University staff are shortly to be consulted on proposals from the trustees of the USS pension scheme to increase employer and employee contributions to the scheme. The USS trustees will publish more details later this month, and the University will consult fully on their proposals, but here’s what we know so far.
What exactly do the USS trustees want to consult on?
They will want views on the “cost sharing” process (USS rule 76.4-8) for the valuation of the pension scheme they put forward last year. According to the 2017 valuation, there is now a £7.5bn gap between the scheme’s assets and the amount now needed to pay out members’ pensions. The trustees say that employer and employee contributions to USS will have to rise if the scheme is to meet existing and future pension commitments.
At present, UK universities and staff contribute 26% of pensionable payroll costs to the USS. The trustees say this will have to rise to 36.6%. Under cost sharing, employers would pay 65% of any increase and employees pay 35%.
But this valuation hasn’t been accepted by employers and the unions. Aren’t they working on an alternative valuation?
That’s correct. In April, the Universities UK and the Universities and Colleges Union, withdrew proposed benefit changes based on the 2017 valuation. Instead, they agreed to create a Joint Expert Panel (JEP) of pension experts to independently review the scheme and agree a joint approach to valuations. The panel has already met four times and is expected to report in September.
However, the USS trustees are legally obliged to agree a valuation and proposals for funding the scheme by 30 June 2018. Although this date has passed, a sustainable contribution scheme must still be approved by the Pensions Regulator and in place by next April. Unless and until the JEP can get agreement on an alternative, the USS must separately proceed with the existing 2017 valuation. USS rules (rules 76.4-8 to be exact) allow the trustees can impose increased contributions on universities and staff to meet the increased cost of deficit recovery and the build-up of future benefits
But most Universities, including Oxford, changed their minds on the 2017 valuation in the spring. Are they being ignored?
Not at all. As you say, in the spring many Universities communicated to UUK that they were now prepared to see a greater acceptance of risk implied in the valuation assumptions. UUK, which had initially accepted the 2017 valuation, withdrew that position and agreed to create the JEP with the Union.
The JEP is considering the valuation in the light of many of the issues put forward by employers and employees in the spring. These include equality, intergenerational fairness and the desire for a guaranteed pension comparable to current provision. The USS trustees have said they will engage with the panel and its recommendations. However, for the time being at least, they are obliged to show the Pensions Regulator that they have a sustainable scheme based on the 2017 valuation.
How would the increased contributions be split?
Under the USS cost sharing rules, employers must pick up 65% of any increase in contributions and employees must meet the remaining 35%. At present, employers make 18% of the contributions and staff pay 8%. Therefore, if the overall contribution rose to 36.6% of payroll, as USS suggests, employers would meet 24.9% and staff costs would rise to 11.7% of salary, before tax. However, USS has already indicated that any such increase would be phased, and would not be imposed in full next April.
A 7% rise in pension contributions is a substantial demand for employers and all Universities will have consider how they could fund the increase. Likewise, staff will want to consider the affordability of a 3.7% increase in their own contributions, although this is before tax. This will be the focus of the USS consultation.
Are the USS trustees proposing changes to pension benefits too?
No. The benefits paid out by USS are a matter for employers and staff. The trustees’ role is to make sure the scheme is sustainable. The increased contributions proposed by the trustees are based on the assumption that we continue with the current (hybrid mix of defined benefit and defined contribution) scheme. If the Joint Expert Panel come up with an agreed position on the valuation, this would be considered by the scheme’s formal negotiating channel, the Joint Negotiating Committee, which could put forward suggestions for changes to benefits.
What happens next?
The USS trustees are expected to publish more details of the cost sharing process later this month (July), including how any contribution increases would be phased. They then expect employers to consult with affected employees and their representatives later this summer.
The University will pass on updates from USS to staff as soon as we have them. We intend to hold forums on the USS proposals starting in September and to relay staff views back to USS. We will also keep staff updated on the recommendations from the JEP and the progress of the University’s own Pensions Working Group at separate forums throughout the autumn.
Further information from the USS trustees on their proposals can be found here.