Universities UK, the group representing 340 Universities Superannuation Scheme employers, has pledged additional covenant support to the pension scheme, in a move it said will spare its members the crippling contribution rate rises announced following the scheme’s 2020 valuation.
Observers have warned, however, that the additional support could come at the expense of other priorities, like improving courses, support and services to students and staff at financially weaker institutions, in particular.
As Pensions Expert has reported previously, the 2020 valuation — which saw the USS deficit quadruple to more than £14bn — led the USS trustee, advised by the Pensions Regulator, to lay out three illustrative scenarios for rate hikes, 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.
It is clear from employer feedback that the vast majority of institutions would not be able to pay more into pensions from an already high 21.1 per cent without having to find that money from elsewhere in their budgets
Phil Harding, UUK/JNC
This ignited a row between the USS and its negotiating partners, who accused the trustee of failing to justify several of its assumptions, including the level of prudence in setting the discount rate, as well as not properly considering the strength of covenant support promises made by employer group UUK and its members.
Almost 4,000 people signed a letter in January attacking the proposals. The letter said the valuation methodology had “little empirical or theoretical justification”.
Then,in March, USS chair Dame Kate Barker rejected a request by UUK to conduct a formal review of the assumptions underlying the valuation and its resultant scenarios, arguing that there would be no justification for doing so unless new information was presented, or until UUK could offer an alternative plan.
Despite Aon criticising the USS valuation assumptions as “overly prudent” in April, and repeated suggestions by the University and College Union that industrial action might be taken unless USS backed down, in May UUK unveiled its alternative proposals, which included additional covenant support and a 20-year moratorium on scheme exits.
Though this prompted the UCU to warn it would not accept “half-baked proposals”, the union did welcome UUK’s insistence on governance reform, put as part of its proposed package.
USS employers have now confirmed they intend to offer greater covenant support, a measure UUK said will allow the scheme’s trustee to keep contributions “very close to current levels”.
Employers representing 94 per cent of USS scheme measures signalled, in response to UUK’s consultation on its alternative package, that they would be willing to go further than the measures previously agreed.
Nevertheless, they also called for immediate action on “longer-term reforms” to explore the feasibility of conditional indexation, the development of a more flexible and lower-cost option for members to help address the high opt-out rate, and to begin scoping a governance review of USS that would start after the current valuation.
Pledge wards off ‘ruinous’ increases
A spokesperson for USS Employers said: “The responses to this short consultation reiterate the strong will of employers to find an outcome to the 2020 valuation that keeps alive the defined benefit parts of the scheme at affordable contributions for members and employers. This is no mean feat in the current economic and regulatory environment.
“By making even firmer commitments to USS on secured debt and by agreeing to an immediate and much longer moratorium on exiting the scheme, employers are taking on considerable additional costs and risk so they can offer members the best possible level of benefits at current contributions,” they continued.
“Without changes to the scheme, members and employers are facing the harsh reality that the USS trustee will implement ruinous contribution increases of up to 56.2 per cent, meaning members paying 18.6 per cent of salaries and employers paying 37.6 per cent.”
They added that UUK will “continue to ask the USS trustee to further consider the valuation assumptions, so that the more affordable UUK proposal can be delivered at the current contribution rate of 30.7 per cent of salary”.
They added that employers want to see “rapid action on the longer-term future of the scheme”, and expressed their hope that UCU, USS and UUK will work together to explore “alternative scheme design”.
Proposals are not without their consequences
However, Phil Harding, lead employer representative on the Joint Negotiating Committee, cautioned that the new, stronger covenant commitments “will limit employers’ ability to borrow money in the future, lead to higher borrowing costs, and could be a barrier to improving courses, support and services to students and staff”.
He warned that it will be the “financially weaker employers that will be most severely impacted”, not least because they “rely on secured borrowing the most and have the thinnest reserves, so increases in cost feed immediately through to cost-cutting”.
Harding explained: “This covenant support can be considered in a similar way to increasing contributions — indeed, that’s how the USS trustee has valued it, saying that contribution levels would need to increase by 80 per cent without it.
“This commitment to covenant support is on top of the increase of more than 50 per cent in the rate of employer salary contributions to USS, from 14 per cent in 2009 to 21.1 per cent in 2019.
“It is clear from employer feedback that the vast majority of institutions would not be able to pay more into pensions from an already high 21.1 per cent without having to find that money from elsewhere in their budgets — potentially having consequences on other employer activities, student experience or jobs.”
Proposals ‘do nothing’ to address benefit cuts
Responding to UUK’s announcement, UCU general secretary Jo Grady told Pensions Expert that while a “a belated commitment from employers to provide some additional support is welcome, it does nothing to address the hole in UUK’s proposals, which will see scheme members suffer cuts to their pension benefits”.
She noted that the employers still need to work with the union “to push USS to carry out a new, moderately prudent 2021 valuation and abandon its flawed 2020 valuation, which has consistently led to unjustified and unnecessary demands to either slash benefits, increaser contributions, or both”.
She said: “UCU’s and UUK’s advisers have criticised USS’s methods and assumptions and the choosing of March 31 2020 as the date to value the scheme, when markets were crashing due to the pandemic. The Joint Expert Panel of pension specialists that UCU and UUK set up has shown that defined benefits are affordable.”
UUK proposes USS governance reform, 20-year moratorium on exits
Universities UK, the employer group representing 340 Universities Superannuation Scheme members, has raised the prospect of a 20-year moratorium on scheme exits in a bid to show a greater commitment to covenant support.
Grady noted that the sector is “in a very strong position with finances in robust health, and there is no excuse to cut member pension benefits as UUK proposes”.
She warned that the employers can either work with the union “and commit more to maintain current benefit and contribution rates, or it can choose to face a ballot for industrial action”.
“UCU is developing its own counterproposals and is currently discussing these with branches, after which they will be submitted to the Joint Negotiating Committee,” she concluded.
