Russell Group has backed the Universities Superannuation Scheme trustee’s suggested “lower-cost, more flexible” alternative to the existing scheme structure.
The group, which represents 24 universities in the UK including Oxford, Cambridge, Kings College London and the University of Manchester, published a statement of principles as part of its response to Universities UK’s consultation on counterproposals to be put to the USS trustee, part of an ongoing battle over the assumptions and consequences of the scheme’s 2020 valuation.
As a consequence of the 2020 valuation — which saw the USS deficit quadruple to more than £14bn — the USS trustee, having been advised by the Pensions Regulator, laid out three illustrative scenarios, in the most favourable of which contribution rates would have to be increased to between 30.7 per cent and 42.1 per cent of payroll.
Under the least favourable scenario, that figure would be as high as 56.2 per cent.
We are hopeful that we might be moving closer to covenant commitments that would provide grounds for us to formally review the recovery plan and discount rate assumptions
USS trustee
This was widely deemed unaffordable and UUK, the employer group representing 340 USS members (including the Russell Group universities), has been consulting on a range of alternative proposals.
Among other initiatives, it is proposed that employers pledge additional covenant support, endorse a 20-year moratorium on scheme exits, and introduce a new “tiered system” of contributions to tackle the “intergenerational unfairness” in the USS, which currently sees one in five employees opt out of the scheme because of the costs associated with membership.
Russell Group supports low-cost solution
As part of its response to the UUK consultation, which closed on Monday, the Russell Group proposed a number of steps that could be read as a compromise with the USS trustee.
It said the published principles are “key to any future discussions around the USS pension scheme”.
Russell Group backed “the principles of the proposals put forward by USS employers in its consultation, including the proposal for an appropriate rolling moratorium on institutions leaving”, according to a statement.
It agreed that the sector should maintain its hybrid defined contribution/defined benefit system, while looking at ways to lower the threshold for DB schemes “to keep contributions affordable for all”.
As part of its consultation, UUK proposed a solution to the problem of “intergenerational unfairness”.
Between 15 and 20 per cent of eligible employees choose not to be members of the USS, compared with a non-participation rate of around 5 per cent in similar schemes. Three in four of those not enrolled are under the age of 40, with many citing unaffordability of the scheme as a reason for their decision.
UUK president Julia Buckingham, speaking at the launch of the UUK consultation in April, suggested “an optional lower-cost flexible pension payment [that] could be introduced to help people at different stages of their lives”.
“It would allow colleagues to choose to pay less for a period, but still benefit from valuable employer contributions,” she said.
“This wouldn’t be a replacement for the main USS scheme, it would be an optional, short-term alternative for those who are currently priced out, 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 in the scheme.”
The Russell Group is backing this proposal.
It welcomed the idea of debt monitoring in principle, but cautioned that more information was needed for employers to know what it would mean in practice, while acknowledging that a “more sustainable solution for the sector” was needed to halt further rises in contribution rates.
Finally, it backed UUK’s call, seconded by the University and College Union, for an independent governance review of the USS to make the scheme “work in a way that is more accountable, transparent and collaborative with the sector”.
“Changes are needed now to address the scheme’s deficit, put it on a more stable, long-term footing and address the fact that around one in five employees have chosen not to sign up for USS membership,” the group said.
“As a sector we must now also start urgently to explore if other options could be viable in the longer term (beyond this valuation exercise) to ensure we get best value for our staff from the significant contribution both they and we make to the USS.”
USS trustee hints at possible contribution rate changes
The USS trustee met for the first time since the publication of the UUK consultation, and on Friday issued a note to all participating institutions informing them that some movement might be possible after all, according to its agreement to revisit its funding assumptions after the receipt of alternative proposals.
“Our initial assessment of the modified hybrid benefit structure included in UUK’s consultation was that it could be implemented by April 1 2022 for a total contribution rate of 34.7 per cent,” the trustee note read.
Aon criticises USS valuation assumptions as ‘overly prudent’
Aon has criticised the methodology and assumptions underlying the Universities Superannuation Scheme trustee’s response to the USS valuation, accusing it of being overly prudent and failing to properly justify several of its assumptions.
It noted that there is “more work to do on the assumptions appropriate to the different set of covenant support measures and benefit structures on which UUK is consulting”.
“We are hopeful that we might be moving closer to covenant commitments that would provide grounds for us to formally review the recovery plan and discount rate assumptions,” the trustee stated.
“We welcome the suggestion of a longer 20-year moratorium on employer exits, and continue to have constructive discussions with UUK and employers on the details of debt monitoring and pari passu arrangements.
“Together with the benefits structure included in UUK’s consultation, a more favourable overall rate than 34.7 per cent could yet be achieved. But we must now wait to see what mandate UUK is given by employers and how that translates into formal proposals tabled by them at the Joint Negotiating Committee that we can formally price.”
