It is almost exactly a year since Universities UK, in response to sustained industrial action by UCU members in defence of their pension benefits, proposed the establishment of a Joint Expert Panel (JEP) on the USS valuation. Much has happened since members voted to accept that proposal and suspend strike action. The 2017 valuation has been completed on a “cost-sharing” basis, with staggered contribution increases but only minor benefit cuts; the JEP Report on the 2017 valuation has been published (and vindicated UCU’s position); and the USS Trustee has consulted employers on a 2018 valuation of the Scheme designed to supersede cost-sharing under the 2017 valuation. The JEP has also begun phase two of its work, which will focus on USS governance and the best way to ensure the long-term sustainability of the Scheme.
While this second phase of the JEP’s work will not be complete for some time, the next month or so will see important developments for the medium-term future of USS benefits and contribution rates. This post updates members on where things now stand with respect to USS pensions, on what is likely to happen over the next few months, and on what the changes will mean for USS members.
- Implementation of the 2017 valuation: cost-sharing from next month
From April 1st, the first phase of contribution increases and benefit changes resulting from the 2017 valuation will take effect. The member contribution rate will increase from 8% to 8.8% of salary, and the employer match of the first 1% of voluntary Investment Builder contributions will be removed. The loss of take-home pay will be around £7.50 per £1000, while those currently taking the match will lose £10 in contributions to their DC pension pot for every £1000 of gross salary. The precise impact on take-home pay at various salary points can be found here (for those making contributions via salary sacrifice) or here (for those making direct contributions from pay).
If the 2017 valuation is fully implemented, there will be sharper increases still in member contributions in October 2019 and April 2019, eventually to 11.4% — equivalent to a cut of more than 3% in take-home pay for most members. However, USS have begun work on a 2018 valuation, and it is hoped that this valuation will be finalised by June 30th and implemented in October 2019 instead of the later phases of cost-sharing.
- The 2018 valuation: the USS position and its (multiplying) critics
Members will recall that the JEP Report recommended a series of adjustments to the 2017 valuation, which in combination would have made it possible to retain status quo defined benefits with a member contribution rate of around 9.1% for the next three years, alongside an increase in the employer rate from 18% to 20.1%. In its proposals for the 2018 valuation, however, the USS trustee has rejected the majority of the JEP’s recommendations on the grounds that the changes would increase the risk of underfunding the Scheme to an unacceptable degree. The trustee has accordingly set a total contribution rate of 33.7% of salaries for the maintenance of current benefits. Implying contribution rates of 10.7% for members and 23% for employers, this would barely improve on the 2017 valuation.
Both UCU and UUK believe that the position of USS is unreasonably damaging to the long-term sustainability of the Scheme, and support the implementation of the JEP recommendations in full. The branch committee has seen the institutional responses to UUK from the Universities of Sheffield, Oxford, and Cambridge, and all take the view that the trustee’s approach remains inappropriate for an immature, open, and well-supported pension scheme like USS, and that status quo benefits could be securely maintained at a much lower price than the Scheme trustee has so far been willing to countenance. In particular, it is unreasonable of USS to insist on maintaining unchanged Deficit Recovery Contributions for 2018, when the deficit itself halved between the 2017 and 2018 valuation dates, and to refuse to defer shifting assets into gilts (“de-risking”) despite the recommendations of the JEP.
- A medium-term compromise: the UUK proposal for contingent contributions
It is, however, unlikely that there can be substantial change to USS’s valuation model until after the report on phase two of the JEP’s work, or in time to pre-empt the later and more expensive stages of cost-sharing. USS has therefore proposed a compromise position. If this were adopted, the (allegedly) required contribution rate would be divided into a lower initial rate (of around 29-30%), but be subject to contingent increases at later dates should the (alleged) Scheme deficit increase between now and the next valuation. UUK were invited to make a proposal along these lines, which they duly did at the end of February.
The UUK proposal is for an initial contribution rate of 29.2% – i.e. 9.1% for members and 20.1% for employers – from October, with 1% increases each April from 2020 if the funding of the Scheme deteriorates. The proposal has been designed so that there is only a 30% chance of any increases beyond the initial rate, and only a 2% chance of the worst-case scenario of repeated increases up to a 10.2% member rate from April 2022. A “significant majority” of employers expressed support for this arrangement in the UUK consultation, and it is clearly strongly to be preferred to the USS proposal of 33.7% throughout the valuation period.
- Looking forward
The UCU position remains that no increases in member contributions beyond the current 8% are justified: if the JEP recommendation were fully implemented with a March 2018 valuation date the current total contribution rate of 26% would prudently fund the Scheme without any changes to benefits. We are glad that employers have finally come to agree that the 2017 and 2018 USS valuations massively overstated the real cost of USS benefits, even if one might justifiably wonder why they took so long to come to this realisation (and what changed their minds). They must now work with UCU to ensure that USS, with or without the Pensions Regulator standing behind them, do not simply dig their heels in and continue to insist on running the Scheme as if the pre-1992 HE sector were equivalent to pre-collapse Carillion or BHS.
The USS Trustee Board meets tomorrow, March 28th, and what emerges from that meeting in response to the UUK proposal will give us a sense of how difficult the way forward is now likely to be.
— Sam James, Cambridge UCU President, 27 March 2019