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University and College Union (UCU) members have taken strike action opposing cuts to pensions in the Universities Superannuation Scheme (USS) taking place in April 2022. This briefing looks at the changes made to the scheme and its valuations.

What is the Universities Superannuation Scheme?

The Universities Superannuation Scheme (USS) is a hybrid workplace pension scheme, made up of two parts. Members build up rights in a defined benefit  scheme on salary up to £59,883.65 in 2021/22, reducing to £40,000 on 1 April 2022. For salary above that level, there is a defined contribution scheme (the value of which depends on factors such as the contributions and investment returns). 

Employers and employees make contributions to a fund, which is invested and used to pay pensions at retirement. It has 340 participating employers, including many universities and higher education institutions. It is overseen by its trustee, the Universities Superannuation Scheme Ltd.

How do scheme valuations work?

Like other defined benefit schemes, the USS must conduct regular valuations, to assess the value of its assets, the cost of its pension promises and decide how much employers and employees need to contribute to the scheme. If the scheme does not have enough assets to pay promised pensions, the trustee must submit a ‘recovery plan’ on how it will repair the deficit to the Pensions Regulator. Valuations are sensitive to the assumptions made (for example, about how long scheme members will live, how earnings will increase, and expected investment returns). This is covered in more detail in the Library briefing Defined benefit pension scheme funding.

The USS is a large, multi-employer scheme, which makes its valuation complex. The trustee starts the process one to two years before the valuation date by looking at its assumptions. Universities UK (UUK), which represents 140 UK universities, consults employers as part of this process. Once the valuation is complete, the Joint Negotiating Committee, made up of an equal number of nominees from UUK and the University and College Union (UCU) and an independent chair, determines how changes to contributions should be shared between employers and scheme members, and can recommend changes to benefits to manage a deficit. The scheme rules allow the trustee to impose contribution rates, an unusual feature in defined benefit schemes.

USS’s approach to risk in valuations has been the subject of intense debate in recent years. Other things being equal, a more cautious approach to investment risk means lower expected returns on investments and higher contributions to fund the same level of benefits.

The 2020 valuation

In an update on the 2020 valuation in March 2021, the USS trustee said the scheme was more underfunded than before and would require more support from employers. The trustee said the required contributions depended on what other support employers were willing to put in place. Different scenarios were presented, with contribution rates varying from 42.1% of pay to 56.2%.

In April 2021, UUK launched an employer consultation on proposals designed to keep total contribution rates at 30.7%. These included measures to reduce the value of pension that employees would build up and a lower cap on the amount pensions can increase due to inflation from April 2022. UUK also said that additional employer support was necessary because the trustee was otherwise prepared to impose “impossible contribution requirements regardless of the impact on members and employers.” Its proposed employer support measures included:

  • employers agreeing not to leave the scheme for a period of time;
  • new trustee monitoring of debt levels of employers in the USS; and
  • increased security for the scheme in relation to new employer debt.

After employers had agreed to support the package the Joint Negotiating Committee agreed to recommend UUK’s proposed package of pension payment reductions on 31 August 2021.

On 30 September 2021, the trustee issued the 2020 valuation. Total contributions were set at 31.2% from October 2021. However, if the recommendation was not implemented, it said contributions would start to increase every six months from April 2022 reaching a total of 57% in 2025.

In a letter to the trustee, the Pensions Regulator said that, although it was “not comfortable with total contributions of 31.2%,” it did not expect to take further action. It was only able to give a provisional view on the alternative scenario that would apply if the Joint Negotiating Committee recommendation was not implemented: it had not yet seen sufficient evidence that the increased contributions would be affordable.

On 1 October 2021 total contribution rates were set at 31.2% of pay, 9.8% for employees and 21.4% for employers.

University and Colleges Union opposition and proposal

UCU opposes the reductions to pensions, which it says would “reduce the guaranteed retirement income of a typical member by 35%.”

On 26 January 2022, UCU put forward its own proposal which would keep pension benefits unchanged. Instead, the scheme members and employers would make higher contributions and a new valuation of the scheme at 31 March 2022 would be issued. UUK launched a consultation on the proposals which found that 93 of the 97 employers which responded did not support UCU’s proposals.

Three days of strike action took place from 1 to 3 December at 58 universities, with 37 of them relating to pensions. In February strike action took place at 68 universities, with 44 of them relating to pensions. Further strike action is planned between 21 March and 1 April 2022 and UCU announced it would open new industrial action ballots at 149 universities, with staff at 65 universities balloted over changes to the USS.

Changes to the scheme

On 22 February 2022, the Joint Negotiating Committee recommended changes to pensions from April 2022, including a UUK proposal to defer the lower cap on inflationary increases:

  • To fund the deferral of the lower cap on inflationary increases, total contributions would increase to 31.4% between 1 April 2022 and 31 March 2024, then return to 31.2%
  • Defined benefits will build up on pay up to £40,000 a year, reduced from £59,883.65 in 2021/22.
  • These defined benefits will build up more slowly.

The USS trustee board confirmed that it would introduce the changes on 28 February 2022.

Strikes over the 2017 valuation

UCU members previously took strike action over the 2017 valuation. UCU argued that the trustee was proposing an overly cautious approach to investment returns, resulting in higher contributions. In March 2018, UUK and UCU agreed to set up an independent joint expert panel (JEP) to review the valuation. In December 2019, the JEP recommended changes to the valuation process

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