Providing defined benefit (DB) pensions is an uncertain business.
The cost of future pensions promises has risen for all private sector DB schemes over the last decade or so, but there are signs that things are changing.
The financial health of the Universities Superannuation Scheme (USS) is much improved based on the USS Trustee’s quarterly monitoring data.
We expect USS to be in surplus at the current 2023 valuation, and the so-called “future service costs” (the benefits which will be earned during the rest of someone’s working life) will be substantially lower.
This is a major turnaround from the situation just three years ago, when USS’s valuation projected a massive deficit, substantially higher future service costs and the Pensions Regulator warned that the approach taken was at the limit of their tolerance for risk. Such volatility in pensions costs makes planning and investment decisions difficult, exposing employees to uncertainty and university employers to unexpected costs which threaten the quality of the education and research which is so vital to our country’s future. It has undermined trust between university employers and their staff.
While few people welcome higher interest rates, they have driven the improvement in USS’s position. Both UUK (which represents all 340 USS employers) and UCU (representing all scheme members), agreed a way forward for the 2023 valuation in a joint statement in March. This has led to a period of industrial relations calm on USS, as joint working continues.
At the last valuation, employers reluctantly supported higher contributions and increased other charges on employers together with reductions to benefits because the only alternative would have been for total contributions to approach almost half of a member’s salary. With the now improved position, employers believe that we can both afford to restore benefits to where they were before April 2022 and reduce the costs for both individual members and for employers. This was agreed in principle on the day that we became aware of the improved prospects for the scheme and employers have overwhelmingly backed this position during consultations.
Employers care about the welfare of staff and I am confident they would have supported this position, irrespective of the industrial relations temperature.
Some of the pain
The 50 per cent increase in the contribution rate to USS since 2009 has clearly been challenging for staff. As employer contributions rose to 21.6 per cent of someone’s salary, and against continuing freezes in the undergraduate fee in England and challenging circumstances in Scotland, Wales and Northern Ireland, pension contributions have been made at the cost of investing in education and research.
When there is relatively little good news, reduced contributions for USS universities will ease some of the pain we’re experiencing (though it will do nothing for those universities who are members of the Teachers’ Pension Scheme who face ruinously high cost increases). It will also help individual USS members who will notice an increase in take-home pay as contributions fall.
Fixing for the future
However, we mustn’t allow ourselves to go from bust to boom and back to bust again. This is the right time to work on substantive reform of USS to ensure that we minimise turbulence in future. Both employers and scheme members deserve a pension scheme that can provide high quality benefits at a predictable and affordable cost.
First and foremost, we must use the improved funding position to build greater resilience and stability, so that decisions arising out of this 2023 valuation are sustainable and do not lead, as far as possible, to further changes being needed at the next valuation.
There are then three priorities. We are exploring alternative scheme designs such as Conditional Indexation (CI), which is a defined benefit scheme design where some or all the increases applied to benefits earned in future would be conditional on the scheme’s funding position. Pension rights already built-up by members would remain fully unchanged and protected. CI has the possibility of providing greater stability, potentially at a lower cost and with higher benefits, along the lines successfully implemented by a small number of schemes in Canada.
Younger generations of the higher education workforce continue to find themselves priced out of a pension because of the high contributions in the one-size-fits-all approach in USS. Around 20 per cent of those who could join the scheme don’t – largely because it is too expensive. Greater flexibility within the scheme could, for example, allow them to pay less (for reduced benefits) for a short period so at least they are still saving for their future within USS and benefitting from an employer contribution.
We will commission a long-overdue independent governance review of USS. Since the scheme was established nearly fifty years ago, many of the overriding rules and structures have remained largely unchanged. We hope that UCU will take part in this review as, by working together, we have the best chance of improving how the scheme is governed, which will be crucial to continued trust and confidence in the scheme, and for the success of stability measures such as Conditional Indexation.
While the immediate outlook for USS is rosier than it has been for several years, we must use this period to bring about long-term changes to the scheme to insulate it as best we can from future shocks. Achieving greater stability for USS will go a long way to boosting trust and confidence in the scheme, and helping members fully appreciate the value of their pensions.