The focus of debate has been on the size of the deficit in relation to pension promises for past service. While this is serious and needs to be addressed, it is not the only issue. The recent valuation also reveals that the cost of providing future benefits has increased from 26% of salaries (18% employer and 8% member contributions) to 32.6% – well above the maximum we see as a sustainable level both for individual members and employers. This means that to provide current benefits into the future the sums that employers and individual scheme members (university sector staff) would have to pay into the scheme would need to rise to unaffordable levels.
Why has this happened? Largely because economic changes, which could not have been predicted at the last valuation in 2014, have reduced future investment return expectations. This is a problem not just for USS but also for many other funded UK pension schemes.
We should be under no illusion, this is not a problem that will go away if ignored. To retain the status quo would only serve interests in the short term. Without reform now, universities will likely be forced to divert funding allocated from research and teaching to fill a pensions funding gap, or if they did not, they would risk the sustainability of USS. The option of no reform is a dangerous gamble. It is a risk that employers cannot take.
It has been suggested that rather than increase contributions or move to a benefits structure that is affordable for the long term, USS should invest more aggressively for higher returns. This would increase the risk that, if the strategy failed, USS would need to call on universities and other higher education sector employers in USS for additional funding at a level most institutions would struggle to meet. It would also be highly unlikely to gain the approval of the Pensions Regulator, which, as well as making sure that USS can pay pensions as they fall due, is tasked with ensuring that the cost of the scheme does not threaten employers’ survival.
There have been numerous meetings between USS, employer and member representatives (UUK and UCU respectively) over the past year to feed into the valuation process and methodology used by USS. We are now approaching the end of USS’s formal consultation with employers on the valuation outcome and options for dealing with both the deficit and the rise in future pension costs. The next step is to reach an employer consensus on the way forward.
UUK, taking into account feedback received from USS employers, will be developing proposals to give the scheme stability and security, to ensure it remains affordable for individuals and universities, and continues to provide attractive benefits to current and future employees. Difficult decisions will need to be taken during the negotiation process, including the reform of future benefits. There are vital decisions that all involved need to get right to strengthen the sustainability of the scheme and avoid further rounds of uncertainty and change.
Employers Pensions Forum (EPF) report sets out universities’ priorities for future pension provision. It is essential that we find a way to continue to provide pension benefits that staff value, within a sustainable framework with the flexibility to adapt to any future change in demands and behaviours. We owe it to current, future and past employees and, also – importantly – to our students to do so.
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The USS is a pyramid scheme. Like all pyramid schemes, it serves well those who joined the pyramid early on. Those who join late (in case of USS after the reforms of 2014 and certainly those who will join/stay with it after those that are required now) are unlikely to recover a fair share of their investments. It would make sense for recent and would-be recruits to pull out of USS and look for other investment opportunities.
There are too many statements made without supporting evidence. Simply making sweeping statements about 'economic changes' - on the assumption that it will tally with the government's austerity agenda and make people feel despondent - is not good enough.
We are told that future investment returns are low. That needs to be shown. What is needed is proper evidence that the expected returns on the USS's large, balanced, diversified, investment portfolio is below the rate of return that is required to pay the benefits. That has not been demonstrated in the Technical Provisions Consultation Document. The fact that long term gilt rates are very low does not constitute a basis for your assertion. There is no reason for a mature pensions scheme to invest in gilts. Your whole premise is a false prospectus.
USS, which runs the scheme, uses an expert firm of actuaries to do this and to assess risks. Actuarial work involves making assumptions about the future, which is inherently uncertain, and different actuaries, faced with very similar circumstances, can apply assumptions that come up with different results. You can read more on the methodology and assumptions made by USS on their website:
"different actuaries, faced with very similar circumstances, can apply assumptions that come up with different results." Exactly. But UUK chooses one that suits their agenda.
I'm also surprised by the vague explanation of why we are in this mess. Future investment return expectations must have been very very optimistic to produce a 2 billion pound hole in 3 years. What return did they expect, what's the long term average, what was USS' return over that period and what was the average return of all pension funds over that period (i.e. were USS fund managers underperforming?)? This is a very murky business, I am not sure I'd trust fund managers more than used car dealers! As far as I can see, long-term investment returns are in the range of 2-3 % for 10-30 years.