UUK launches consultation on alternative route to USS valuation

Universities UK (UUK) has launched a consultation with participating employers of the Universities Superannuation Scheme (USS), proposing an alternative path to the 2020 USS valuation which it has argued could help bring headline costs down.

The consultation, which will run for seven weeks, will seek employer views on ways of creating a “valuable, affordable, inclusive and sustainable” scheme for the long term.

The group has been working with its actuarial adviser, Aon, to explore a potential alternative path for the valuation which could help meet its broader objectives.

These include an aim to maintain a defined benefit (DB) element of the scheme and "affordable" contribution levels for both members and employers, as well as a reduction in the number of people being "priced out" of the scheme, and the inclusion of "fair" valuation assumptions.

As part of this effort, employers will be asked if they can offer additional financial backing, or covenant support, to lessen the rise in contributions.

UUK president, Professor Julia Buckingham, argued that this potential increased support, alongside other reforms, could enable a “significant DB element" to be preserved at current contribution levels.

Further proposals included decreasing the salary cap for the scheme from £60,000 a year to £40,000 a year, capping indexation at 2.5 per cent a year, and reducing the rate members' pensions accrue from 1/75th of salary to 1/85th of salary.

The consultation will also explore whether employers would support the introduction of a new, short-term flexible option for the “growing number” of early career staff who are currently priced out of the scheme.

This option would see lower earners save in a "flexible" defined contribution (DC) scheme, in which they would be able to contribute 4 per cent of salary.

"The USS is a one size fits all scheme, so people can only be part of it if they are able to afford to contribute 9.6 per cent of their salary," Buckingham explained.

"Whilst this is affordable for many, this rate is pricing many staff out of the USS. They are missing out on money from their employer toward their future, and they are prevented from getting valuable life cover and other benefits."

Sshe argued that the proposed optional lower cost flexible DC pension could be introduced to help people at different stages of their lives, to ensure they still benefit from "valuable" employer contributions.

"This wouldn’t be a replacement for the main USS scheme," she clarified, "it would be an optional short-term alternative for those who are currently priced out, which is often those at the very beginning of their careers and those on lower pay grades, as a way of starting to address the intergenerational unfairness of the scheme."

The consultation will also ask employers to share concerns on governance, and to suggest areas for consideration in a post valuation governance review.

In addition to this, UUK has confirmed that it will continue to press the trustee to review valuation assumptions, despite the USS's recent rejection of a review of the valuation approach.

Instead of a review, the USS trustee suggested that "the most productive way forward" would be working with UUK on developing alternative packages, highlighting UUK's newly launched consultation as a key part of this.

Indeed, Buckingham said that group is "hopeful" that employer responses to the consultation will help to support continued discussions with the trustee, emphasising however, that UUK will also be exploring all governance options to " achieve movement in the valuation outcome" in the meantime,

"Although the USS trustee has stated that it will not review its valuation approach until an alternative proposal is put forward, it ultimately has the power and the room to manoeuvre to fair assumptions which lower its pricing, to minimise the extent of the changes we need to make to the scheme and to keep alive a significant element of DB," she added.

Commenting on the plans more broadly, Buckingham concluded: "It would be a dreadful outcome if an overly cautious approach by the USS trustee were to lead to unjustified and unnecessary cuts to the scheme.

"We have been clear from the outset that we’re not arguing that the scheme status quo can be maintained. With the deficit of the scale reported, some reforms will be needed.

"However, we must ensure that any reforms are proportionate, justified and in the best interest of scheme members. Employers are committed to working with scheme members, UCU and the USS trustee to seek an affordable solution."

UUK has previously warned against "unaffordable" increases, after the USS's update on its 2020 valuation process suggested that pension contributions may need to increase to as much as 56.2 per cent of payroll.

The University and College Union (UCU) has also backed calls for employers to "challenge" the USS valuation approach, later stating that it "cannot rule anything out", with some branches of the union recently passing key motions, which called for industrial and legal action in relation to the pension issues being faced.

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