Employer and staff pension contributions to UK higher education’s biggest pension scheme are likely to rise to 49.6 per cent of salaries, according to the latest valuation.
The latest valuation report from the Universities Superannuation Scheme, published on 3 March, concludes that without further financial commitments from employers to strengthen the scheme’s covenant, overall contribution could even rise to 56.2 per cent.
According to the calculations, the best-case scenario would see future contributions increase from the current 30.7 per cent to 42.1 per cent of payroll. However, this would require more financial support guarantees from employees than are currently on the table, the fund says.
The increases reflect the need to make a substantial amount of deficit recovery, as the fund’s deficit now ranges from £14.9 billion to £17.9 billion.
Universities UK, which represents 340 USS employers, has indicated a range of commitments to USS, including a six-year moratorium on employer exits from the scheme. Under this scenario, salary commitments would rise to 49.6 per cent of salary, the report says.
Bill Galvin, chief executive of USS, said that this currently seemed the most likely scenario but said that the proposed commitments were “weak”. Increased commitments that USS wants from employers, which include prioritising USS pensions over any new debt, would mean that the scheme would be willing to take significantly more investment risk over the longer term.
If UUK increased its commitments, including at least a 12-year moratorium on employer exits, the USS trustee said the overall contribution rate would need to be 42.1 per cent.
Mr Galvin said that the USS recognised the difficulty in increasing contributions but said the fall in interest rates since 2018 and the recent financial impact of the Covid-19 pandemic meant they were necessary. “We are somewhat dismayed the challenge is so substantive…but people will need to come together and work on this,” he said.
However, in a statement, UUK said that the “very high prices for current benefits put forward by the USS trustees are unaffordable for employers, risk pricing even more staff out of the scheme, and undervalue the collective and enduring financial strength of the participating employers”.
Contributions are already set to grow to 34.7 per cent in October 2021 (11 per cent from employees and 23.7 per cent from employers). The increase in contributions has led to widespread strike action across the sector since 2018. The University and College Union has repeatedly criticised the valuation approach to USS and raised concerns about the underappreciation of the strength of the employer covenant.
UUK added that “employers understand that the USS has a sizeable deficit and that a high number of staff on lower grades opt out because the contributions are too expensive for them”.
“It is important that USS is designed so that people in early career can also access an affordable pension. This means it is vital that contributions to the scheme are affordable and sustainable for staff and employers alike and that reform is necessary,” UUK said.
“However, employers and scheme members need a stronger and clearer justification from the USS trustee for the very high pricing decisions. Without this justification, employers and scheme members will be concerned that the scheme is facing an unnecessary level of reform. Employers and their staff need significant reassurance that the USS trustee is not being overly prudent on matters like projected investment returns or undervaluing possible covenant support measures, both of which remain under discussion.”
The joint negotiating committee, which includes representatives from UUK and UCU, will now be asked to decide on any changes to contribution rates or benefits that may be necessary.
Jo Grady, general secretary of the UCU, said that “problems” with USS’ valuation methods and assumptions “have not been properly addressed despite widespread dissatisfaction among members and criticism from across the pensions industry and the higher education sector”.
“USS chief executive Bill Galvin was awarded an eye-watering bonus last year, but USS members who have worked so hard during the pandemic are being told that either contributions have to go up or benefits must go down. After a decade of pay and conditions being degraded, many precarious and low-paid higher education workers can no longer afford to be USS members. Even more will quit if contribution rates go up further and this will endanger the health of the scheme as a whole,” Dr Grady said.
“USS and employers must do better. For their part employers need to show higher education staff that their commitment to USS is serious by working with UCU and USS on covenant support measures and to get key aspects of the [joint expert panel’s report] implemented. UCU will be holding a special sector conference for higher education branches to decide our next steps and cannot rule anything out.”
Dame Kate Barker, chair of the USS trustee board, said: “We fully recognise the scale of the challenge facing the scheme and sympathise with our employers and members in light of the difficult decisions that lie ahead. Trends in financial markets have made the valuable pension promise offered by USS – a set inflation-linked income for life in retirement, regardless of what happens to the economy in future – much more expensive today than in the past.”
