USS latest: update from the University

Summary

• USS has announced that universities and staff need to pay in much more to the scheme to maintain the current level of benefits
• UUK and UCU dispute these figures, with UUK calling on USS to provide more detailed evidence
• The University’s Pensions Working Group believes a solution is possible that keeps costs at current levels and avoids excessive reform
• Staff at Cambridge are invited to an online open meeting to learn more about the 2020 valuation and how they might be affected.

Full message

Dear colleagues,

We wrote to you on 3 March 2021 to let you know that USS has said the cost of preserving the current benefits in the scheme has risen significantly – from 30.7% of salary to between 42% and 56% of salary. This would result in staff and employers paying in significantly more for the same pension. You can read the message in full on the USS latest section of the University website.

I am now writing to provide you with an initial response to these figures, and what they might mean for the future of the scheme, from the University’s Pensions Working Group (PWG), of which I am the Chair. The PWG is a subcommittee of the Finance Committee, and has members from the Council, the Cambridge Colleges, Cambridge UCU and the post doc community sitting on it. It will play a lead role in shaping the University’s response to the forthcoming consultation with employers on how to move forward on the challenges that USS faces.

Initial response

The PWG agrees with UUK and UCU that there is a lack of clear evidence to justify these exceptionally high contribution rates, which are clearly unaffordable for both members and employers. Even at the lower to mid price range, contribution rates would have a significantly damaging impact on the higher education sector – its ability to manage employment costs (already stretched after the past year), fund teaching and research, and deal with any resulting industrial dispute.

USS appears to have been heavily influenced by the Pensions Regulator, which has taken a proactive role in steering the trustee’s assumptions to a place where it is difficult for the stakeholders to reach a compromise that protects pensions, is compliant with regulation, and avoids damaging consequences on the sector and those working in it.

The trustee has also taken little account of UUK’s response to its valuation assumptions, and evidence provided to it by the Valuation Methodology Discussion Forum (VMDF), a key working group which put forward alternative approaches to USS’s valuation methodology, and of which I am a member. The evidence presented at the VMDF showed that USS as an open scheme, with a unique mutual structure and long-term investment horizon, is very resilient over the long term, and can afford to ride out the short-term volatility expressed in recent valuations.

Way forward

The PWG believes there is a way forward for the scheme that preserves the current structure, brings prices down to affordable levels, and avoids an unnecessary level of reform to scheme benefits. This would require all of the stakeholders to work together collaboratively and in good faith, and to be open to compromise on current positions.

In the first instance, the PWG believes that employers should bring forward an enhanced package of covenant support measures to bring contribution levels down to the lowest end of the trustee’s assumptions. Covenant support is essentially financial commitments that universities would make to demonstrate that they could weather extreme financial or other situations. Strong covenant support measures reflect and reinforce employers’ ongoing commitment to the USS scheme and would reduce the level of prudence – and therefore contributions – that USS and the regulator were comfortable with.

Meanwhile, USS should take account of the strong performance of markets since the valuation date of March 2020 – as scheme rules permit – to further reduce the deficit and deficit recovery contributions.

Risk sharing

The PWG also believes that the attitude of the USS trustee and the regulator to the level of prudence required makes some reduction in the value of guaranteed benefits likely. It is possible that benefit levels above a guaranteed minimum could be ‘risk-shared’ between employers and members, so that if market conditions turned out to be more favourable than expected, members could see their benefits enhanced. The PWG is strongly of the view that sharing risk in this way has the potential to provide better value and more sustainable benefits over time – but the scheme changes to ensure risk sharing works effectively are likely to require some time to develop.

There should be serious consideration to a lower cost, more portable section of USS for early career researchers. This may go some way to addressing the scheme’s high opt out rates among younger members in particular. Such an alternative could be designed in a way to avoid undermining the core USS DB scheme.

Overall, some degree of benefit reform that is significantly more modest than that suggested by USS would adequately reduce the amount of defined benefit risk building up over time and place less reliance on the collective strength of employers. This would in turn permit a reduced level of prudence aligned to a revised benefit structure.

The kind of process described above, with appropriate give from all sides, could still maintain a very valuable defined benefit scheme at costs similar to those currently paid by members and employers. UUK will now consult with participating employers on some of the key challenges facing the scheme and further updates will be provided on this and other news in future bulletins.

Open meeting

We appreciate that everybody cares about their pension, and that the current situation with USS is complex and technical. We would therefore like to invite all Cambridge members of the scheme to an open meeting where these issues and others will be discussed in more detail. Staff will have the opportunity to put questions to me and to Dr Daniel Weiss, Cambridge UCU pensions rep.

The meeting will be on Tuesday 13 April, 1-2pm via the Teams Live format. An access link has been provided  in an email sent to all Cambridge members of USS today. Staff can submit a question in advance of the event via the Live Q&A panel (click on the icon with a question mark in a speech bubble if you can’t initially see this). A reminder will be sent nearer to the time, and a recording will be made available afterwards.

Best wishes,

Anthony Odgers
University Chief Financial Officer and Chair of the Pensions Working Group

This message was sent to all Cambridge members of USS on Friday 26 March via the USS bulletin.