UUK tries to dispel valuation myths as UCU presses on with strike action

The union is currently exploring next steps following a ballot over industrial action. As Pensions Expert has reported previously, the USS has been in a protracted battle between its trustee, UUK and UCU over the assumptions underlying its 2020 valuation.

The results of its latest valuation saw the scheme’s deficit quadrupling to more than £14bn, requiring that contributions be raised to between 30.7 per cent and 42.1 per cent of payroll under the most favourable scenarios. However, unless employers agree to a series of conditions, the rates could be increased to as much as 56.2 per cent of payroll.

There is simply no credible evidential basis for what they have asserted at USS, or UUK

Dr Ewan McGaughey, King’s College London

UUK has been consulting on alternative proposals, which include stronger covenant support measures and a 20-year moratorium on scheme exits, that it hopes will produce a more favourable outcome than the hiked contribution rates that employers and unions have branded “unaffordable”.

More than three quarters (76 per cent) of UCU members balloted backed strike action. Turnout was 53 per cent, though UUK countered at the time that the union only breached the minimum 50 per cent threshold required by law because people turned out to vote against the motion, and almost half — 31 of 68 — of the institutions balloted did not support the strike.

Strike action ‘deeply frustrating’

In a press briefing held with the Universities and Colleges Employers Association, Alistair Fitt, vice-chancellor of Oxford Brookes University, said the prospect of strike action was “deeply frustrating” and expressed his sorrow that “once again the students might be about to suffer because the union does not agree with the way that pension schemes are run and regulated in this country”.

He added, however, that universities will be able to mitigate the impact of the strikes through online learning and other tools developed during the pandemic.

“Now, of course, we respect the right of our union members to decide to take strike action, and we know that our colleagues won’t have done so lightly. But it really is the last thing that students want or need or deserve after the disruption caused by the previous industrial action, and of course the Covid-19 pandemic,” Fitt said.

He acknowledged the criticism, widely made, that the USS trustee’s assessment was overly prudent, but pointed out that the trustee is bound by the law and a more optimistic assessment would not have been backed by the Pensions Regulator.

He added that, despite the changes agreed as part of UUK’s alternative package, which pledged “unprecedented” levels of covenant support, the scheme would remain “among the very best private pension schemes in the country”. 

“USS employers pay in 21.4 per cent of salary to the scheme and members pay 9.8 per cent. The average for other private sector schemes is 13 per cent for the employer and staff contributions combined, as well as the significant employer contribution,” Fitt said.

He argued that the issues raised by the 2020 valuation are not reactions to current economic events, but are long-standing and need to be “urgently addressed”.

“We would urge all scheme members to look at the modelling from USS on the specific impact on the proposals,” he continued.

“Figures published by the USS trustee for a range of example members show that the proposed changes could reduce the amount of pension that members receive at retirement by about 10 to 18 per cent, and this reduces to 7 to 15 per cent when the state pension is included.”

Fitt urged members to consider the “escalating costs” if changes are not “carried through”, which he contended would “likely [price] many members out of a workplace pension saving”.

UCU has previously argued that the changes proposed by UUK would lead to cuts of up to 35 per cent in an average member’s benefits, but he countered that the methodology behind this figure ignores the defined contribution elements of the scheme, which are unaffected by the proposed changes.

“Employers will listen to the concerns of scheme members through the member consultation and we absolutely remain open to considering affordable alternatives from the union,” he said. 

“The union has included details of a possible proposal in a press release, but it’s not clear whether this has the support of their negotiators, union branches and wider membership. UUK has said that it will consult employers on the proposal if the union formally tables it at the Joint Negotiating Committee, which is the official forum for deciding on changes to the scheme.”

Fitt added that no change “is simply not an option”, as the USS trustee “has confirmed that should reforms be blocked, members and employers will face escalating contribution rates starting in April 2022 and rising every six months until 2025, rapidly reaching completely unaffordable levels that would undoubtedly lead to mass member opt out and employer insolvency”.

UCU general secretary Jo Grady said: “USS’s assets have jumped to unprecedented levels this year, from £66.5bn in 2020 to £80.6bn. UUK had previously agreed with us that the 2020 valuation was flawed, so it is bizarre to hear them argue that a 2021 valuation might be even worse when the scheme has evidently bounced back from the pandemic.

“The USS board has now formally confirmed that contributions for members will rise no higher than 11 per cent until October 2022, even if employers revoke their cuts. Meanwhile, the vice-principal of the University of Edinburgh has made it clear that employers can afford to pay a little bit more to protect staff pensions.

“Our ballot result and USS’s improved financial position means employers must now meet our demands. Staff will rightly be furious to hear employers spinning instead of getting around the negotiating table,” she added.

‘No credible basis’ for UUK claims

One particular point of contention is the timing of the 2020 valuation, which critics argue came at the economic low point of the pandemic and has since been superseded by a recovery in assets and the broader economy.

Responding to this point, Stuart McLean, head of pensions at UUK, said that the USS has run an indicative valuation exercise based on figures as of March 31 2021, which concluded that a revaluation would not solve the problems identified in the 2020 valuation and may indeed exacerbate them.

“While the deficit is reduced, because assets have bounced back, what you can expect assets to do in the future is more pessimistic then, hence the future service rate increases,” he said. 

“So what you gain on the deficit you lose on the future service rates — and that can lead to even higher contributions than they are, and that’s the trustees position on this. We might differ with them over 1 or 2 per cent, but it’s not going to be material to make a difference to the scale of the change that we’re looking at here.”

Critics did not accept this response, however. 

Dr Ewan McGaughey, senior lecturer at King’s College London, who is bringing legal action against the USS directors alongside Dr Neil Davies, senior research fellow at the Bristol Medical School, told Pensions Expert: “The problem is that they’re manipulating the actuarial assumptions to suit the outcome they want.

“They assumed 0 per cent growth of pension assets above [consumer price index] inflation for 30 years in the methodology for the 2020 valuation. All they’re doing now is assuming similarly terrible rates of growth and higher liabilities, for instance, by altering people’s life expectancy,” he said.

“USS Investment Management, run by [USS chief executive] Bill Galvin, did not disclose the reasoning behind their (indefensible) assumptions, even to the main board of USS Ltd for the 2020 valuation. This is why we brought legal proceedings to establish a credible methodology that works in the interests of pension beneficiaries, not suit a narrative that justifies cutting people’s retirement rights.”

McGaughey added that predicting future surpluses and deficits “is like betting on race horses, or indeed trying to predict the stock market. There is simply no credible evidential basis for what they have asserted at USS, or UUK. Of course, at the press briefing they did not provide you with reasons for what they said because they do not exist”.

UCU is considering legal action of its own and has called for the 2020 valuation process to be paused.