Every three years the scheme has an official valuation. In summary, the valuation checks that the assets of the scheme (investments, contributions) match the liabilities (benefits to pay out). In March 2011 the scheme had a deficit of £2.9 billion, which means that there was not enough funds or assets in the scheme to meet all of the liabilities if the scheme were to close on that date. As at March 2014, the deficit had risen to £12.3 billion. In view of this, to keep the scheme viable and to reduce the deficit the scheme has to change.
Reform of the USS benefit structure is both necessary and urgent. Unless reforms can be agreed before June 2015, the USS trustees will have no choice but to increase contributions to a level that is unsustainable for members (c12%) and employers (c25%) alike. After that, the conversations would not just be about ‘how can we change the scheme?’ but ‘where can we make cuts (most likely in staffing) to meet the additional costs of USS?’ or even ‘how much longer can USS survive?’ In addition, it is highly likely that the trustees would need to impose further contribution increases following future fund valuations.
In addition to extending the period for reducing the deficit (the "Recovery Period") and increasing employer and employee contributions, one of the options for reducing the deficit is to change the benefits the scheme provides. All three options are being proposed to reduce the deficit since it would not be possible to reduce the deficit without changing the benefits.
In addition to changing the benefits, the proposals include extending the period for reducing the deficit (the "Recovery Period") and increasing employer and employee contributions. All three options are being proposed to reduce the deficit since it would not be possible to reduce the deficit by applying only one or two of them.
The proposed changes put forward by the USS JNC in January 2015 are as follows:
- Move from Final Salary (FS) to Career Revalued Benefits (CRB)
- FS benefits accrued to the date of the change will be increased by CPI
- CRB up to a salary threshold of £55,000 (to be increased annually with CPI)
- Defined Contribution (DC) for pensionable pay above the salary threshold of £55,000 - 20% of your salary above the salary threshold will be paid into your DC savings)
- Employer Contributions increase from 16% to 18%
- Employee Contributions increase from 7.5% (FS) or 6.5% (CRB) to 8%
- Option for all employees to make extra DC savings, 1% (employee) matched by 1% from the employer on all pensionable pay
- Future CRB accrual to be at 1/75 of pensionable salary each year (currently 1/80).
The proposed date for change is April 2016, until then the scheme will remain as it is.
An online benefits estimator will be available as part of the USS Consultation website at www.ussconsultation.co.uk. You will need your national insurance number (which you can view on your Epayslip) and your USS membership number (printed on the letter sent to you about the USS Consultation) to log in and use this.
No. The benefits you have accrued up to the date of the change will remain in the scheme. It is benefits that you accrue from 2016 that will change. See the proposals for more information.
No. If you are a member of the Final Salary Section of USS, your existing final salary benefits would be protected at the date of the change, calculated on pensionable salary and service at that date and increased each year in line with the CPI.
After the date of the change all members will build up future defined benefits in the career revalued benefits section on their salary up to the salary threshold of £55,000.
Any salary in excess of the £55,000 threshold would accrue benefits in the defined contribution s(DC) ection.
So in effect when you came to retire you could have three benefit calculations made for you:
- Any final salary benefits accrued up to the date of the change, revalued to retirement
- CRB built up after the the date of the change on salary up to £55,000
- Benefits in a DC arrangement built up on salary in excess of £55,000 (plus the extra 2% paid in if you choose to pay the matched 1% extra contribution)
If you change your post or hours between now and April 2016 there will be no change to the way your USS benefits are calculated.
This is not the case. You will build up benefits on all of your pay. If your pensionable pay is above the salary threshold of £55,000 then 20% of your salary above £55,000 will be paid into your Defined Contribution (DC) saving arrangement. There is no salary cap or limit to pensionable pay.
For those current members of the CRB section there will be no difference in their benefits unless their pay rises above the salary threshold of £55,000.
For members currently in the final salary section of USS (who will change to CRB for future benefits), the impact of the proposed changes will depend on their individual circumstances. All members with salary above the salary threshold of £55,000 will build up additional benefits in the DC section of the USS.
Some changes to pensions which were announced in the March 2014 Budget mean that the funds in the DC scheme could enable the member to take more of their pension as cash and will give greater flexibility as to how and when this portion of benefits are taken.
