University CFO Anthony Odgers, also a member of the USS joint negotiating committee, explains in five steps how we got here and what the University is doing on USS.
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USS puts forward unmanageable costs to maintain benefits
USS is required by law to undertake a valuation – essentially an assessment of its overall financial health – every three years. It must be satisfied that it can fulfil its legal promise to pay current and future pensioners the benefits that they have and will accrue. We are currently two-thirds of the way through a valuation set at 31 March 2020.
At the start of the process, USS calculated the shared cost between employers and members of maintaining current benefits to be between 42% and 56% of salary, a huge increase from 30.7%. This would have resulted in you paying somewhere between 13% and 18% of your salary into your pension, up from 9.6%, and the University contributing between 28% and 38% of salaries, up from 21.1%. Such contributions would have been catastrophic for employers and left members without a viable scheme to pay into.
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UUK develops a proposal that maintains costs but cuts future benefits
A counter proposal was put forward by UUK that contained cuts to benefits in new accrual but with no increase in costs to members and employers. The UUK proposal would not affect benefits accrued to date, with the new benefit structure due to be implemented from April 2022.
After several months of negotiations over the summer, the USS joint negotiating committee (JNC), comprising five UUK negotiators, including me, five UCU negotiators, and an independent chair, passed UUK’s proposal on the casting vote of the chair.
While UCU did present possible alternative options at the JNC in August, it did not table a proposal formally, and its options were not re-tabled following the UCU Special HE Sector Conference last month. However, given the costs that USS had said would be needed to maintain the existing benefits, significant cuts would have been necessary under any formulation.
Throughout the valuation, USS has made clear that it would impose significant rises in contributions for employers and members if a decision were not made by the JNC, with rises scheduled for October 2021 to a combined 34.7%. This would have seen member contributions increase to 11%, with further increases occurring rapidly from October 2022. The already large number of eligible members who cannot afford to pay into the scheme would likely have increased.
The JNC’s vote in favour of the UUK proposal means that extra payments have, for now, been largely avoided. However, USS has made provision to re-impose contribution rises should the 2020 valuation not be completed in time.
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Regulatory prudence - the real problem at the heart of USS
The real problem at the heart of the dispute is the cost attributed by the USS trustee to maintaining existing benefits. This in turn is significantly influenced by the UK actuarial and regulatory approach to risk for defined benefit pensions schemes, and it is important to note that the Pensions Regulator has said that it agrees with USS’s position.
Over a series of valuations, members have seen cuts in their future benefits locked into the scheme on the basis that something very bad, but ultimately unlikely, might happen – that USS will not be able to make good on its future pension promises. But they see no flexibility in the scheme to benefit from improved market conditions.
That is why the University believes the only way to address the underlying problem, in the absence of changes to actuarial practice and pension regulation, and to achieve a sustainable and good value-for-money pension for members, is to explore an alternative scheme design such as conditional indexation (see link below) that shares risk more effectively between employers and members.
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The University of Cambridge and Cambridge UCU push for scheme re-design
The University and Cambridge UCU have been working together (and with others) to push for this exploration as soon as possible, so that the cuts from the 2020 valuation would apply for the minimum amount of time possible. All the main players (USS, UCU and UUK) have now agreed to work together on this, although it is likely to take a couple of years to complete (i.e. beyond the deadline for the 2020 valuation). USS, UCU and UUK have also agreed to review overall governance of the scheme, and discussions continue on developing a lower cost option for members currently priced out of USS.
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UCU decides to ballot its members
As of last month, UCU is calling for the current JNC decision to be revoked and an alternative proposal to be agreed, while pressing for an additional 2021 valuation. This would impose additional costs and uncertainty on employers and members at a time when both are facing tax and other inflationary cost pressures.
It is also not clear that a 2021 valuation would produce a better result, although UUK has requested actuarial advice on this. On the face of it, the position could be better with the deficit much reduced, but USS (backed again by the standard regulatory approach) has stated that this should result in the deficit being paid off more quickly rather than in a significant reduction to annual contributions. In any event, I am concerned that starting again with a 2021 valuation would distract from the important work of making progress with alternative scheme design that could finally solve the structural problems inherent in the scheme.
Finally, there is still time to influence and change the UUK proposal when the member consultation launches in November. We will be in touch with staff shortly to provide further details and run online briefings. I encourage all members at Cambridge to make their views known.
Anthony Odgers