UUK consults on way out of USS valuation wrangle

The measures proposed include asking for additional covenant support from employers, amending the accrual rate, lowering the earnings threshold above which members pay into the defined contribution section of the hybrid scheme, and introducing a new, flexible option for early-career staff. 

The package is intended in part to tackle long-standing issues such as the scheme’s deficit and the drop-out rate, especially among workers starting out in the sector and who are being “priced out” of the scheme under the current contribution model.

It will be a dreadful outcome if an overly cautious approach by the USS trustee was to lead to unjustified and unnecessary cuts to the scheme

Julia Buckingham, UUK

Its ultimate goal, however, is to act as an alternative to the current proposals put forward by the USS trustee on the back of its 2020 valuation, which UUK has long argued are based on unnecessarily high levels of prudence and which necessitate “unaffordable” contribution rate increases.

Pledge covenant support to avoid ‘dreadful outcome’

As Pensions Expert has previously reported, the 2020 valuation results saw the scheme’s deficit quadrupling to more than £14bn, requiring that contribution be raised to between 30.7 per cent and 42.1 per cent of payroll under the most favourable scenarios.

However, unless employers agree to a series of conditions, the rates could be increased to as much as 56.2 per cent of payroll.

This prompted the University and College Union to warn that it “cannot rule anything out” in opposing the USS proposals.

In a briefing before the launch of the consultation on Wednesday, Julia Buckingham, UUK president and vice-chancellor of Brunel University, reiterated employers’ disappointment at the “poor value” USS had put on the covenant support package initially proposed by UUK, which she said “[undervalued] the collective financial strength of participating employers”.

The USS trustee previously rejected a bid to revisit the assumptions underlying its valuation, stressing that there was no cause to do so until new information presented itself, although it stated it was open to alternative proposals.

By asking employers for more significant covenant support as part of the UUK consultation, Buckingham said it was hoped USS could be persuaded “to evolve their assumptions and allow a significant defined benefit element to be preserved at current contribution levels”.

Regardless, UUK “will continue to pressure” USS while the consultation is ongoing and “will be exploring all governance options to achieve movement in the valuation outcome”, she said. 

“Although the USS trustee has stated that it will not review its valuation approach until an alternative proposal is put forward, it ultimately has the power and the room for manoeuvre to fairer assumptions that lower its pricing to minimise the extent to the changes we need to make to the scheme, and to keep alive a significant element of defined benefits.

“It will be a dreadful outcome if an overly cautious approach by the USS trustee was to lead to unjustified and unnecessary cuts to the scheme,” Buckingham added.

Employers did not break promises

Though requesting more covenant support from employers, UUK made clear in its consultation document that it rejected the claim, often made by the USS trustee, that the present covenant position is weaker than anticipated because employers did not keep past promises.

“We simply do not agree with this characterisation of events, and believe it to be inaccurate,” the document stated.

“Employers did collectively agree in good faith to consider extra covenant support measures such as a long-term rule change on employer exits, but this was always based on the need to fully and fairly define the arrangements that were proposed to be adopted, to better understand their justification, and for UUK to further consult with employers about them.”

UUK acknowledged that progress had been made, but said that “we still do not have satisfactory detail” about some of the proposed changes; for example, on de minimis provisions and on “covenant enhancing” secured borrowing.

“Whether we agree with the rationale or not, it is clear from the scenarios set out that the USS trustee is prepared to insist that the scheme deficit is paid off quickly — something which is materially (and disproportionately) detrimental to the immediate generation — if employers do not provide the covenant support measures the USS trustee has requested,” UUK noted.

“The USS trustee also seems prepared to impose impossible contribution requirements, regardless of their impact on members and employers if the covenant support measures are not forthcoming. In such circumstances, there appears little alternative but for employers to avert what would be lasting damage and try again to find acceptable covenant measures.”

Opt-outs and ‘intergenerational unfairness’

Other measures proposed in the consultation are intended to tackle the issue of opt-outs of the scheme.

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.

“We currently have a two-tier scheme, where some people have a strong pension offering, but others are being priced out by a 9.6 per cent member contribution rate and therefore have no pension benefits, nor the bereavement and incapacity benefits provided through USS unless the employer (or the individual) makes alternative life insurance provision for those members opting out,” UUK explained.

A range of scenarios were presented to tackle this “intergenerational unfairness”, among which was a new tiered system of contributions. 

In her briefing, Buckingham highlighted the suggestion of “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.”

USS will review assumptions

A USS spokesperson said: “We welcome UUK’s constructive response to the funding challenges facing the USS pension scheme and its focus on identifying solutions to ensure higher education employees can continue to enjoy a valuable, affordable and secure pension. We also share UUK’s concerns over the high opt-out rates among some groups of members.

“During UUK’s consultation with employers, we will continue to work constructively with our stakeholders to achieve the optimal position on covenant support, contributions and benefits for our members. We recognise that this valuation has been far more challenging than all parties expected when we completed the 2018 valuation.

“We have confirmed to UUK that we will review our assumptions once alternative packages are put forward and we have assessed their impact on the overall risk position for the scheme. We also stand ready to engage further with the Pensions Regulator on these matters and to consider post-valuation experience, if appropriate.”

UCU has been approached for comment. The consultation closes on May 24.