Time is running out for agreement on USS

Industrial action now looks likely as unions and employers disagree over USS scheme terms and valuations. David Kernohan breaks it down.

David Kernohan is an Associate Editor of Wonkhe

Employers will have a further chance to comment on a proposal to alter USS benefits while retaining contribution levels, following a decision by the Universities Superannuation Scheme (USS) Joint Negotiating Committee (JNC).

This latest development, and the ongoing disagreements played out between the Universities and College Union (UCU) and the USS Employers function of Universities UK (USS Employers) are a part of a longer story that goes back to a controversial scheme valuation in 2017.

Background

Since then we’ve seen a blizzard of statements and positions from UCU and USS Employers, and three sustained periods of industrial action – the most recent in early 2020. At a fundamental level, pension holders are concerned about proposed rises in contributions alongside changes to retirement benefits – and employers are also concerned about rises to their contributions.

This has a particular impact on lower-paid staff (often early in their career). Increases in contributions from individuals would lower their take-home pay substantially, and increases in employer contributions would make it more expensive to employ workers.

Valuation

These proposals increases and detriments are driven by valuations of USS that suggest a shortfall between income and resources on the one hand and commitments on the other. The UCU position is sharply critical of the methodology (and latterly, timing – a pandemic perhaps not providing a representative economic backdrop) of these valuations.

However, USS trustees point to their responsibilities as set out by the Pensions Regulator (tPR) – the way pension schemes should be valued is set out in regulations, and trustees see limited scope for innovation. The extent to which the pension valuation process has deviated from tPR rules is linked to the unusual structure of USS – a traditional pension scheme links to a single employer, whereas USS involves more than 340 employers in and around the higher education sector.

This strength in numbers – USS works on a “last-man-standing” principle which would require every one of those 340+ employers to cease contributions before the scheme folded – is expressed in terms of a covenant, which has a value attached to it and is used in scheme valuations. A more convincing covenant (for instance a 20 year binding agreement not to leave the scheme) is worth more – in this case equivalent to c.£1.3 billion per year.

Proposals

And here we reach the nub of this week’s action – employers have indicated a willingness to strengthen the covenant for a set of proposals consulted on by USS Employers, but not on one put forward by UCU. For this reason the independent chair of the JNC felt able to use her casting vote to support the USS Employers proposals, but UCU members of JNC (there are five each from USS Employers and UCU, plus the chair) chose not to put their own proposals forward – the weaker covenant made them more expensive.

Here’s what the two proposals look like (based on the UCU comparison):

USS EmployersUCU
Employers pay 21.1% of salary, as currentlyEmployers pay 24.9% of salary (3.8pp more than currently)
USS members (those with pensions) pay 9.6% of salary, as currentlyUSS members pay 8.1% of salary (1.5pp less than currently)
Accrual reduced from 1/75 to 1/85Accrual reduced from 1/75 to 1/80 (back to what it was in 2016)
Salary threshold for defined benefits lowered to £40,000 from £60,000.Salary threshold for defined benefits lowered to £40,000 from £60,000.
Benefits protected against inflation up to 2.5% (currently full protection to 5% and half protection between 5% and 15%)All benefits protected against inflation via enhanced employer contributions.
Flexible options under discussion.Members could choose to pay lower contributions, linked to a lower accrual rate
Members who spend more than 3 months in USS entitled to benefits.Members who spend more than 3 months in USS entitled to benefits.

Up until 2011 USS was a final salary pension – annual retirement income was linked to the value of your last year of earnings. Since that point, new entrants to the scheme would receive pension income on a career average revalued earnings basis (CARE). In 2016 all members moved to a CARE basis, with previous benefits protected based on salary in April 2016

“Accrual” refers to the proportion of your CARE that you can expect to receive each year you claim your pension – so if you contribute to USS for 20 years starting today you could currently expect to receive 20/75 of your CARE salary. Previous benefits are preserved.

What’s important here is that the scheme remains, at least in part, a Defined Benefit pension – the industrial action in 2018 kicked off after JNC proposed a wholesale move to a Defined Contribution (where the amount paid into the pension, rather than the amount available annually on retirement, is defined) basis in response to the 2017 valuation. This appears to be off the table for the moment, as (if an agreement is reached) is a previous (2019) proposal to raise member contributions to 11 per cent of salary.

What’s next

Tuesday’s JNC-approved proposal now goes out for consultation with members and representative bodies. This leaves a window open for UCU to seek changes to the proposal. If members cannot agree a response to the 2020 valuation the default USS proposals kick in in October, with a very sharp rise to both member and employer contributions.

Calculating the future impact of changes to pensions is a complex and controversial process – USS Employers, USS, and UCU have all published opinions from various firms of actuaries that present differing pictures of future benefits and the health of the scheme. It is clear that the USS Employers proposal will lead to no changes in headline payment rates and lower benefits for members, though the amount of detriment is disputed. The default USS option substantially raises payment rates for members and employers, but retains current benefits. UCU’s plans would lower member contributions, raise employer contributions, and reduce benefits (though to a lesser extent than the USS Employers proposal) – but this proposal is not out for consultation.

The union is preparing for “inevitable” industrial action – and the usual briefing and counter-briefing has commenced. UCU claims that a request for a one month extension was rejected, USS Employers claims that no such request was made. USS Employers claims that no discussion of UCU proposals was permitted, and that employers stand willing to comment on UCU proposals – UCU does not agree with this version of events. UCU claim that USS Employers did not support calls for a new valuation to replace the 2020 one, USS Employers claims that employers have raised concerns about the 2020 valuation but tPR and USS trustees would not permit such a replacement and a 2021 valuation would increase costs further.

There’s also a USS statement to add to the general gaiety. And it is also worth noting a major governance review of USS is incoming, which could look at everything from lower-cost options for low-paid staff to conditional indexation.

One response to “Time is running out for agreement on USS

  1. USS has been failing for some time and is headline news around the University sector, what’s not addressed is the knock-on effects on many ‘local’ University scheme’s for non-academic staff. One scheme I have a personal interest in, having refused to join USS at the offered 8 year existing pension bought ONE USS pension year I refused to transfer due to that detriment, has been targeted repeatedly both by the University and US pension ‘providers’, whilst we saved current members DB all potential future members are now on a DC scheme provided by an outside company.

    During that fight the Universities biggest excuse for cutting down DB benefits was ‘equality’ with the USS scheme, as the cleaners etc on said local scheme would pro-rata have a better retirement income than the academic members of USS. That USS members had/have enough income to save and invest in supplementary private pensions and property, whilst local scheme members struggled just to make ends meet and would have liked to have at least a not uncomfortable retirement to look forward to it seems ‘equality’ in retirement means struggling on then too…

    Universities who adopt such a pensions ‘equality’ approach had best be prepared for strikes not just from the academics, but from the ‘essential workers’, cleaners, security etc who actually keep the place running safely too.

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