As a new member you are already in the CRB scheme. For those new members earning less than the salary threshold of £55,000 you will receive the same benefits under the proposals. However you could be be better off if you choose to pay the additional 1% DC contribution which would be matched by the University. The significant DC employer contribution above the salary threshold of £55,000 means that in many cases even higher earning new members should enjoy broadly the same level of benefits as under the current arrangement, with some members likely to be better off in the reformed scheme.
It is also worth remembering that the the salary threshold of £55,000 will be increased each year in line with CPI (subject to the outcome of a review to be completed by the USS JNC by 31 March 2020).
Under these joint proposals the standard member contribution rate will be increased to 8% of their pensionable salary. (Final Salary section members currently pay 7.5% and CRB members pay 6.5%) You will also have the option to pay another 1% to the DC arrangement which will be matched by the University.
The employers will increase their overall contribution to USS from 16% to 18% of pensionable salary to help ensure the USS remains sustainable and benefits remain attractive. This additional investment is approximately £135m a year and follows an increase in employer contributions from 14% to 16% in 2009.
Employers reviewed how much they could contribute to the scheme and concluded that 18% was the maximum which was affordable in both the short and long term. Contributions above this level would not be sustainable and could prevent investment in capital projects, such as student facilities, buildings maintenance and updating of IT systems in order to continue to compete in the global education market. It was concluded that the 18% contribution rate and the changes to scheme benefits would still ensure that USS remains a sustainable attractive benefit for staff.
A key objective is to address the USS’s sizeable and volatile funding deficit and to achieve that it is essential to move to a position where the rate at which the liabilities grow is more predictable. Simply paying more money into the USS without bringing the defined benefit liabilities under control will fail to address either the deficit or the risk that contributions for USS members and employers alike, may otherwise rise to unsustainable levels for a longer period of time.
USS is one of the few remaining Final Salary schemes to make changes. Large companies like BT have already closed their schemes. Teachers Pensions (TPS), the NHS and the Local Government Schemes are all undergoing changes, although unlike these scheme, it should be noted that USS is a private pension arrangement unlike the TPS or NHS.
Like USS, the TPS final salary structure has become unaffordable; to bring costs under control the TPS is moving to a CRB structure for all members with effect from next April.
But there are more differences than similarities between the schemes. Unlike the USS, the TPS is unfunded and operates on a pay-as-you-go basis, whereby pensions are paid from current contribution income. Being a public sector scheme, TPS is backed by the Government so any difference between the contributions coming in and the pensions going out can be picked up by HM Treasury and ultimately, the taxpayer.
In addition, TPS members pay more towards their pension: the average employee contribution is 9.6%, but contributions are tiered based on the member’s salary and range from 6.4% to 12.4%. The proposed member contribution to the reformed USS is 8% for all members.
The current USS scheme costs 23.4% of salaries and, without reform, this will continue to increase. Moving to a TPS equivalent scheme would require an overall contribution level of 43.9% which would be unaffordable for employers and employees.
Through Universities UK, the University had made its views known about the scheme and the proposed changes including the assumptions made for the valuation, the investment strategy and benefit structure. However the USS scheme is governed by independent trustees and they, in conjunction with the JNC (Joint Negotiating Committee) who are made up of UUK representatives and UCU members are the formal body who decide on the USS structure and benefits.
Valuing a pension scheme is an inexact science, as it is necessary to make predictions about future events, such as salary increases, life expectancy and investment returns. This is the job of the USS Trustees and, with the help of their professional advisors, they have modelled a wide range of possible outcomes, always bearing in mind that they are required to act prudently. While the Trustees changing the assumptions in this instant could affect the size of the deficit, it cannot change a deficit into a surplus. The deficit is sizeable and persistent and benefit reform is unavoidable, and expected by the Pensions Regulator.
The USS has made available an explanation of its assumptions online at: http://www.uss.co.uk/SCHEMEGUIDE/FUNDING/Pages/default.aspx
In preparing the proposals, the employers considered, modelled and costed a wide range of different options. The proposed reforms represent the best package of pension benefits among the options considered for retaining a defined benefit structure for the highest proportion of members, while remaining affordable for employees and employers. The proposals agreed for consultation by the USS Joint Negotiating Committee are the result of a series of intentive discussions between Universities UK and the UCU and differ significantly from those submitted by the employers in October 2014.
