017. This was immediately challenged by UCU (which represents employees in the scheme). We covered the news on Wonkhe at the time.
USS consulted Universities UK (which represents the employers’ interests in the scheme) regarding this valuation, as it is required to do as part of the triennial revaluation. In turn, Universities UK consulted all 350+ employers that pay in to the scheme, which includes several that are not UUK members.
UCU engaged First Actuarial to develop the union’s own analysis of the scheme and linked proposals, based on available data. What is notable is that its report included detailed methodological information, the USS valuation having received criticism for not going into as much detail as some might like.
In October, the UUK response to the USS consultation was published. In numerical terms, a small majority of employers supported the USS position on risk, but a significant minority requested the scheme took even less risk than suggested. Since this time, some commentators have suggested that this latter group disproportionately included a number of Oxford and Cambridge colleges. Though these smaller employers need to be consulted, the expression of responses in raw percentage terms perhaps did not make any weighting between the responses of larger and smaller employers clear.
UCU consulted its members – finding 86% would support a call for industrial action to defend their existing pensions benefits. In November it began a formal ballot. The USS valuation was updated to reflect the expressed preferences of employers in December 2017.
All this fed into Joint Negotiating Committee (JNC) talks – the formal process which UUK and UCU are brought together to input into the future of the scheme. Around Christmas time, it was announced that the JNC had accepted a proposal made by UUK on behalf of employers to reform USS to help meet the expressed desire for lower risk.
The employee representatives (UCU) on the JNC were not happy with the proposal. On 22nd January, UCU announced the results of their ballot – which overwhelmingly supported industrial action.
The proposal recommended that all contributions moved to a defined contribution model that currently applies only to contributions related to the component of a salary over £55,550. This was coupled with the availability of a 4% employee contribution rate, for the lowest paid, that would allow more people to enter the scheme. Employer contributions would remain static at the current – and generous relative to many other schemes – 18% of salary. UCU countered that retirement income would fall across all members, with some groups seeing very significant losses.
Further talks between UUK and UCU did not result in an agreement. The strikes and actions short of a strike (ASOS) started on 22nd February, with support from NUS. And Polling from YouGov indicated wide support for the action amongst students.
As strikes commenced, a number institutions saw claims from students for compensation based on them not receiving lectures and assessments paid for by their fees. This can be seen as a form of support for the strike, putting further pressure on institutions. There was widespread surprise as universities minister Sam Gyimah offered support for these claims.
And let us not forget action short of a strike – working to rule (contractual duties only) by staff unable to strike has caused significant disruption, and had led to controversy over certain institutions withholding pay from those involved. Some strikers too have seen intimations that they would lose pay until work is made up. None of this has improved public perceptions of universities
A significant number of vice chancellors offered support for the renegotiation of the USS proposal. Talks began on 27th February, with both sides agreeing to ACAS arbitrated talks which will start on 5th March.
Reversion to an earlier proposal, or the development of a new one, are options that has been put on the table – but whatever happens, there is a hard deadline of 30th June for the submission of proposals to the Pensions Regulator. And anything substantially new needs to be consulted on.
Where does this leave us?
The move from a hybrid DB scheme to a DC one (though technically the new scheme would remain a hybrid) moves the risk of volatility in investment performance from the employer to the employee. It significantly reduces the reliability of retirement income forecasts. While there are arguments that DC gives employees more flexibility, it is widely seen as a negative move, and given that this is the one deemed less risky to employers, it seems reasonable to conclude that it is negative for many employees.
Who loses out? Employees with long service in the scheme will be less exposed to the future terms, so will experience the least impact. Those with long service ahead are the most disadvantaged. It may be that the lowest paid, those earning below £55k a year, will get the worst of it as they currently have the whole of their current pension within the DB section of the hybrid model. When it seems like pretty much everyone will lose out, you can see why the strikes occur.
But there is a positive in the proposal for many lower paid staff. Not everyone can afford the 8% of their salary that they would currently expect to contribute to a USS pension, much less the higher levels that are currently proposed by UCU. The UUK proposal accepted by the JNC allows for a 4% contribution rate for the lowest paid, that would not be viable in the current DC environment. Giving more staff access to a pension – and the related death-in-service insurance – is hugely important.
There’s also a logic on the employers’ side. Increased costs need to be paid for, and many institutions are under pressure. And may be even more so if (when) the post-18 funding review results in lower income for universities. There are bigger forces at work too: the removal of the state safety net, marketisation and competition, the increasing pressure on individual institutions to act in their selfish interests rather than with a view to collective altruism. While students may show support for the strike, they would also be justified in complaining that their fees today are paying for yesterday’s underfunded pensions – and indeed tomorrow’s underfunded pensions.
The current pensions dispute is complicated and unpleasant; let’s hope that the negotiation and conciliation process has an ameliorating impact.
2 responses to “A beginner’s guide to the USS dispute”
A 4% contribution rate for people who are paid less isn’t a positive; given that it will shrink their pensions, at best it’s a deferred negative.