The vice-chancellors of the universities of Oxford and Cambridge have joined forces with local unions to call for a radical redesign of UK higher education’s largest pension scheme which would end automatic inflationary increases in benefits but would, they say, keep contributions below 30 per cent of salary.
A joint statement argues that a contribution rate of 25 to 30 per cent of salary “should be sufficient to secure a good pension” for members of the Universities Superannuation Scheme and says that conditional indexation “is likely to be the best way” to achieve this.
The move is an attempt to break the deadlock between the USS, Universities UK and the University and College Union which threatens to plunge the sector into a fourth round of strike action over pensions in little over three years.
Reporting an estimated deficit of between £14.9 billion and £17.9 billion, the USS warned in March that combined contributions from staff and employers may need to rise as high as 56.2 per cent of salary to protect existing benefits.
In response, UUK has proposed making pensions less generous in order to keep contributions at or close to their current rate of 30.7 per cent, but the UCU’s national leadership has warned that this would “pull the rug from under people’s retirement”.
In the statement, Cambridge vice-chancellor Stephen Toope and the university’s UCU branch president, Michael Abberton, along with Oxford vice-chancellor Louise Richardson and UCU president David Chivall, warn that the current requirement for the USS to be able to meet its obligations in the event of most of its employers going bust meant that members saw their benefits eroded “on the basis that something bad – but ultimately unlikely – might happen”.
At the same time, there was “little flexibility in the scheme to benefit from improved market conditions”.
In contrast, under conditional indexation, benefits would not automatically increase with inflation until retirement, and this would instead be conditional on market performance.
Over the medium to long term, “we would expect benefits to appreciate as much or more under this approach as in the current inflation-linked scheme”, the statement says.
Conditional indexation offered a middle way that still guaranteed a level of benefits “but would share some of the risk and reward of market performance with members”, said Anthony Odgers, Cambridge’s chief financial officer.
“Because the USS has such low base assumptions, there are almost no circumstances in which you will do worse than the USS have suggested. And very, very many circumstances where you will do better,” he told Times Higher Education.
Mr Odgers said that pension rules had made deciding on the future of the USS scheme “incredibly frustrating” and meant that a full redesign was the only way to protect defined benefits in the fund. “We really are going to do our best to make sure it doesn’t disappear,” he said.
The Oxbridge statement calls for the USS, UUK and the UCU to put together a team to explore the idea “as a matter of urgency” so that, even if a redesign cannot form part of the current valuation exercise, “any benefit reductions/increases [would] be in place for the minimum amount of time”.
UUK had already put forward the idea of conditional indexation as part of a major review of governance it called for alongside its proposals on benefits.
“Scheme design and valuation need to start with the assumption that USS will invest in the assets that will deliver the best overall return over the long term, without excessive concern for volatility along the way,” the Oxbridge statement says.
“This should provide the best pensions for members with the lowest overall level of contributions.”
The statement adds: “Until this happens, it is difficult to see an end to the problems that USS, its members and employers, have experienced since at least 2016.”