Update on USS pension proposals

Following previous communication about proposed changes to the USS pension scheme, this note provides further information on the different proposals.

Debates about pension schemes are very complex, and different pension experts can take different views on the long term risks to pension schemes. At the heart of the current dispute has been a disagreement about whether or not USS as it stands (a defined benefit pension) is sustainable and affordable for the future. This has been, and remains, an issue for many other pension schemes and you will be aware of changes to pension schemes in other sectors. Universities UK and the Pensions Regulator are of the view that there is a need for significant reform.  UCU are more sceptical about the level of risks long-term.

Some have suggested that the UUK proposals are an ‘attack’ on the USS pension scheme.  However the purpose of the proposals has been to defend the pension scheme and to preserve its long-term viability for the sake of current and future pensioners. It is expected that a 60 day consultation will start in mid-March, giving all members of USS the opportunity to comment and suggest changes.

The Pension Regulator exists to protect the member’s interests in any pension scheme. They have asked for a plan to be in place by 30 June 2018. The law requires the USS Trustees to take a prudent approach in its valuation of the scheme. The Pension Regulator is there to check that this happens and to ensure that the scheme will be able to pay the pensions that members are due now and in the future. The Pension Regulator has written to USS to express concern about the level of risk being taken by the scheme in arriving at its draft valuation.

The UCU Proposal

The UCU proposal, which was rejected by the UUK representatives and the Chair of the Joint Negotiating Committee, moved UCU’s position to one which acknowledged that there would need to be change to the contributions to the scheme.  However the UCU proposal would have significantly increased the cost of pensions for us as employer and for employees in the scheme.

A significant increase in employee contributions from 8% to 10.9% would be expected. For example, this means that a Grade 8 employee could be paying an extra £106 per month out of their salary to sustain the defined benefit scheme.

From the employer point of view the increase would be £4.6m a year on top of our existing £15.1m USS pension bill. What exactly would this mean for us?  It would effectively mean we would have to recruit an additional 500 students to mitigate the costs of the UCU pension proposals. Our infrastructure would simply not cope with this scale of growth, even if we were able to recruit that number, in the current demographic trough where there are declining numbers of 18-year olds. Or by another measure, £4.6 million is the equivalent to the cost of 90-100 posts at the University.

Our financial plans would therefore be challenged by an increase to pension contributions that are likely to be a consequence of the UCU proposal.  And this would be at a time when our income from tuition fees has already been frozen and there is also a real prospect of fees reduction.

The UUK Proposal

The UUK proposals do not require any increase in employee or employer contributions and also permit employees to reduce their contributions to 4% if they so choose, but to still receive the full 18% employer contribution.

From an employee point of view, this reduces cost today and means, based on the recent valuation, that there is a lower likelihood of further reduction to benefits in the future. Indeed, the UUK proposal keeps the door open to re-introducing a defined benefit element if conditions improve.

So what does this mean for a member of the USS scheme? The reduction in costs today means less certainty about the value of the pension to an individual in the future. While benefits already accrued are preserved, and contributions to the defined contribution scheme are still considerably higher than the UK average, this proposal does not offer the certainty of a defined benefit scheme. It is extremely difficult to predict what that variation will be, as it depends on the value of investments, but the consultation in March, where all USS members will be consulted individually and be able to assess the proposal will provide further information and guidance on this.

Martin Williams                                                                 Richard Brooks

Director of Finance                                                          Director of Human Resources

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