The USS trustee carried out a valuation of the scheme as at March 2017. This revealed a significant rise in the cost of future service benefits and a sizeable funding deficit. To ensure the sustainability of the scheme, Universities UK (UUK) submitted a proposal for benefit reform on behalf of USS employers to the Joint Negotiating Committee (JNC) on 13 November 2017.
To develop its proposal, UUK engaged closely with the employers that it represents, but has also taken the time to consider carefully the implications for members. Whilst there would be a full consultation on any proposed changes with affected members and their representatives, it is important at this stage for employers – and member representatives – to have an initial indication of the effect of UUK’s proposed benefit reforms.
UUK asked its actuarial advisors, Aon, to model estimated member outcomes under the current benefit structure – on the basis that, hypothetically, it was viable to continue with those arrangements – and under UUK’s proposals. In order to model member outcomes there are a number of assumptions that have to be made, including expected investment returns on defined contribution (DC) savings. UUK and Aon considered these assumptions carefully to ensure that they offer a balanced and fair indication of member outcomes. Aon’s modelling is based on USS scheme data to ensure the credibility of the information provided.
Aon’s modelling demonstrates that through the employers’ proposal competitive and generous pensions will remain even though the scheme faces significant funding challenges.
Current USS benefits are unaffordable, requiring an increase in contributions of 11.4% of salaries. UUK has considered carefully which solution would best meet the needs of employers and members. Given the extremely challenging funding position of USS, any proposal would represent an expected reduction in member outcomes in terms of the monetary value of pension savings accrued, unless £1bn additional contributions were paid each year.
UUK’s proposal involves moving to DC benefits from 1 April 2019. There are unfortunately some misconceptions regarding the comparison between defined benefits (DB) and DC benefits. Even if some DB was maintained at this valuation, the level of DB that could be afforded for the current contributions would be very low. DC does not offer the same guaranteed outcome that DB does but DC does have advantages to members, such as the greater flexibility and choice it offers, and the opportunity for better outcomes. Maintaining even a small level of DB would restrict the ability to realise the benefits of DC, whilst accruing only a very small amount of guaranteed pension. For this reason, employers believe that DC-based provision – through a reduction in the salary threshold to zero for the time being at least – is the most effective offer than can be provided for members, maximising the contributions towards future service, providing specific certainties in relation to ill-health and family benefits, and giving additional flexibility.
Overall, Aon’s modelling suggests that under UUK’s proposals, and including standard state pension entitlements, current members should continue to receive retirement incomes which are equivalent to 80-90% of those received currently in terms of monetary value. The full modelling and assumptions used can be viewed here. The current economic conditions, that are extremely challenging for DB pension schemes, have been persistent over the last decade. However, there is always a possibility that this could change in future. For this reason, UUK’s proposal retains the flexibility to reintroduce DB at a future point.
Failure to respond to the challenges faced at this valuation would fail to safeguard the accrued benefits of members as is expected by members and required under pension funding rules, and could also severely harm employers’ abilities to afford high quality pension benefits in the future. The modelling provided by Aon demonstrates that despite the extremely challenging circumstances at this valuation, employers’ proposal will help to maintain future pension arrangements which are still hugely attractive.
Download: Aon’s modelling (PDF)