Govt dismisses USS guarantee as employers discuss new proposals

The Times reported in January on a Freedom of Information Act request by pensions consultant John Ralfe that revealed the government had guaranteed USS liabilities on behalf of the Office for Students.

Because the USS is a ‘last man standing’ scheme, a guarantee on behalf of the Office for Students could, hypothetically, entail the government underwriting the whole scheme, while Ralfe at the time pointed to other potential implications, such as the fact schemes with government guarantees are not eligible for the Pension Protection Fund.

The hypothetical scenario would require every UK university and other contributing employer in our world-leading universities sector to go bust. This is not something the government expects or intends to let happen

Department for Education

The guarantee was confirmed in writing on February 16 by universities minister Michelle Donelan, who said: “The Department for Education agreed to guarantee liabilities due to the USS built up by the Higher Education Funding Council for England prior to its cessation in 2018.

“The department also agreed to guarantee future liabilities due to the USS built up by the Office for Students, in the event that there is winding up of the OfS or its successor body if no other body assumes the OfS’s functions.”

The Department for Education dismissed the revelation at the time and a spokesperson referred Pensions Expert back to its initial response. 

“The hypothetical scenario [underwriting the entire scheme] would require every UK university and other contributing employer in our world-leading universities sector to go bust. This is not something the government expects or intends to let happen,” it said.

Guarantee has no bearing on valuation dispute

The USS, though, felt compelled to issue a briefing note following Donelan’s confirmation of the guarantee, countering suggestions that it might have a bearing on the ongoing 2020 valuation dispute with the University and College Union.

The USS said the government’s guarantee did not alter the scheme’s covenant strength, already rated as ‘strong’.

As an open, immature scheme, USS must account “for the ability of all participating employers to fund the scheme on an ongoing basis— not just the ability of the wealthiest,” it explained.

“The OfS’s participation in the scheme has no material impact on the strength of these factors.”

It added that Donelan’s guarantee of the OfS’s obligations “does not guarantee for the obligations of other employers in the scheme. Nor does it amount to a general obligation to meet the liabilities of the scheme as a whole and in all circumstances. Put another way: it does not release participating employers from their responsibilities to the USS.”

The USS also rebuffed the suggestion that the ‘last man standing’ nature of the scheme was significant, not only because of the improbability of widespread insolvency across the higher education sector, but because employers have agreed a moratorium on scheme exits as part of their proposals to end the ongoing 2020 valuation dispute.

The UCU likewise dismissed the revelation, a spokesperson telling Pensions Expert that it has “no bearing” on the union’s position in the dispute.

Employers consult on UCU proposals

On February 15, employer group Universities UK confirmed it would consult its members on UCU proposals to end the ongoing row over the scheme’s 2020 valuation.

UUK had previously agreed a deal with the USS trustee, which included a moratorium on scheme exits and pledges of greater covenant support in exchange for limiting the contribution rate hikes proposed by the trustee, after the 2020 valuation showed the scheme’s deficit had quadrupled to more than £14bn.

The union rejected the employers’ proposals, however, arguing that they amounted to cuts to guaranteed retirement income of “typical” USS members of as much as 35 per cent, though UUK disputed this figure.

Unless a deal is agreed by the end of February, the trustee will have no choice but to revert to the original rates when it submits its contribution schedule to regulators, something employers have said would be “ruinous” and “unaffordable”.

UCU members are currently in the second round of strike action over UUK’s plans. The UCU published alternative proposals, under which member contributions would stand at 11 per cent and employer contributions at 23.7 per cent from April to October this year, rising thereafter to 11.8 per cent for members and 25.2 per cent for employers from October.

The union also demanded that employers agree to pay a maximum of 25.2 per cent and members a maximum of 9.8 per cent from April 1 2023, “so as to secure current benefits or, if not possible, the best achievable as a result of the call on the USS to issue a moderately prudent, evidence-based valuation”.

UUK initially said the UCU’s proposals were not a serious attempt to solve the problem, but the union has subsequently received confirmation from the USS trustee that there is “no impediment” to implementing them, and called on UUK to consult its members over the UCU’s solution, which UUK has now done.

UUK members have until February 18 to submit their views. Announcing the consultation, UUK said that the UCU’s proposals reflect the union’s “strongly held belief that the next valuation will be significantly better and enable more flexibility in scheme design”, though it noted “that there is little evidence at this stage that this belief will be proven correct”.

It said it is awaiting more information from the union as to how its proposals could be “legally and formally achieved”, suggesting that there is not enough time to conduct another valuation before rate increases kick in on April 1 2023.

It likewise cautioned that the Pensions Regulator had not yet given its view on the viability of the UCU’s proposals, and that there is likely to be too little time for it to provide this before the consultation closes.

Finally, it reminded employers that the union’s proposals would require the same covenant support measures as pledged for UUK’s proposed solution, coupled with a higher contribution rate than planned for under those proposals.

UUK has previously warned that its proposals were at the limit of affordability and sustainability, with higher rates inevitably damaging students’ university experience.

In a funding update, also issued on February 15, the USS acknowledged a point often raised by the UCU to back its calls for a new valuation: scheme funding has improved since the 2020 valuation was carried out, with assets recovering to pre-pandemic levels and standing now at £89.3bn.

However, it stressed that “this is just one part of the overall picture”, as liabilities and future service costs have also increased. 

It said that persistent market volatility means “it is very difficult to reach any definitive conclusions as to the true direction of travel based on the past few months alone”.