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In autumn 2021, University and College Union (UCU) members voted for strike action to oppose proposed cuts to pensions that are in the Universities Superannuation Scheme (USS). This briefing looks at the changes made to the scheme and its various valuations, leading up the vote.

What is the Universities Superannuation Scheme?

Universities Superannuation Scheme (USS) is a hybrid workplace pension scheme, made up of two parts. Members build up rights in a defined benefit (DB) scheme on salary up to £59,883.65 (in 2021/22). For salary above that level, there is a defined contribution (DC) (where the income the individual might get at retirement depends on factors such as contributions made 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 DB schemes, the USS must conduct regular valuations, to assess the value of its assets, the cost of its pension promises and decide on the level of contributions that need to be made by employers and employees. If the result is that the scheme underfunded, the trustee must draw up a ‘recovery plan’ to repair the deficit and submit this plan to the Pensions Regulator (TPR). The outcome of any valuation is sensitive to the assumptions made (for example, about how long scheme members will live, earnings growth, investment returns and how much employers are willing and able to increase financial support if needed). Library briefing, Defined benefit pension scheme funding has more on this.

The valuation process for the USS is complex, reflecting its nature as a multi-employer scheme. The trustee starts the process one to two years in advance of the valuation date by assessing core assumptions, such as employers’ attitude to investment risk and their willingness and capacity to increase support for the scheme. Universities UK (UUK) consults employers as part of this process. Once the valuation has been done, the Joint Negotiating Committee (JNC) (made up of an equal number of nominees from UUK and the University and College Union (UCU) and an independent chair) determines how any contribution increases should be shared between employers and scheme members, and/or to recommend benefit changes to manage any deficit. The rules of the scheme ultimately enable the Trustee to impose contribution rates, a feature that is unusual in DB schemes.

As discussed below, 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, requiring higher contributions to fund the same level of benefits.

The 2020 valuation

In an update on the 2020 valuation in March 2021, the trustee said level of underfunding in the USS had increased, meaning it would require more support from employers. It said the rate of contributions that would be required would depend on what other support for the scheme employers were willing to put in place. Different scenarios were presented, with contribution rates varying from 42.1% to 56.2%.

In April 2021, UUK launched a consultation with employers on a package of proposals designed to keep total contribution rates at 30.7%. The package included measures to reduce the value of pension that employees would build up after April 2022. In addition, UUK said additional employer support was necessary because the trustee was otherwise prepared to impose “impossible contribution requirements regardless of the impact on members and employers.” The 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. On 21 July 2021, UUK said employers had agreed to support the package. Then on 31 August, the Joint Negotiating Committee agreed to UUK’s proposed package of pension payment reductions.

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

In a letter to the trustee, TPR said that, although it was “not comfortable with total contributions of 31.2%,” it viewed this as marginal and 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 JNC recommendation was not implemented as it had not yet seen sufficient evidence that the increased contributions would be affordable.

An employer consultation with employees on the benefit and contribution changes is currently underway.

UCU opposition

The University and Colleges Union (UCU) opposes the cuts to pensions, which it says would “reduce the guaranteed retirement income of a typical member by 35%.” On 9 November, it wrote to Universities UK (UUK), calling on it to consult employers on: withdrawing the pension cuts recommended by the JNC; agreeing to pay higher contributions for a fixed period of time to allow a negotiated settlement and calling publicly for a 2021 valuation of the pension scheme.

The UCU took steps towards legal action over the 2020 valuation by writing to the chief executive of the USS on 25 October, setting out its concerns about the integrity of the valuation process.

It announced on 16 November 2021 that there would be three days of strike action from 1 to 3 December at 58 universities. This follows two ballots of its members, one relating to pensions, the other to pay and working conditions. In 37 of the 58 universities the strikes relate to pensions. On 25 November 2021, UCU said it would re-ballot members at 42 universities between 6 December and 14 January. This came after some branches narrowly missed the 50% turnout threshold needed to support strike action.

Strikes over the 2017 valuation

UCU members previously took strike action over the 2017 valuation. The union argued that the trustee was proposing an overly cautious approach to investment returns, which would result in contribution rates having to increase. 

In September 2017, UCU published a report by First Actuarial, which showed that payments to pensioners from the USS could “very nearly” be paid from the contributions made to the scheme and that there was a strong likelihood that USS investments could safely deliver the pension benefits. This approach was disputed by both the trustee and UUK, who argued that it would involve an unnacceptable level of risk.

On 14 November 2017, the trustee said UUK’s response to consultation indicated that it should take a more cautious approach still – increasing the deficit and the level of contributions required even further. Pension benefit cuts were proposed and there was industrial action in early 2018. On 23 March 2018, UUK and UCU agreed to set up an independent expert panel to review the 2017 valuation

Expert panel reports

In its first report, published in September 2018, the JEP said the flow of cash in and out of the scheme was positive (contributions exceeded the cost of paying pensions) and was projected to remain so for the next 50 years. Together with the strength and long-term nature of the higher education sector overall, this meant that, unlike most occupational schemes, the USS trustee could afford to take a very long-term approach to its investments. In its second report, published in December 2019, the JEP recommended changes to the valuation process more generally, which it hoped would foster a more co-operative environment. A series of meetings between trustees, employer and employee representatives followed, resulting in changes to the valuation process, such as the agreement of shared valuation principles. In a briefing on the Joint Expert Panel’s recommendations in March 2021, the trustee said that areas of disagreement remained, reflecting “differences of opinion, perspective and duty.”

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