Glossary of key terms

This glossary features definitions of terminology in relation to ongoing developments with the USS pension scheme. The definitions are based on UUK’s understanding and as such are not official, and are overridden by those contained within the scheme Trust Deed and Rules and pensions legislation.

Accrual rate
The proportion of salary a member receives annually as a pension in retirement (eg 1/75th) under the defined benefit section of USS. NB when using this rate to calculate the amount of benefits for each member, a member’s pension builds up each year and at retirement the aggregate of all of the yearly credits, with revaluation, is paid.

Affordability
For employers, in essence: how much an employer are able to spend on pensions. Different employers will have a different ability to pay pension contributions. In deciding on an appropriate and sustainable level of pension contributions, employers give consideration to the attraction and retention of staff, and value for money, but also to the consequences of higher contributions such as the effects on other areas of expenditure such as wider reward, investment in capital projects, research and improvements in facilities.

Assets
The money a pension scheme currently has.

Benefits
Money received by an individual or their dependants from a pension scheme. Given at retirement or following other life events such as sickness or death.

Cost sharing
A feature in the USS scheme rules under changes in rates of contributions are shared between members and employers. The ratio is 35:65 between members and employers. The cost sharing feature is enacted when the stakeholders decide, or in the event that no other decision is made (it is the default).

Contingent contributions
Contingent contributions are additional monthly contributions, required in the event that the scheme funding level deteriorates below a certain threshold.

Contingent support
Arrangements that can be put in place to support the level of scheme funding, for example a pledge to pay extra contributions in certain circumstances. USS has no such feature, although this issue has been discussed in recent reviews of scheme funding

Covenant
The ‘covenant’ is the collective financial strength of over 340 employers in the USS scheme.  

Deficit
A pension scheme is in deficit when the present value of its portfolio of assets is less than the present value of the liabilities that have been built up. The liabilities, which run for many years into the future, are given a present value by applying a discount rate (which is linked to the expected rate of return on the scheme’s assets in the future).

Deficit recovery contributions
A portion of the contributions to the defined benefit section that is used to close the deficit over a period of time in what is known as a recovery plan.

Defined benefits (DB) scheme
A form of retirement savings where members are promised a set amount of pension benefits, based on their salary and length of service, which are (broadly) inflation-proofed.

Defined contributions (DC) scheme
A form of retirement savings where members are not promised a set amount of pension benefits. The total amount of benefits members receive will depend on how much they and their employers contribute, the level of charges that have applied, and how well the pension scheme's investment fund has performed.

De-risking
A strategy designed to reduce the scheme’s exposure to risk arising from the uncertainty associated with economic and demographic changes, for example changes to interest rates, and to life expectancy.

Discount rate
The assumed return on an investment in percentage terms. It is used to calculate the future cost of benefits.

Gilts
Bonds issued by the UK government which have a fixed interest rate or a rate linked to inflation. The USS trustee uses this rate, among other things, to judge the expected return on the fund’s assets in a valuation of the scheme.

JEP
The 'Joint Expert Panel'. See ‘What is the JEP?

JNC
See ‘Joint Negotiating Committee

Liabilities
The total of all of the current and future pension commitments which have been built up by the scheme’s members. These current and future commitments are given a present value using a discount rate.

Lower bookend
The lower bookend is the percentage of salaries required to fund the cost of future benefits and recover the deficit as calculated on a technical provisions basis in the 2018 valuation, with the incorporation of some of the Joint Expert Panel’s recommendations. Contributions at the lower bookend (of less than 30% of salary) will be acceptable to the USS Trustee if employers agree to an appropriate contingent contribution arrangement. 

Monitoring and Action Framework
A way that the USS trustee measures the financial position of the scheme between formal valuations.  It contains triggers, which if activated require certain actions to be followed.  A new framework is being planned for the 2020 valuation.

Pari Passu
This refers to how the trustee of the scheme is treated as a creditor (a creditor is someone to whom money is owed by another). The USS trustee wants pari-passu arrangements on secured debt taken-on by USS employers. This means other creditors of a university, for example banks, are not treated more favourably as a creditor than USS. The trustee is in discussion with employers about this (late 2019).

Pensions Regulator
An independent body, established by government in 2004, to look after workplace pension schemes in the UK, and in particular it supervises all pension schemes that provide defined benefits to ensure that they are safe and secure.

Prudence
In financial terms, being prudent means being more cautious rather than optimistic (and more specifically, more cautious that an assumption that would be a 50th percentile, or middle, expectation).  This is important when making assumptions about future investment returns; trustees are required under pensions legislation to make prudent assumptions in specific areas.

Rebate
The USS Trustee has agreed to provide employers with a ‘rebate’ against what it deems to be the required level of contributions to fund the cost of future benefits and recover the scheme’s deficit (the upper bookend). The rebate will be given in return for employers’ acceptance of an appropriate contingent contribution arrangement for the 2018 valuation (see lower bookend).

Recovery plan
A Recovery Plan is one of the formal documents required to conclude the valuation of a pension scheme. The recovery plan sets out the duration and level of deficit recovery contributions that are required.

Reliance on covenant
Should the scheme enter significant financial difficulty, the trustee in extremis needs to have the ability to call on the 340 employers to put in extra. This ‘reliance’ has a monetary value, and is used to inform discussions on the future of the scheme (it helps the trustee to decide how much risk to take).

Risk
Used in lots of contexts, but in essence the term encapsulates the trade-off between secure and predictable investments with lower returns, or less secure and more volatile investments with potentially higher returns.

Risk appetite
A qualitative assessment of the amount of risk that key stakeholders are willing to take.

Schedule of contributions
A formal document required to conclude the valuation of a pension scheme. It sets out the levels of contributions required from both employers and scheme members, and confirms when these contributions are due

Self sufficiency
The status a DB scheme achieves when it can rely on low-risk/low-return investments to pay all the pensions it owes, without expecting to need further contributions.

Test 1
A measure of risk used by the USS Trustee, which aims to ensure that DB benefits can always be funded, with a high degree of confidence. It aims to ensure that reliance on covenant can never exceed how much employers are willing to pay, by altering other assumptions and calculating a specific discount rate.

Trigger metric
This is the metric that is monitored to decide if contingent contributions are triggered and become payable.

Trigger threshold
This has two components:

  • a specified level which needs to be breached by the trigger metric before contingent contributions become payable
  • a minimum time period for which trigger metric must remain above the specified level before the contingent contributions are triggered

UCU
See ‘University and College Union

Upper bookend
In the USS Trustee’s view, the upper bookend is the percentage of salaries required to fund the cost of future benefits and recover the deficit in the scheme, as calculated on a technical provisions basis in the 2018 valuation. The upper bookend figure is proposed to be 33.7% of salary.

UUK
See ‘Universities UK

Valuation
An assessment of a pension scheme’s overall financial health.