Employers in the Universities Superannuation Scheme (USS) have agreed to make even stronger promises to the scheme to provide defined benefit pensions at affordable levels for scheme members and employers.
The additional financial backing – or covenant support – would save members and employers from contributions rises up to 80% higher after the USS Trustee confirmed the additional support would allow it to price Universities UK’s proposed alternative package at contributions very close to current levels.
In response to a short consultation by Universities UK (UUK), which represents 340 USS employers, employers representing 94% of scheme members agreed to go even further with their covenant support than previously agreed to support the package.
They also urged immediate action on longer-term reforms, to explore the feasibility of Conditional Indexation; the development of a more flexible and lower-cost option for members to help address the high opt-out rate; and to begin scoping a governance review of USS that would start after the current valuation.
A spokesperson for USS employers said:
“The responses to this short consultation reiterate the strong will of employers to find an outcome to the 2020 valuation that keeps alive the defined benefits part of the scheme at affordable contributions for members and employers. This is no mean feat in the current economic and regulatory environment.
“By making even firmer commitments to USS on secured debt and by agreeing to an immediate and much longer moratorium on exiting the scheme, employers are taking on considerable additional costs and risk so they can offer members the best possible level of benefits at current contributions. Without changes to the scheme, members and employers are facing the harsh reality that the USS Trustee will implement ruinous contribution increases of up to 56.2%, meaning members paying 18.6% of salaries and employers paying 37.6%.”
“We will continue to ask the USS Trustee to further consider the valuation assumptions so that the more affordable UUK proposal can be delivered at the current contribution rate of 30.7% of salary.
“Employers also want to see rapid action on the longer-term future of the scheme, and we hope that UCU and USS will join UUK to explore alternative scheme design, a lower contribution option for members, and a review of the scheme’s governance.”
Making such strong covenant commitments to the scheme will have consequences for all employers as it will restrict their ability to borrow money in the future, which could curb their plans for improving the education, support, and services for students and staff. It is also expected to push up the cost of borrowing as the security available for lenders will be less valuable and that will be reflected in their pricing.
Phil Harding is the lead employer representative on the Joint Negotiating Committee, the forum where the University and College Union (UCU), representing scheme members, and employers decide how to meet the challenges posed by the valuation including the future benefits offered by the scheme and the level of contributions for employers and members.
Until recently, Mr Harding was Director of Finance and Business Affairs at UCL, one of the country’s largest higher education employers, before becoming Director of Finance and Estates at Trinity Laban Conservatoire of Music and Dance.
Mr Harding appreciates the significant impact that the level of covenant support will have on institutions of all sizes:
“With the loss of government capital funding for higher education, institutions need to be able to borrow money to sustain their investment in the physical and digital infrastructure. This level of proposed employer covenant support will limit employers’ ability to borrow money in the future, lead to higher borrowing costs, and could be a barrier to improving courses, support and services to students and staff.
“It will be the financially weaker employers that will be most severely impacted, since they rely on secured borrowing the most and have the thinnest reserves, so increases in cost feed immediately through to cost-cutting.
“This covenant support can be considered in a similar way to increasing contributions – indeed that’s how USS Trustee has valued it, saying that contribution levels would need to increase by 80% without it. This commitment to covenant support is on top of the increase of more than 50% in the rate of employer salary contributions to USS from 14% in 2009 to 21.1% from 2019.
“It is clear from employer feedback that the vast majority of institutions would not be able to pay more into pensions from an already high 21.1% without having to find that money from elsewhere in their budgets – potentially having consequences on other employer activities, student experience or jobs.”
Notes to editors
- Without covenant support measures from employers, the USS Trustee has said it would price current benefits at 56.2% of salary, 80% more than the current contribution rate of 30.7% from members and employers combined.
- The USS Trustee values this additional level of covenant support at around £1.3 billion per annum, which is the difference at current benefit levels between scenario 1 (priced at 56.2% of salary) and scenario 3 (priced at 42% of salary) in the USS Trustee’s proposals.
- Unless there are changes to the scheme, employers and scheme members face escalating contribution rates: for employers, from the current level - 21.1% of salary – to 23.7% in October 2021 and at least 28.5% next year and possibly as high as 37.6% if the USS Trustee requires total contributions from employers and scheme members to be 56.2% of salary.
- Similarly, members would see their payments rise from 9.6% of salary, to 11% in October 2021 and reach at least 13.6% next year, and possibly as high as 18.6% if the USS Trustee requires total contributions from employers and scheme members to be 56.2% of salary.
- These rises would almost certainly price more and more members out of pension savings and lead to cuts in teaching, research, and jobs at many institutions as employers would be forced to pay extraordinarily high pension costs and have to find this money from elsewhere in their budgets.
- In an earlier consultation, employers gave their support for a package of covenant support measures to reduce costs in the scheme and to allow defined benefits to continue to be offered as part of the defined contributions mix.
- The short consultation was subsequently launched after the USS Trustee indicated that this level of benefits could be provided for an overall cost of 31.2% of salary (therefore, a rate 0.5% higher than current contributions of 30.7%). To reach this price the USS Trustee asked for further requirements as part of its ‘counter proposal’ for a covenant support package.
- Discussions are taking place between USS, the UCU, representing members of staff in the scheme, and UUK at the Joint Negotiating Committee (JNC). There are rules which apply in default to how any increases in costs shall be shared between members and employers (65% for employers, 35% for members), should the JNC not decide otherwise.
- Under the alternative proposal from UUK, scheme benefits would change, but contribution levels would remain the same. USS employers has published modelling to give examples of how this could impact staff on different salary levels, on 15 June 2021, 28 May 2021, and 9 April 2021.
- A full consultation with members would follow any decision by the JNC with clear and detailed information about what this would mean in terms of contribution costs and benefits to members - and to reassure them that their pension benefits built up to date are unaffected and secure.