Cutting through the spin on USS #2

This UoN UCU’s response to UoN’s post about USS – UoN text in black, UCU response in red

Reporting latest developments on USS pension, UoN failed to accurately report what happened at JNC and UCU actions. We take this opportunity to rectify information and put some of the statements reported in context.

The Joint Negotiating Committee (JNC) has decided to progress the employers’ proposal for changes to the USS pension scheme to consultation with scheme members and representative bodies.

The decision means that scheme members could avoid significant increases in their contributions, which the USS Trustee has said it would otherwise be required to implement, going up from the current 9.6% to 18.6% of their salary from as soon as April 2022.

USS argued that to keep benefits unchanged, contribution rates need to increase to somewhere between 42% and 57% (cfr. 26% pre-2018 dispute). This is based on a flawed valuation of the scheme in March 2020 (see below) and essentially is a rip off.

The proposal is backed by university employers increasing their support for the covenant that underpins the scheme by some £1.3 billion per year.

The JNC decision on the UUK proposal was passed by the casting vote of its Chair, on the final day for negotiations on its already extended timetable, after UCU decided not to put its counter proposal to the vote of the committee.

UUK ensured that UCU’s proposals could not be put to the vote by saying they would withdraw commitment to the scheme that USS claimed was necessary to bring the costs down. Essentially, UUK would not pledge covenant support for UCU’s proposals, but only for their own proposals.

If the JNC’s recommendation is formally accepted by the USS Trustee, a 60-day consultation on the proposals will follow with scheme members as required under the scheme rules.

A spokesperson for USS employers said:

“Today’s decision by the USS Joint Negotiating Committee provides a viable and implementable solution to the 2020 valuation. The employers’ proposal sees a significant element of defined benefit retained while preventing unaffordable contribution levels.

The 2020 valuation is deeply flawed. It used data from 31 March 2020, when markets were experiencing maximum impact of the pandemic, wiping billions off the value of USS assets. In addition, the forecasts on investment performance are overly prudent, basically assuming that ‘investments can no longer be relied on to grow in real terms’ (see Sam Marsh’s blog for full details).

Employers briefly challenged the valuation but changed their minds quickly and opted for cutting pensions again – a 21% hit to benefits and ‘no detriment’ to employers – as outlined in the proposals that are now being sent to USS members for consultation.

Valuations are due every three years. The last one was in 2018 and committed employers to an increase in contributions from 21.1% to 23.7%, a small increase that employers are doing all they can to avoid. The next one should have been in 2021 and would have shown a considerable recovery in assets, but employers were not interested.

Easier to implement cuts to pensions than to challenge the 2020 valuation.

“The additional backing offered by employers is unprecedented among UK pension schemes, with the USS Trustee valuing their additional covenant support at around £1.3 billion per year, which has the impact of limiting the benefit reforms needed.

“The valuation methodology adopted by the USS Trustee and the position of The Pensions Regulator meant that no change was not an option. The employers’ proposal for reforms is an alternative to the USS Trustee’s proposed unaffordable contribution rates for scheme members and employers, which would have caused considerable disruption for members and risks forcing more people to leave the scheme.

The valuation methodology adopted is the crux of the problem. It needs reform urgently, otherwise we will be in the same situation again in 2023.

“In partnership with the University and College Union (UCU), we look forward to progressing a major governance review of USS, jointly exploring future options for scheme design including Conditional Indexation, and shaping a lower-cost option so staff on lower salaries are no longer priced out of retirement saving.”

This could have been initiated already by engaging with UCU proposals instead of not providing covenant support.

USS Employers has published detailed FAQs about the employers’ proposal and challenged some of the assertions in recent UCU statements. You can read these alongside further background information on the University’s USS 2020 Valuation webpages.

The employers’ proposal for changes to the scheme, required to meet its 2020 triennial valuation, includes:

  • minimising increases in contributions to the scheme by members to no more than 0.2%, and employer contributions to 0.3%, meaning that members’ contributions would only rise from 9.6% to no more than 9.8% of salary.
  • maintaining the scheme’s Defined Benefit /Defined Contribution hybrid model with Defined Benefit applying up to a salary threshold of £40,000, and retaining Defined Contributions at an overall 20% of salary above that threshold.
  • employers to offer further, stronger covenant support measures including a moratorium on exit, debt-monitoring and ensuring that pension promises are even more secure through protecting the USS Trustee’s status as a creditor.
  • a commitment that should the scheme’s financial situation get better then improvements to benefits can be considered rather than reducing contribution rates.
  • addressing the high opt-out rate, which sees around 20% of members choosing not to join the scheme and losing out on the 21.1% employer contribution, by giving eligible members the choice of a new lower contribution option.
  • a major new review of the scheme’s governance, and exploring moves to a conditional indexation model, which pegs a part of annual pension provision to the performance of scheme funds, via a working group of members’ representatives, employers, and USS.

While the reform package passed by the JNC proposes a particular set of changes to the future pensions earned from USS’s defined benefit and defined contribution sections, the forthcoming consultation with scheme members could lead to these proposals being amended. Employers remain open to considering alternative benefit structures and formulations, provided they are viable, affordable and implementable.

UCU’s proposal would have been a viable, affordable and implementable short term solution to the 2020 valuation and would have provided a breather during which to consider governance reform, not just review, and future options for scheme design. UUK blocked the road for this to happen by not pledging covenant support.

UUK’s proposals, instead, signify drastic cuts of employees’ pensions:

  • now, your pension grows by 1/75th of salary for every year you work; UUK proposals would cut this to 1/85th – cutting pensions by 12%;
  • now, every pound you earn up to £59,800 adds to the secure defined benefit element of your pension; UUK proposals would cut this threshold to £40,000
  • now, inflation can’t erode the buying power of your pension unless it exceeds 5%; UUK proposals would cut this protection to 2.5%

To see what impact these proposals will have on your pension, visit the modeller provided by UCU here.

Benefits which members have already earned within USS are protected by law and secure, and the employers’ package, and in particular the unprecedented additional covenant support measures provided by employers, further strengthens that protection.