Attractive pensions benefits are possible without huge price hikes

In recent years, the cost of providing pensions in the UK has risen because people are living longer, long-term interest rates are low, and there is a weak outlook for investments in the future.

The Universities Superannuation Scheme (USS) is not immune to these pressures, and, last month, the USS trustee, which runs the scheme, set very high prices to maintain the status quo on benefits.

The uncomfortable truth is that action needs to be taken. However, these levels of contributions – up to 56 per cent of salary – would be unaffordable for employers and members. Moreover, a difference of opinion exists between employers and the USS trustee over the scale of the problem.

That is why Universities UK (UUK) is consulting 340 employers over alternative proposals. Employers are not arguing that the scheme’s status quo can be maintained. However, we are urging the USS trustee to consider a revised approach and assumptions that bring down the headline costs and reduce the scale of reform needed, ensuring that any changes are proportionate and justified.

Proposals in our consultation, which runs until 24 May, indicate how we could preserve a significant element of defined benefits in the scheme, thereby continuing to offer a valuable pension to staff in the future.

The deficit was highlighted by 2018’s first report by the Joint Expert Panel (JEP), set up jointly by UUK and the University and College Union (UCU). We that believe applying the same approach used by the JEP to this valuation would result in a fair outcome – which would still require a level of reform to maintain the combined employer and member rate of 30.7 per cent at present.

If there is no agreement, the USS trustee will implement higher contribution rates for employers and members in October (34.7 per cent of salary – split 23.7 per cent for employers and 11 per cent for members), agreed as part of the last valuation. Ultimately, it could impose even higher levels of contributions, which it sets out in its recent update report.

It is easy to simply oppose change, but reform is necessary to tackle the scheme’s funding gap and to ensure that USS pensions are affordable for members and employers alike.

Through our consultation, we are asking employers to seek views of their staff on the way forward. Our alternative proposal aligns with the outcome we believe that the JEP would arrive at. It envisages the continuation of the current contribution levels for members and employers and significantly less drastic benefit reform than the USS trustee is proposing in its three outlined scenarios.

It depends on even stronger financial underpinning of the scheme from employers (known as covenant support). Importantly, it also requires the USS trustee to move its assumptions and value on covenant to a fairer position.

The consultation also asks for employers’ feedback on the suggestion to more fully explore a move to a conditional indexation model, whereby members would receive a guaranteed core level of benefits but future increases would be dependent on investment returns. This has the potential to be an attractive and sustainable option. Employers are very willing to consider feasible and affordable alternatives from the UCU on tackling the scheme’s financial challenges and designing the benefits package to best suit the needs of all eligible employees.

This valuation provides a vital opportunity to address one of the major problems with the USS. We want to find a way to make the scheme affordable for the 20 per cent of staff who currently opt out of joining the scheme, many of whom are priced out. The consultation proposes a flexible payment option, whereby members can pay a lower contribution rate while still benefiting from money from employers pay into their pension.

We continue to take every opportunity to convince the USS trustee that it can allow more leeway, which would limit the extent of the changes needed.

The commitment of employers to their staff and to the scheme is clear from their investment in USS pensions. There has been a 50 per cent increase in the level of employer contributions as a percentage of salary to the USS over the past decade (an extra £623 million per year), pushing staffing costs up to 59 per cent of the higher education sector’s budget – the total staff spend is 44 per cent higher than it was six years ago. Furthermore, the USS values employers’ additional covenant support at 14 per cent of payroll, the equivalent of £1.25 billion a year.

The very high pricing proposed by the USS trustee comes despite the recent changes made to the valuation process, agreed through joint working by the UCU, UUK and the USS, and informed by recommendations in the second JEP report, published at the end of 2019.

This has seen the removal of the controversial “Test 1” valuation methodology, which the union campaigned to change, and the development of shared valuation principles and a scheme purpose. Yet employers remain concerned that aspects of the scheme governance are unhelpful and feel that their opinions are not properly considered in the valuation process. Therefore, as part of our consultation, we are seeking employer views on whether a formal review of the scheme’s governance should take place.

Over the coming weeks, UUK wants to work with employers, the UCU, members of university staff and those running the USS to ensure that USS pensions remain valuable and are affordable for all.

Alistair Jarvis is chief executive of Universities UK, which represents 340 USS employers. Its consultation closes on 24 May.