The last triennial valuation of the USS as at 31 March 2011 showed that the scheme’s liabilities exceeded its assets by £2.9 billion and changes to benefits and contribution rates were made as a result.
Notwithstanding the changes made in 2011 this deficit has increased significantly. It reached £9.8 billion in March 2012, then £11.5 billion in March 2013. It has also been very volatile; it had swung back down to £7.9 billion by June 2013. The outcome of the 31 March 2014 valuation – available at the end of 2014 – is expected to show continued growth in the value of the USS’s assets, but also the continuation of a very substantial deficit. The main reason for this large and volatile deficit has been the continuing global economic challenges since the financial crisis of 2008.
The closure of the USS final salary section and its replacement by a career revalued benefit (CRB)section for new entrants from October 2011 was the primary change adopted in response to the valuation outcome in 2011. It was intended to reduce the deficit over time and contain the cost of future benefits. However, this has not happened and instead the deficit has continued to grow.
There are a number of reasons why the USS’ deficit has continued to increase since 2011 including:
The USS Trustees and the employers are in agreement that action must be taken to deal with this much larger deficit than initially anticipated and the volatility in the USS funding level must be addressed. There is also a need to ensure that the scheme’s reliance on the participating employers does not increase. This provides an assurance that the employers can comfortably support the USS going forward and also that the employers (and employees) can be reassured regarding the sustainability of the scheme.
In December 2013 the USS Trustees wrote to Universities UK setting out their views on how the funding and investment strategy of the USS should be managed. The USS Trustees estimated that the employers would need to pay a contribution rate of 25.1% in order to retain the current employee benefits. Under the cost sharing rule introduced in 2011 this would mean that the employee contribution rate would have to increase to 12.3%. We consider that these rates are unaffordable for employers and employees alike.
The USS Trustees are also concerned about the risk that the deficit could continue to grow in future and aim to reduce the risk of this happening. They propose to do this by reducing the investment risk that they take with the USS’s assets. Currently the investment risk carried by USS is relatively high due to the fact that the majority of the USS’s assets are held in equities (stocks and shares) rather than government bonds. However, by reducing the investment risk (and the expected rate of investment return) the cost of funding the benefits provided by the USS increases. This is because the USS Trustees can no longer rely on the higher investment returns they predict they will obtain from equities and instead need more cash contributions from employers (and employees) to fund the benefits.
Recalculating the deficit based on the USS Trustees’ proposals increased it from around £7 billion to £13.1 billion as at September 2013. This would push the contributions required even higher, to unaffordable levels for employers and employees. Therefore the Trustees prompted a review of the benefits provided by USS in order to ensure that they remained affordable and to allow the USS Trustees the scope to reduce the investment risk in the scheme.
Universities UK as the employers’ representative has maintained a continuing dialogue with the University and College Union (UCU) and the USS Trustees about the changes that may be needed and these discussions will continue over the next few months. This means that the exact details of the proposed benefit changes that Universities UK will submit to the USS Joint Negotiating Committee (JNC) in the autumn have not yet been finalised although the need for further change is clear.
Universities UK as the employers’ representative has proposed the following changes to the benefit structure:
Defined benefits (DB)
Defined Contribution (DC) benefits
Death in service and ill health benefits
Employer and employee contribution rates
The proposed changes summarised in section 3 are the subject of a consultation by Universities UK with employers from July to September 2014. Following the completion of this consultation Universities UK will hold further discussions with the University and College Union before submitting proposals to the JNC.
If it is determined that changes to benefits are required, a statutory consultation undertaken by employers with affected employees will follow. This statutory consultation must run for a minimum period of 60 days. This consultation is not just with USS members but any employee who is eligible to join the USS but has chosen not to or who has been a member and has since opted out. Any employers who wish to make certain changes to their occupational pension scheme must consult with employees, and must demonstrate that they have taken the employees’ views into account before any decision is taken as to whether changes are implemented.
There is a long way to go yet but we are hoping that the detail of any proposed benefit changes will be available so that the employees can be consulted early in 2015. The consultation document will set out the employers’ case for change and provide detail on exactly what changes are proposed. This will include examples of the impact on member benefits and we hope to be able to provide modellers to assist individual members to understand the impact that any changes may have on their personal retirement benefits.
Universities UK is the formal representative of USS participating employers on funding and investment issues. Universities UK is undertaking a consultation with all USS employers in the period July to September 2014 so that their views on benefit changes are taken into account when Universities UK on behalf of the employers considers how it should respond to the results of the 2014 USS valuation.
The Employers Pensions Forum (EPF) was established jointly by Universities UK, the Universities and Colleges Employers Association (UCEA) and GuildHE in 2007 as a broad based forum for higher education institutions to discuss pensions issues and to enable the higher education sector to continue to offer staff access to high quality pensions schemes as an important part of the total remuneration package. The EPF USS Group, which consists of representatives from the USS employer institutions, has been considering the employers’ position in detail. It is advised by the actuarial consultancy Aon Hewitt.
The USS Trustee Board consists of 4 Universities UK representatives, 3 University and College Union representatives (including the pensioner director) and 5 independent trustees. The Board is responsible for managing the administration of the USS as well as the funding and investments to ensure that the right benefits are paid to the right people at the right time.
The University and College Union (UCU) is the trade union which represents scheme members on the Trustee Board, the JNC and other USS committees. It is briefing branches in July 2014 on the 2014 valuation and the employers’ approach to funding, investment and potential benefit changes. Universities UK and UCU will continue to meet regularly during the coming months to discuss the employers’ proposed approach and to finalise the detail of the benefit structure.
Decisions on proposed rule changes in USS are the responsibility of the JNC before they can be implemented. The JNC consists of 5 Universities UK representatives and 5 UCU representatives and one independent member who acts as a chair. The JNC has established a sub-committee consisting of employer and UCU representatives which has been meeting since last year in order to build the knowledge and understanding of the financial position of the USS.
The Pensions Regulator is responsible for the governance of occupational pension schemes in the UK including the USS scheme. The regulator has a duty to try to prevent schemes from falling into the Pension Protection Fund which was established to pay compensation to members of eligible defined benefit pension schemes when their employer goes insolvent. It does this by monitoring scheme funding levels and engaging with Trustees and employers in order to ensure that any scheme deficit is being dealt with appropriately. The regulator is particularly concerned about the level of risk being supported by the employer and will be actively involved with the trustees of a large scheme such as USS from the beginning of the valuation process.
FAQs on the funding deficit and the valuation process are available on the EPF website at www.employerspensionsforum.co.uk/en/EPF-News/news.cfm/20may14
FAQs on the valuation process are available on the USS website at www.uss.co.uk/news/Pages/ValuationFAQs.aspx
An update for members on scheme funding can be found at www.uss.co.uk/schemeguide/funding/Pages/default.aspx
This briefing is also available as a printable pdf document (below).