The Aon view: how close is 'Option 3' to the JEP's recommendations?

John Coulthard, Kevin Wesbroom and Andrew Claringbold of Aon write:

We have been asked to clarify our views on whether we believe 'Option 3' meets the Joint Expert Panel’s (JEP) first set of recommendations, and whether an overall contribution rate of 26% would be more in line with the JEP.

In our view, the proposed contribution rate under Option 3 of 30.7% is reasonably close to the JEP recommendations set out in their report of 13 September 2018. In saying this, the JEP provided an example approach with a contribution rate of c.29.2%, and said that: 'The Panel believes that there are a number of different paths that the Trustee could adopt to reduce the contribution rate to below 30%; the charts above simply demonstrate one approach.' 

Moreover, employers and members have benefited in the short-term from the USS Trustee carrying out a 2018 actuarial valuation rather than considering the JEP recommendations as part of a 2017 valuation – which could have led to higher contributions coming into place much earlier, say from 1 January 2019 for illustrative purposes. If we 'average' the USS Trustee’s proposal over the period 1 January 2019 to 1 October 2021 (when the contribution changes following the 2020 valuation may be expected to be implemented), then this works out as 29.8% (ie three months of 26%, six months of 28.3%, and two years of 30.7%). So, at least at an 'average' level – and taking into account the basic fact that employers (and members) have benefited from the Trustee not implementing higher contributions sooner – the JEP recommendations appear to be met.

We have also been asked to give a view on whether a contribution rate of 26% would be more in line with the JEP recommendations. We do not believe that it is. This is a more difficult question because the JEP recommendations applied to a 2017 valuation, and the Trustees have subsequently decided to call a 2018 valuation as a device to consider the JEP recommendations (while retaining 31 March 2020 as the next actuarial valuation, as would have been the case had the JEP recommendations been considered as part of a 2017 valuation). However, when the JEP made their recommendations, they knew the 31 March 2018 position. This is both because Aon drew their attention to the improved position, and also the JEP requested this information from USS who provided it (Annex 9 of the JEP report).

If the JEP had viewed the 2014 valuation outcome of 26% as being the correct rate for a short-term fix (ahead of the more fundamental review being carried out for JEP Phase 2 and to inform the 2020 valuation), then we believe they would have said so – rather than saying the Trustee could adopt a contribution rate below 30%. Likewise, if Aon had believed 26% would be a credible contribution rate for the Trustee and Pensions Regulator, then we would have said so in our Expert Witness commentary to the JEP.

As an aside, when viewing increased pension contributions from an employee perspective, it is worth bearing in mind that the impact on take-home pay will typically be smaller than the headline change. That’s because pension contributions are payable out of gross pay (ie pay before tax and national insurance are deducted).


John Coulthard, Kevin Wesbroom, Andrew Claringbold

Aon, 12 June 2019