Universities UK (UUK), its advisers Aon, and the USS Trustee have worked collaboratively on exploring possible approaches to greater sustainability in the pension scheme – with Conditional Indexation being one of the leading considerations.
UUK asked Aon to comment on the initial work to explore whether a Conditional Indexation model could work for USS.
“The cost of DB benefits, calculated by the Trustee on advice of the Scheme Actuary, varies over time.
Where costs increase, this has led to benefit changes being made to keep the costs affordable. In effect, future benefits are already “conditional” as they depend on the market conditions at future valuations being conducive to providing benefits for an affordable level of contributions.
Clearly, this is not ideal, and part of the challenge for the 2023 actuarial valuation is to help introduce more stability going forward. Ultimately though, when providing “defined benefits”, it is not possible to fully define the cost, and there will be scenarios where changes may be required.
This is where the Conditional Indexation workstream comes in. The broad idea with Conditional Indexation is to provide an additional safety valve on benefits so that benefit increases can be amended.
The details are explained in more detail in the USS document, but it is important to note that past benefits would remain fully guaranteed, and the ability to amend future benefits in the UK is constrained (in particular: benefits cannot reduce, and benefits in payment must increase by at least the lesser of CPI and 2.5%).
The initial modelling carried out by the USS team suggests that it is possible to deliver higher benefits with CI for a similar cost in most scenarios, when compared with the current benefits. Broadly, this is because CI provides a mechanism for members to benefit in most scenarios from investment returns being higher than the prudent assumptions adopted for the actuarial valuation. With the Trustees having an additional lever, it becomes justifiable for the Trustees to employ less prudence in their approach.
Putting this workstream into context, with higher interest rates, the cost of new benefits has come down substantially since work began on the Conditional Indexation workstream. This means that we do not expect Conditional Indexation to be a primary focus of the 2023 actuarial valuation, with UUK (through its joint statement with UCU) seeking to prioritise a return to previous benefit levels as quickly as practical subject to this being done sustainably. The initial USS analysis shows there is merit in considering this approach further ahead of the 2026 valuation in terms of making the benefit design more robust (i.e. less likely to require amendment to keep costs affordable), and providing higher benefits in most scenarios to members for the same underlying costs"
John Coulthard FIA, Senior Partner, Aon