Dear colleagues,
The local branch of the University and College Union (UCU) and a number of UCU members have written to me this week raising concerns about the USS pension scheme and proposals for changes to the benefits. Although I have responded to these emails individually, on reflection I thought it might be more helpful, and more transparent, to publish an open letter so everyone can see my response.
I fully appreciate that planning for financial security in retirement is an issue of understandable concern to all members of staff. For this reason, as an employer, the University values pensions as an extremely important aspect of your employment reward and benefits package. This is at a time when we have to face up to聽the stark financial realities facing both the sector-wide USS pension scheme, and our University鈥檚 own PASNAS scheme. (We will be providing separate additional communication to PASNAS members shortly).
The future sustainability of defined benefit (DB) schemes is a problem world-wide, and many such schemes have closed. Pension schemes have become increasingly expensive and unsustainable in their current form if they are to ensure the security of benefits already earned, and to ensure that future pensions are secure, due to slower economic growth, lower investment returns and improving longevity.
In respect of USS, I want to emphasise a number of key points:
Firstly, some of those who have contacted me say they are concerned they will lose value in the pension they have built up so far. To be crystal clear, everything already 鈥渂uilt-up鈥� in USS including defined benefits is not affected by these proposals and will still deliver the corresponding benefits. Any changes to the USS scheme will only affect the future accrual of benefits.
Secondly, it is important to understand that the USS scheme, which is a private pension scheme not underwritten by Government, is overseen by the Trustees, who are responsible for the scheme, not the universities. The Trustees are drawn from three groups: UCU, Universities UK (UUK), and independent members. Universities Superannuation Scheme Limited (USS) is a separate organisation from the universities and other Higher Education institutions that have members in USS 鈥� there are around 360 employers who contribute to USS.
There are regular valuations of USS every three years to ensure it has sufficient funds to pay benefits already earned and, importantly, that future contributions into the scheme will cover the cost of new benefits being earned. The valuation process is complex and involves a number of assumptions including returns on investments and the longevity of members, and is carried out by an independent actuarial company. The USS Trustees have a responsibility to make sure that the costs and risks are accounted for and that the USS funds will meet the obligations into the future. The Scheme鈥檚 assets (or pension investment 鈥榩ot鈥�) are not something the employers have any call on.
However, if the USS Trustees calculate that higher payments are needed to maintain the same level of benefits, then they have to ask the employers and employees if they are willing to pay more. If employers and employees can鈥檛 make higher contributions then they have to look at changes to the benefits. This is what has happened now, and the Joint Negotiating Committee (JNC) with UUK and UCU representatives, met 30 times to discuss the options and proposals, as well as modified proposals from UUK during subsequent negotiations. The JNC finally sent its recommendations to USS on 23 January. USS will circulate these proposals for consultation to USS members from 19 March for 60 days. Whatever changes are finally agreed for the scheme will have to pass the scrutiny of the Pensions Regulator, who has well-defined requirements for all pension schemes.
Thirdly, I appreciate that there is a difference of view between UCU and USS, UUK and the Pensions Regulator as to the health of the scheme and the future risks faced by the scheme. However, there is no ambiguity whatsoever that employers are paying 18% of salary for every employee into the scheme. For salary below the threshold (currently 拢55,550) the full 18% goes into the defined benefit section to meet the costs of future benefits, expenses, and to help reduce the deficit. For salaries above the threshold employers still pay 18%, and of this 12% goes into the defined contribution scheme, with the rest going towards the 1% match, subsidised management fees for members, and to help reduce the deficit in the defined benefit section. Employers would not be paying the deficit contributions if there wasn鈥檛 a deficit. Furthermore, the USS valuation shows that this current level of contributions by universities and employees is not enough to meet the future pension payments and benefits at the current levels.
Failure to respond to the challenges faced at this valuation would fail to safeguard the accrued benefits of members and is required under pension funding rules. This has contributed to the need to consider proposals to change the funding of the scheme or the benefits of the scheme for future accrual.
Fourthly, it is important to understand that in the revised scheme employers will still pay the same overall contribution as they do in the current scheme – a total of 18% of salary including the deficit payments. The employer contributions have increased 30% over the last 10 years and universities are simply not in a position to pay more in the current challenging economic climate. Southampton is not alone in needing to manage its escalating costs and any additional pension contributions would mean extending already challenging savings targets still further.
We also think that most employees (who currently pay 8% of salary) would not want to pay a lot more for the same benefits. The increase in payments necessary to maintain the status-quo in benefits from the current scheme would be substantial for both the employer and employee and this would require an additional contribution of at least 11.4% of salaries (currently employers contribute 18%, employees 8%).
This has meant that the Joint Negotiating Committee – consisting of equal numbers of UUK and UCU representatives and an independent Chair, Sir Andrew Cubie – have had to consider a change in the scheme. UUK proposed a move from a combination of the current defined benefits (DB) and defined contribution (DC) to one based only on defined contributions (DC). This would reduce the risks and lead to a way to manage the deficit and shortfall in funding, satisfying the Pensions Regulator and ensuring that future commitments to pensions and benefits can be met.
The proposals show that the DB element of the scheme will not close, but there will be no further build-up of defined benefits for at least the next three years – but there could be in the future if the situation improves. This means that future contributions to the pension will be 100% into the DC element at a proposed higher rate of 13.25% of salary contribution from the employers and the same 8% (or a lower option of 4%) from the employee. The employers would still pay the total of 18% of salary with the balance going towards reducing the deficit in the DB element of the scheme. UCU do not support this proposal which was recommended by the JNC and are seeking to retain contributions into the DB element with higher contributions from employers and employees, with a lower accrual rate, as well as contributions to the DC element.
Fifthly, although I play no direct personal role in negotiations and I do not sit on the UUK Board, I have made clear to Universities UK my own belief that they, as the universities鈥� negotiating body, should seek to achieve the best possible affordable scheme. Indeed, employers have no reason not to – pensions are an extremely important aspect of employment reward and benefits. The problem is that the increased costs necessary to maintain the current DB+DC scheme are simply not affordable by the employers (and probably by most employees) and so the changes that were put in place in 2016 have had to be revisited, and the proposal is to increase the contribution of the modified DC scheme to 100% for future contributions (but not to close the DB scheme).
All members of the USS scheme will have the opportunity to respond to the consultation on the proposals, run by the Trustees of the scheme, in the coming weeks.
Further useful information can be found at:
SUSSED LINKS
USS pension reform – JNC agrees proposal put forward by employers
All SUSSED posts on pensions can be found .
USS LINKS
UUK
Financial Times
Kind regards,
Professor Sir Christopher Snowden
President and Vice-Chancellor