The modelling provided to members to show potential benefits under the proposed changes has been developed by USS using assumptions about future salary progression and investment returns that were jointly agreed in discussions between UCU and the employer representatives at the USS Funding and Benefits Sub Committee. Independent modelling using the same assumptions should produce the same answers; modelling using different assumptions would produce different answers, but these would not be consistent with the way the USS trustees are required to value the scheme.
While it is true that in the last financial year the USS’s income – contributions and investment returns – exceeded its outgoings it is not enough for a pension scheme simply to cover its outgoings on a year by year basis. Rather, like all funded UK pension schemes, USS is required to meet its ‘statutory funding objective’, that is, to have sufficient assets to meet its liability to pay benefits already built up in the scheme. For some years now, the USS has had a sizeable and persistent, yet volatile, deficit on this basis. Not only is it desirable to take steps to eliminate this deficit, the trustees are required by law to put in place a plan to do so and their plan must meet the requirements of the Pensions Regulator.
The USS is becoming increasingly ‘mature’; pensioners are living longer and the ratio of pensioners to active members is increasing. So, while the USS may be cash flow positive at the moment that will not always be the case. The most significant and fastest increasing liabilities are associated with the final salary section of the USS which is why it is necessary to close this section to bring costs under control. In March 2013, the USS was in deficit by £11.5 billion, it is thought that the deficit as of March 2014 is £12.2 billion.
The USS is a private occupational pension scheme and as such falls under the remit of the Pensions Regulator. It has to meet certain minimum levels of funding, a test which, using the most recent assumptions proposed by USS, it fails to the tune of around £12.3 billion as at 31 March 2014. Accordingly the USS trustees must agree a ‘recovery plan’ to remove the deficit over a reasonable period. If the stakeholders fail to agree on reforms, the trustees will be compelled to increase contributions to a level that would be unsustainable for members (at 12%) and employers (at 25%) alike.
The proposed reforms are not politically motivated. They are designed to address the continuing funding deficit while providing attractive benefits that are sustainable and affordable over the long term. The employers recognise that a good pension scheme helps to attract and retain the calibre of staff needed to maintain the UK HE sector’s global reputation for excellence. Unfortunately, the current level of USS benefits is unaffordable over the long term and to continue to support it unreformed would result in funds being diverted away from core university activities and may lead to staffing cuts.
A USS Consultation website at www.ussconsultation.co.uk has been created to provide full information about the proposed changes.
You may also be interested in the following:
The University will be undertaking an equality assessment and publishing it on its webpages.
The investment decisions that USS made in 2011 at the last valuation were affected by various issues but the main one was that the expected investment returns did not happen; this was not due in full to the USS assumptions but was part of the global slowdown in growth and investment that all pension schemes of this nature suffered.
The proposals regarding AVCs are complex. Detailed information is given in the USS consultation website and you will have the opportunity to comment on these as part of the consultation process.
These benefits are now in payment and the benefit promise to them is required to be kept, their pensions cannot be changed once in payment.
The proposed DC element of the benefits for those earning above the salary threshold of £55,000 and those who choose to put in the extra 1% is a protected fund which is allocated to a named individual and will be protected for that individual.
The Defined Contribution (DC) element of the USS scheme will be administered and invested by USS.
As the assumptions made by the USS Trustee are looking long term into the future finance markets. No guarantee can be made that the investment assumptions will be correct. However the assumptions being considered by USS, following advice from the Scheme Actuary, are very prudent and the proposed changes to the scheme will lower the volatility of the benefits so that the investment returns anticipated will meet the requirements of the scheme in the future.
These will operate in the same way as for the current CRB structure of benefits – reflecting the improved 1/75th pension accrual rate where appropriate – and will be based on the member’s total salary, regardless of whether it falls under or over the salary threshold. This means the amount of pension your survivor would receive would usually be equivalent to half the pension you would have received had you remained in the scheme until Normal Pension Age (up to a maximum of 40 years) and as if the salary threshold had not been introduced.