Higher pensions contributions avoided after USS Trustee accepts employer plans for reforms

3 Sep 2021

The USS Trustee board has agreed to take forward the Joint Negotiating Committee’s (JNC) recommendations for concluding the 2020 USS valuation, saving university employers and hundreds of thousands of scheme members from steep contribution increases from 1 October 2021.

Employers and scheme members were facing escalating contributions from October – for employers, from 21.1% of salary to 23.7%, while members would have seen their payments rise from 9.6% of salary, to 11%. But with the USS Trustee board’s approval of the JNC’s decision to modify benefits, and agreement to proceed with a dual schedule of contributions, new rates of 21.4% for employers and 9.8% for members will apply instead.

The alternative approach to the valuation – passed by a JNC vote – was developed by Universities UK (UUK), the formal representative of over 340 employers in the scheme following consultation with all scheme employers. The proposal includes additional commitments by employers on covenant support and benefit changes to prevent unaffordable rises in contributions. Central to the proposals are formal commitments from employers to explore alternative scheme designs (including conditional indexation) for the future; accelerate a major review of USS governance with independent expertise; and work with stakeholders including the University and College Union (UCU), representing scheme members, to develop and implement a flexible, low-cost option for lower paid members of staff.

The employers’ proposal was backed by the JNC Chair on 31 August 2021 following months of talks, after UCU representatives declined to formally table their own proposals for reform and refused repeated requests from employer JNC representatives to share the draft UCU proposals with employers for a view.

Employers agreed to provide an additional £1.3 billion worth of financial backing to the scheme – or ‘covenant support’ – to ensure the scheme’s current hybrid of guaranteed ‘defined benefits’ and defined contributions (which depend on the performance of investments) could be maintained.  

A spokesperson for UUK, on behalf of USS employers said:

“The USS Trustee board’s decision means decent pension benefits can continue being provided for contributions of 31.2% of salaries, which is close to the current contribution rate of 30.7%, and substantially lower than the 34.7% rate the USS Trustee previously said would apply in October. This decision in combination with the other reforms also prevents a further escalation of contributions next year.

“Avoiding higher contributions is essential for both employers and scheme members. For employers, higher rates would have consequences for jobs, teaching and the student experience, while unaffordable contributions for members would undoubtedly force many to drop out of the scheme in greater numbers, and miss out on money from their employer towards their future.

“Employers are committed to working in partnership with UCU to progress a major governance review of USS, jointly exploring future options for scheme design, including shaping a lower-cost option so staff on lower salaries are no longer priced out of retirement saving by high contribution rates.”

Notes to editors

  1. The changes to benefits and contributions levels are subject to a statutory 60-day employer-led consultation with affected employees and their representatives, due to be launched later this year.
  2. Final contributions rates are subject to a further consultation with employers on the schedule of contributions, recovery plan, and statement of funding principles.
  3. The JNC is a separate body, made up of five representatives from UCU, five representatives from UUK, and an independent chair. The JNC’s responsibilities include feeding in views to the USS Trustee on behalf of both the scheme members and employers and deciding on any recommendations for changing the scheme. The USS Trustee is responsible for setting the contribution rate required in order to deliver the scheme benefits, and the JNC has the responsibility to decide how increases (or decreases) in costs to the scheme should be met. The JNC decision on the UUK proposal was passed by the casting vote of the JNC Chair, Judith Fish, after UCU decided not to put a counter proposal to the vote.
  4. Without changes to the scheme, members and employers would have faced ruinous contribution payments, which the USS Trustee has said it would be required to implement – members would be asked to pay 18.6% of salary (currently 9.6%) and employers pay 37.6% (21.1% at present) potentially from as soon as April 2022.
  5. Without reform to the scheme, the contribution rates imposed by the USS Trustee would have hit the pockets of staff in USS through an initial 15% rise in October 2021, meaning a scheme member earning £40,000 would have had to pay an additional £47 each month to maintain pension benefits.  They would have increased even further in April 2022, by  £133 more per month for the same benefits – compared to current levels. 
  6. The scheme’s active payroll as at 31 March 2020 was £8.962 billion. The total monetary contribution to pensions by USS employers is therefore currently £1.89 billion per annum, meaning each additional 1% contribution to USS equates to an extra £89.6m per annum, equivalent to approximately 2,000 individual members of USS employed in USS institutions (based on an active membership of 200,355 and average USS member salary levels, as detailed in the rule 76 report presented by USS to the Joint Negotiating Committee.)
  7. The impact of the UUK proposal and the risk of taking no action to resolve the scheme’s financial challenges are clearly stated on the USS employers website and published modelling gives examples of how benefits could change for people on different salary levels: USS Employers back changes to the pension scheme, 15 June 2021Employers respond to UCU's benefits modeller, 28 May 2021, USS valuation: Aon comments on March 2021 materials, 9 April 2021.
  8. A full consultation with members and representative bodies will now follow on the proposed solution to the 2020 valuation with clear and detailed information on what the proposal passed today would mean in terms of contribution costs and benefits to members – and to reassure them that their pension benefits built up to the date are unaffected and secure.
  9. The value of the overall covenant support package already agreed to by employers is worth the difference between 56.2% and 42.1% of contributions to the scheme, equivalent to c.£1.3 billion per year. For more information see: http://www.ussemployers.org.uk/news/employers-pledge-even-greater-levels-support-uss-pensions
  10. 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 in addition to the increase of more than 50% in the rate of employer contributions to USS from 14% of salary in 2009 to 21.1% from 2019.
  11. Conditional Indexation (CI) involves annual increases to pension benefits – above any statutory minimum increases – may be dependent on scheme investment returns and not guaranteed. (This may be considered, for future benefits, by stakeholders after the 2020 valuation.)