Looks at the consultation on the 2017 valuation of the Universities Superannuation Scheme (USS) and the proposed reformsJump to full report >>
Recent valuations of the USS have shown an increasing deficit, the main cause being “lower expected levels of future investment returns and lower yields on index-linked gilts” (2017 Annual Report).
In September 2017, the USS Trustee launched a 4-week consultation with Universities UK (UUK) on the assumptions it would take for the 2017 valuation. It proposed a “prudent” approach to the assumptions on investment returns. An important factor in this was that although investment returns had been higher than expected, these were likely to reduce in future. Other things being equal, a prudent approach to the assumptions on investment returns would require a higher level of contributions (from employers and employees) because the return on assets is expected to be lower. (USS, 2017 Actuarial Valuation, 1 September 2017, p7)
On 14 November 2017, the USS trustees said UUK’s response “indicated to us that we should take a more moderate approach to risk.” They therefore agreed to “retain the 2014 approach to de-risk the scheme’s investments over the next 20 years.” In practice, this would result in a marginally lower income from investments, requiring higher contributions and increasing the estimated deficit (UUK responds to USS consultation). In a statement explaining its approach to risk on 22 March 2018 UUK said that the trustees had decided on the valuation assumptions based on their “interpretation of the Universities UK feedback, among other factors.”
A report by First Actuarial for the University and College Union (UCU) challenged the Trustee’s approach. It argued that a focused on the cash-flow needed to pay benefits showed that there was “no need to change either the contribution rate or the benefits to have a prudent funding plan.” The Trustee’s approach risked a vicious circle: on the basis that the trustees had responded to the employers’ concern that they did not want an increase in contribution rates by setting “a higher funding target and lower “investment risk”, two actions which are guaranteed to put the employers’ contribution rate up.”
On 17 November 2017, Universities UK proposed closing the scheme to the build-up of future benefits, which would be provided instead through a defined contribution (DC) scheme. Employers would continue to maintain their total contribution at 18% of salaries.
UUK put forward revised proposals, which were agreed to on 23 January 2018 by the Joint Negotiating Committee (made up of equal numbers of representatives from UUK and the UCU and an independent chair), on the casting vote of the chair. On this basis, the scheme had an estimated funding deficit of £6.1 billion and was 91% funded (USS website, proposed changes to future USS benefits).
The UCU made plans for escalating strike action following a ballot of its members in which 88% voted for strike action on a turnout of 58% (press release: 29 January 2018).
UUK and UCU agreed on 12 March to retain a defined benefit scheme for three years from 2019, during which time: member and employer contributions would increase; the accrual rate would reduce (from 1/75th to 1/85th) and members would accrue DB benefits on salary up to £42,000 (down from £55,000). Both parties would investigate risk-sharing options for the future. However, this proposal was rejected by UCU members on 13 March 2018. UUK expressed its disappointment.
On 23 March 2018, UUK and UCU proposed establishing a panel of independent experts to review the USS valuation. Its work would “reflect the clear wish of staff to have a guaranteed pension comparable with current provision whilst meeting the affordability challenges for all parties.” Current contribution rates and pension benefits would continue until at least April 2019. On 13 April UCU announced that its members had voted to accept the proposals and that it would “suspend its immediate industrial action plans but keep its legal strike mandate live until the agreement between UCU and USS is noted by USS.”
In May, the trustees explained that the law nonetheless required them to complete the valuation and that the cost-sharing rule would take effect. Under this rule, any required increase in the contribution rate (that cannot otherwise be addressed by a JNC decision on benefit and/or contribution changes) is split 35/65 between members and employers respectively (USS announcement 3 May 2018; and 22 June 2018). On 24 July, the trustees announced that the valuation had shown the deficit to be £7.5bn, which meant the scheme was 89% funded. In the absence of a JNC agreement to change benefits, contributions would need to increase:
The Joint Expert Panel was expected to report back in September, at which point UUK and UCU would consider its recommendations before deciding on any future changes to benefits and/or contributions (USS/the JEP and cost sharing).
UUK acknowledged that the trustees were following scheme rules and hoped that the work of the expert panel would allow the higher levels of contribution increases proposed to be avoided (UUK press release, 25 July 2018).
Commons Briefing papers CBP-8156
Author: Djuna Thurley