The Universities Superannuation Scheme’s deficit has quadrupled to more than £14bn, requiring contribution rate hikes from employers amounting to an “unaffordable” 56.2 per cent of payroll, according to figures announced on Wednesday.
The rate hike would affect 200,000 members and 350 higher education employers, who could face paying more than £2bn a year — in the case of some lecturers, many hundreds of pounds more — without any increase in benefits.
USS attributed the rise in large part to persistently low interest rates and to a lower-than-expected investment return.
A range of scenarios were presented, with the most favourable still including a rise in contributions from employers and members to 42.1 per cent of payroll from their current 30.7 per cent.
After a decade of pay and conditions being degraded, many precarious and low-paid higher education workers can no longer afford to be USS members
Jo Grady, UCU
The trustees submitted the most favourable scenario to the Joint Negotiating Committee, made up of Universities UK and University and College Union representatives. This scenario is dependent on a range of commitments by employers which, if they are not agreed to, will result in one of the less favourable scenarios and rate rises to as much as 56.2 per cent.
New commitments needed to sustain most favourable outcome
However, the commitments necessary to secure the most favourable outcome are proving hard to secure.
In a webinar announcing the updated figures, USS chief executive Bill Galvin gave as an example a proposed rule change that would see an employer looking to leave the scheme having to seek permission from the trustees.
He explained that such a move would assist the scheme in negotiating the terms of any exit, particularly of a wealthy employer, that might otherwise damage it significantly.
While USS had asked for a 30-year moratorium on employer exits from the scheme, employers had rebuffed that suggestion and offered only a six-year moratorium, which USS hoped to increase to 12 years, Galvin said.
“These are the kind of dynamics I think that underpin the various different proposals,” he said.
Lack of commitment to the scheme was cited by the regulator as a justification for its rating the covenant as “tending to strong”, lower than USS’s self-assessment of “strong”, he added.
As such, scenario one “is probably an irrelevance to the funding discussions” unless employers agree to the extra support measures.
However, a UUK spokesperson said the proposed increases were “unaffordable”.
“The very high prices for current benefits put forward by the USS trustee are unaffordable for employers, risk pricing even more staff out of the scheme, and undervalue the collective and enduring financial strength of the participating employers,” they said.
“Employers and scheme members need a stronger and clearer justification from the USS trustee for the very high pricing decisions. Without this justification, employers and scheme members will be concerned that the scheme is facing an unnecessary level of reform.”
Scenarios ‘at the limit’ of compliance
The three scenarios presented by USS were deemed “at the limit” of compliance with legislation, according to the Pensions Regulator’s director of supervision, Mike Birch.
Dame Kate Barker, chair of the USS trustee board, said that the scheme had explored a range of other scenarios, all of which TPR deemed outside the realm of compliance with the Pensions Act 2004, principally because they were insufficiently prudent.
“We fully recognise the scale of the challenge facing the scheme and sympathise with our employers and members in light of the difficult decisions that lie ahead,” Barker said.
“Trends in financial markets have made the valuable pension promise offered by USS — a set inflation-linked income for life in retirement, regardless of what happens to the economy in future — much more expensive today than in the past.
“I believe everyone involved with USS wants to find a way forward, consistent with our legal and regulatory duties, that provides valuable and secure pensions and puts the scheme on a sustainable footing. We are committed to being as collaborative and constructive as we can in supporting UUK and UCU’s discussions to this end.”
UCU ‘cannot rule anything out’
UCU has hit out again at what it considers to be USS’s flawed methodology, which it said risks “endangering a healthy pension scheme”.
It has argued often against what it deems an “overly pessimistic” view of the higher education sector, one which does not take into account the scheme’s growing asset base.
In January, nearly 4,000 people signed a letter to the trustee in which changes to the discount rate and level of prudence were explicitly questioned, and a perceived lack of transparency in decision-making was criticised.
In response to Wednesday’s update, UCU general secretary Jo Grady said: “USS is trying to spin the fundamentally flawed assumptions that its valuation of the pension scheme relies on as objective matters of fact. In doing so it risks endangering a healthy scheme.
“Problems with USS’s methods and assumptions have not been properly addressed, despite widespread dissatisfaction among members and criticism from across the pensions industry and the higher education sector, including the universities of Oxford and Cambridge.
“UUK now needs to step up the pressure on USS to change its approach,” she continued.
Grady argued that USS’s asset base is “huge” and “has doubled in size since 2011”, making it odd that the trustee “continues to revise its assumptions down”.
She criticised the decision to proceed with a valuation date of March 31 2020, in the middle of a global pandemic and “as markets were crashing”, and pointed out that the scheme receives more in contributions annually than it pays out, making it able to “ride out any bumps”.
Thousands warn of ‘unjustified’ USS discount rate rises
More than 3,000 people have written to the trustees of the Universities Superannuation Scheme to criticise proposed changes to the valuation methodology that, they say, will result in its members and employers being overcharged by the scheme.
Grady also drew attention to Galvin’s “eye-watering” bonus, awarded in 2020, which did not sit well with “USS members who have worked so hard during the pandemic [and] are being told that either contributions have to go up or benefits must go down”.
“After a decade of pay and conditions being degraded, many precarious and low-paid higher education workers can no longer afford to be USS members. Even more will quit if contribution rates go up further and this will endanger the health of the scheme as a whole,” she said.
“UCU will be holding a special sector conference for higher education branches to decide our next steps and cannot rule anything out,” she added.
