USS contributions could increase to nearly 70% of payroll to plug DB deficit

Contributions to the Universities Superannuation Scheme (USS) could potentially double in an effort to repair the scheme's defined benefit (DB) pension deficit, with estimations for future contributions ranging from 40.8 per cent to 67.9 per cent of payroll.

Based on the proposals put forward for the scheme's 2020 valuation consultation, the scheme's deficit could range from £9.8bn to £17.9bn, depending on the extent to which employers are "able and committed" to support the scheme.

The USS proposed that employers could keep the increase in contributions to the lower level of around 40 per cent and the deficit at approximately £10bn if they agreed to measures to help support the scheme.

The USS also provided an illustrative cost of continuing to offer the current benefits without plugging the deficit, which ranged from 29.4 per cent to 37.6 per cent of payroll.

It explained that the range in illustrated contributions, whilst “very wide”, was necessary to show, as there are a number of covenant-related factors outside their control that could change and would be critical to the overall valuation outcomes, including the sector's resilience to Covid-19.

The sector has been heavily affected by the ongoing pandemic, with the consultation itself delayed by a fortnight in light of the “urgent and difficult matters” relating to A-level results and admissions.

The consultation is seeking views on the proposed methodology and assumptions to be used in setting the scheme’s technical provisions, which will in turn determine the contributions required to fund the benefits.

Currently, contributions to the scheme are set at 9.6 per cent for members and 21.1 per cent for employers, a total of 30.7 per cent, although this was due to increase to 34.7 per cent on 1 October 2021.

The USS acknowledged that both Universities UK (UUK) and University and College Union (UCU) consider the current contributions to be at “the limits of acceptability”, and that the potential outcomes illustrated are “therefore unlikely to be considered affordable or sustainable by employers and members”.

UCU head of high education, Paul Bridge, said the union had "no confidence" in the "needlessly cautious" methodology applied by the USS.

"We are also disappointed USS has cherry-picked from the recommendations made by the Joint Expert Panel," he continued. "UCU members are well informed and expect to see better evidence behind the judgements USS has made.

‘We want USS to take account of the strong long-term outlook for the scheme. Members are leaving the scheme because of its high cost - calling for unnecessarily large reductions in benefits and increased member contributions is not the way forward. Universities need to start demanding more from USS and push back against this approach."

UCU, employers, USS and members have been in dispute over proposed increases to pension contributions since 2017, with UCU stating in April that it remained "some distance" away from a contribution agreement with universities.

Commenting on the consultation, USS group chief executive, Bill Galvin, stated: “Employers promise our members retirement benefits regardless of what happens to the economy in the future.

“The hard reality is that persistent low interest rates and greater uncertainty of future investment returns have created an environment where such promises have become increasingly expensive.

"With the higher education sector already facing considerable challenges, we are acutely aware of just how unwelcome the prospect of paying more for pensions will be."

He added: “We fully recognise that the contribution rates we’ve illustrated are unlikely to be considered affordable or sustainable by either employers or our members.

"We are committed to working with our stakeholders, UUK and UCU, as they consider how to respond to these challenges, and to working with stakeholders to ensure USS is a sustainable scheme.”

The USS consultation suggested that growing costs and the risk of opt-outs could be mitigated through additional employer commitments or other measures, including benefit adjustments.

Although it also clarified that these are “primarily issues for the UUK and UCU to address” via the Joint Negotiating Committee.

The scheme also emphasised that the potential contribution ranges have been illustrated only to support the consultation, and will be subject to separate consultations later in the valuation process.

The USS confirmed that it will also consult on the schedule of constrictions, recovery plan and statement of funding principles following the initial consultation.

Furthermore, the scheme explained that employers could reduce contributions if they were willing to make “further commitments over and above those assumed under the 2018 valuation” through contingent funding structures, debt monitoring and agreements to long-term rule changes.

Commenting on the consultation, a UUK spokesperson emphasised that "now, more than ever" members need choice around their contribution levels, with employers acutely aware that the current employee contribution levels are leading to "high levels of opt-outs" by younger and lower paid staff.

The spokesperson stated that the figures showed the "significant challenges facing the scheme", covering a "huge range of illustrative outcomes", with a number of factors still to be determined.

Considering this, they explained that employers will require further information on some issues before they can fully respond, including the results of the trustee’s covenant assessment and discussions on an appropriate recovery plan.

They continued: "Nonetheless, we will be engaging with employers over the coming weeks on this first formal consultation in relation to the USS 2020 valuation (technical provisions), to hear their views on the proposed approach and assumptions.

“Over recent months, we have worked closely with the UCU, which represents staff who are members of the scheme, and with USS to bring about important changes to the scheme.

"This has led to a new valuation methodology in line with the Joint Expert Panel’s recommendation, and the removal of the Test 1 measure of employers’ risk appetite, which the union has campaigned for.

"Additionally, a scheme purpose and shared valuation principles have been agreed alongside a commitment from all involved to greater levels of transparency.

“We want to continue a positive dialogue with UCU and USS throughout this valuation, and to work with members and employers to secure an attractive and sustainable scheme through these economically challenging times.

"We should collectively explore potential ways of making it more appealing and inclusive, including the possibility of allowing members to opt to reduce their contributions in return for different benefits, rather than leave the scheme."

Employers have until 30 October to provide feedback to the consultation.

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