USS reform shares cost and risk with members

The scheme has increased its normal retirement age, moved to career average for new members and asked members to share the cost of pension contributions above a set level.

Sean Greene, pensions policy officer at USS, said the trustee board had agreed that the changes recommended as far back as 2010 were "in the best, long-term interests of the scheme as a whole".

He added: "The employers informed affected members about the proposed changes and undertook a consultation [with members and their representatives]."

USS is not the only educational workers' pension scheme to have made such changes. Last month, schemeXpert.com reported on a successful switch to career average at the Superannuation Arrangements of the University of London.

Defined benefit schemes that share longevity risk with their members can reduce the current cost to employers to fund their pension promises.

This can lead to companies offering a higher guaranteed retirement income for longer.

USS's path to reform

A sub-group of USS's Joint Negotiating Committee assembled in late 2008 to review its affordability.

The committee comprised representatives from the Employers' Pension Forum, representing USS employers, and the University and College Union, representing USS members.

The sub-group committee was headed by an independent chairman, Sir Andrew Cubie, who was jointly appointed by the employers and the members of UCU.

Any technique that helps [the employer] limit volatility breeds stability for members in the continuation of DB

In 2010, the employer forum published a document explaining the reasons behind the planned benefit changes, entitled USS – The Need for Reform.

The committee accepted a set of proposals from the employer in July 2010 and these were put to the trustee board. The employers then consulted members on the changes between October and December 2010.

The committee accepted some amendments, including allowing members who leave the final salary scheme to rejoin it within 30 months rather than being put in the new career average arrangement.

The eventual changes to the scheme mean the following changes came into force in October and were factored into the triennial valuation:

• New entrants' benefits are now provided on a career-revalued rather than final-salary basis;

• The normal retirement age was increased – for future service and new entrants – to 65;

• Flexible retirement was introduced;

• Member contributions were increased to 7.5 per cent for final salary and 6.5 per cent for career average;

• Should total contributions top 23.5 per cent of salaries a year, employers will fund 65 per cent and members 35 per cent of the excess; and

• Increases to pensions in payment or deferment have been capped.

Despite the changes, lower-than-expected investment returns and higher-than-expected salary increases meant the funding shortfall grew over the period.

The scheme's latest valuation, published in June, showed the scheme is currently 92 per cent funded, with a shortfall that increased from £707m in 2008 to £2.9bn in 2011.

How to communicate changes

The inclusion of UCU in the decision-making process from the start helped the scheme to communicate its changes, demonstrating the value of early consultation with stakeholder groups.

Barry Parr, co-chair of the Association of Member Nominated Trustees, said such cost-sharing agreements that maintained DB pensions were "highly pragmatic and laudable".

Arguably, risk sharing is a fairer approach for both members and employers

He added: "It is clear that the employer needs to control his risks and any technique that helps limit volatility from his perspective breeds stability for members in the continuation of DB schemes."

Member-nominated trustees might well be the first port of call for members seeking some explanation of the changes.

"Here it is important that MNTs help give the facts and inevitably some further clarification but they do not have the overt obligation of trying to persuade," he added.

Schemes have been called upon to communicate to members that career average is a better alternative than losing DB altogether and moving to defined contribution.

"Arguably, risk sharing is a fairer approach for both members and employers than the old system where employers bore almost all of the risk," said Phil Page, client manager at Cardano.

"Trustees and employers can communicate the need for fairness in risk sharing and that risk sharing is probably better than a move to a DC arrangement."